Our housing market appears to be in a bad state and we’re not alone, Western Australia and Queensland are experiencing a rise in listings, a drop in sales and lower prices.
So are we seeing the end of a bubble?
Locally, lending figures have dropped, with real estate agents admitting the market is in trouble.
Economists, Hyman Minsky and Charles Kindleberger developed a framework for analysing bubbles, breaking down a rise and fall into five stages.
Displacement – New opportunities are created. In 1999 and 2000 a 50% capital gains discount and the first home owner’s grant were introduced. At a local level, house prices were low and good value for mainland bargain hunters, or first home buyers with free money.
Credit creation – Credit availability has increased with the rise in house prices. Once you needed a decent deposit to buy, not any longer, while interest only loans become available.
Euphoria – Buyers think prices can only go upwards, overconfidence and optimism abound. Heard anyone talk of how much money they will make, or how they can’t lose in property? The boost to the first home owner’s grant furthered displacement and fuelled euphoria.
Distress – High prices increase financial stress. Some investors see further gains as unlikely and cash out. New buyers hesitate, prices level and begin to fall. Locally, there’s talk many investors are trying to sell rental properties, while we know sales have dropped. Those who entered last face their equity being erased.
Revulsion – Buyers, worried of further drops, refuse to participate in the market, as forced sellers continue to push prices down. Assets become exceptionally cheap, as they now overshoot their value on the down side.
Decide if anything seems familiar to you, but remember this – be it euphoria, distress or revulsion, human beings rarely remain rational when it involves financial gains or losses.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we ‘re one of only six fiduciary financial advisors in Australia.
