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Australia: Buyers beware

When a government minister says a property bubble has formed it should be something to make you sit up and take notice.

On Monday, Australia’s Treasury Secretary, John Fraser, noted that in Sydney (pictured) and parts of Melbourne were “unequivocally” in the midst of a residential property bubble.

“It does worry me that the very low historical interest rates are encouraging people to perhaps over-invest in housing. I am not just talking about buying housing, but I am talking about investing in housing. You just have to see these renovation shows … to realise something is amiss.”
Australia is seeing historically low interest rates, despite two cuts so far this year by the Reserve Bank of Australia.

Media reports have suggested that if the rest of the Australian economy were experiencing the same inflation, growth and demand that is being experienced by the real estate sector, the economy would be in a more robust position however, recent GDP numbers have been falling and are forecast to continue to head south.

Fraser is not the only voice suggesting a bubble has formed.

Respected journalist and founding editor of the best-selling Australian financial magazine Money, Pam Walkley, wrote along similar lines in her column in the May edition of the magazine.

Walkley, also the former property editor at the Australian Financial Review, added Brisbane to both Sydney and Melbourne in terms of being overvalued, and wrote that Sydney could be as much as 25 percent overvalued currently, citing one leading expert.

Those high prices, she added, will lead to low rental returns for investors, meaning they are solely dependent on the ever-increasing prices to earn long-term capital appreciation returns on their assets.

For current investors this is good news, with house prices predicted to rise by as much as 15 percent more before the end of this year in the three cities.

But the good news may not last forever. Walkley’s column cites Louis Christopher, head of SQM Research, who noted that in 1989 when prices in the Sydney market reached close to 35% overvalued there was a price correcting.

Walkley wrote: “Investors buying now, especially in Sydney and to a lesser degree in Melbourne and Brisbane, need to be very confident that the good times will continue to roll.”

For overseas buyers of Australian property, proper due diligence and a complete understanding of market conditions arguable has never been more important. They need to know exactly what the property they are buying is work in reality, and not in the minds of a developer or real estate agent.

Serious investors will have a good feel for where the property market it is heading, but first-time overseas buyers will be especially vulnerable and should survey the market and gather as much market data as possible before signing on the dotted line.

These are just several voices sounding words of serious caution, but they are influential and knowledgeable voices with facts that need to be understood.

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