Three key factors that work against property bubble theories

Interesting piece from Jessica Irvine from the Sydney Morning Herald on the great Aussie property bubble debate.

The main thrust of her article is that it is clear that housing is more expensive relative to incomes than it used to be, but it is not clear from the factors that she focuses on, that we are in the unsustainable bubble territory claimed by some commentators.

The three key factors she points to are:

1. the rise of dual income households. That is why the Reserve Bank prefers to use household disposable income (i.e. after-tax) when considering movements in affordability.
2. households' increased ability to borrow against a given income. Financial deregulation has made banks more willing to lend. At the same time, the shift to lower interest rates has boosted borrowing capacity.
3. there have been genuine problems with the supply of new homes. Strong population growth, a shift to smaller household sizes and a preference for larger houses have run up against resistance to urban consolidation and the natural boundaries to expansion of cities

She concludes that the best outcome will be if house prices simply remain steady and allow for wages to catch up and that we should not expect house prices to rise faster than wages.

To read the full article click here