we are talking about will the Australian Property Bubble burst?

I've got an email from bingo asking me, Hi Ryan, people seem to think that property can

only go up, but looking at the US and EU , I would say not. Do you think the GFC or the

property bubble will affect us in Australia? Cheers Ben. I wonder why it says bingo on

my email? Anyways bingo or Ben, it's a very great great question and there's a lot to

it to say whether or not the property bubble is going to burst or whether properties are

going to continue to grow in value. Australia is noted as one of the most unaffordable

places to live compared to peoples incomes, the price of the house is exceedingly high.

So does that mean that the property bubble is going to burst and that prices will fall?

Well people overseas who speculate on the Australian market think that it will fall.

Places like the US or the UK have all had their bubbles burst and they were in the same

unaffordable range that Australia is today. But Australia is different to other markets

across the world and there are some factors that you may need to look at to think whether

or not the bubble is going to burst. So in order for a bubble to burst you need to have

a great deal of people willing to sell their houses at fire-sale rates and you need to

have a market that is unwilling to buy those houses. So you've got this flooding of the

market of properties or people just wanting to get rid of them and sell them no matter

what the cost and then you've got a whole bunch of buyers on the market who don't really

want to buy the properties and so that has to take place.

A difference that's important to note between us and the US, is that when you borrow money

for a house in the US or back in when this did happen I don't know if they have changed

things, if you decided that you couldn't afford your mortgage, and you're going to default

on that loan and you then handed the house back to the bank. If the bank sold the house

and there was a deficit, let's say you purchased the house for $500,000, gave it back to the

bank. They could only sell it for $300,000 and there is that $200,000 deficit in your

loan, let's say you've got a 100% loan. In the US in a lot of cases, the banks would

actually have to wear that $200,000 cost, however, with most loans in Australia it works

differently. If you have a $500,000 mortgage you default and give your house back to the

bank and they can only sell it for $300,000, that $200,000 debt still gets assigned to

you and so I would say that there's going to be a lot more responsibility in the Australian

market compared to the US market, because if I knew that I purchased a house and it

was below what I paid for it and I could just ditch it, and I wouldn't have to think about

it, I wouldn't have any of that debt; well I'm probably more likely to do that, than

in Australia if I ditch it, then I'm still going to have all this overarching debt and

I won't even have a property to show for it. So, will it crash, will it not, there's just

too many factors to say whether it will or it won't. But Michael Yardney, I was reading,

I was actually doing some research on this, and Michael Yardney who is very well known,

he's a director at Metropole Property Strategists, he was stated saying, 'For property market

to crash you need desperate sellers willing to give away their properties at fire-sale

prices and no one willing to buy them,' which is what we talked about and he says, 'what's

different is that you need one or more of four things to happen none of which is on

the horizon, a major depression,' well we just kind of been through the great recession,

so are we coming up for a major depression? Probably not, 'You need massive unemployment,

you need exceedingly high interest rates,' you know in Australia interest rates are so

low at the moment, five percent (5%), I've seen interest rates below five percent (5%),'

all you need an excessive oversupply of properties.' Something interesting about the Australian

market is that the government does limit what land is available to develop on. So in a lot

of areas the land is extremely restricted. Take Sydney for example, you've got the water

on one side so obviously you can't build a house on the water and then you've got all

these national parks surrounding it. There are national park areas, state parks to the

north, there's a big national park to the south and then you got the Blue Mountain ranges

to the west. So Sydney is pretty boxed in, in where it can grow and what land there is

able to build upon and so when you've got a lot of people wanting to live in an area

the government's not releasing land for people to build upon and forcing people to build

more high-density properties, we kind of see an area where the supply is not keeping up

with demand, so there's more and more demand for properties and due to developments and

whatever reason there's not enough supply entering the market to fill that demand.

So if it did come to a point where there was much greater supply than there was demand,

then definitely prices could go down, could there be correction because of the great increase

in the growth that was seen? Yes, there could be a correction or there could be a stabling

off of the overall market in Australia, but does that mean that it's a bubble that's going

to burst and prices are going to decrease fifty percent (50%) like some of these overseas

analysts are predicting. I think property prices aren't in a bubble in Australia, but

that is due to my limited belief of what the market is and the things that control the

market. Obviously there's so much that goes into economics at such a great scale. But

I hope that answers your question Ben, I hope that helped you and if you want your question

answered then go to OnProperty.com.au/contact and send me your question or you can just

email me ryan@onproperty.com.au. So until tomorrow when I answer another reader's question,

remember that your long term success is only achieved one day at a time.