A new website developed by economics professors is exploring whether – and how much of – the housing demand is being driven by “panic buying” and speculation.
A professor of economics at Macquarie University has posited that the roaring housing demand is being driven by concerns about house prices exceeding affordability, and investors speculating on a “large and almost certain” profit, in the future.
Macquarie Business School professor of economics Shuping Shi and Sterling professor of economics and statistics at Yale University Peter Phillips have created a website that provides real-time bubble indicators for housing markets in the eight Australian capital cities and six primary New Zealand regions.
Through the website, the professors have aimed to allow policymakers and consumers to see at a glance when a housing market in “in the grip of a speculative bubble”, Professor Shi said.
The temperature-taking model benchmarks real estate prices against housing and macroeconomic fundamentals such as rents, interest rate, income and housing supply to provide a statistical tool to assess the existence and degree of speculative behaviour.
The model determines what the professors have called the “fundamental” and “non-fundamental” components of house prices.
Non-fundamental components include borrowers deciding to purchase property now because they fear they would not be able to afford it in the future (panic buying), and purchasers entering the market “purely for speculation purposes”.
This would mean that they are purchasing property not because they require a house now or in the future, but because they could be investors predicting that the purchase would result in a “large and almost certain profit down the track”, according to Professor Shi.
The fundamental components would include price increases driven by decreasing housing supply, or purchasing decisions driven by rising household income, decreasing interest rates (which means borrowing becomes more affordable), or rapidly increasing rent, which means buying becomes more attractive than renting.
It is the rate of expansion of the non-fundamental component of house prices that Professor Shi’s model is using to identify what she called “housing fever”.
Housing market in speculative bubble
As such, the website’s latest analysis based on March 2021 quarter figures has shown that the Australian market overall is in a speculative bubble, as are Sydney, Melbourne, Brisbane, Adelaide and Canberra.
Professor Shi said the speculative bubble started in Brisbane and Sydney in September/October 2020, followed by Canberra in December 2020.
She said that while the interest rate is at its record low and housing supply has declined significantly in some cities, these factors cannot fully explain the rising house prices in some cities.
“The expectation of a ‘large and almost certain’ profit like a magnet attracts a lot of people entering the market,” Professor Shi said.
“Together with the ‘panic buying’, they lead to a substantial jump in housing demand and hence an explosive expansion of housing prices.
“That is what we identify on the website, and what we are aiming to provide is some insight into what is actually going on in the market, whether it is due to the fundamental demand, or driven by these other types of demand.”
Concerns about future housing affordability
Professor Shi said that a point of concern for economists and policymakers is the long-term impact of a prolonged expansion of house prices.
She asked: “Can young people afford a house without substantial financial support from the older generation in the future?
“Also, there is the issue of wealth inequality, because the people who have houses experience a substantial increase so that over the long term, their wealth will accumulate a lot faster compared to people who missed out and cannot enter the market.”
She noted that in some cities, price-to-rent ratios, which is a key indicator of housing affordability, have seen double-digit growth in a single month, raising flags for the general public and policymakers.
Professor Shi said that along with providing independent modelling for policymakers, the website could also be useful for consumers in making a decision to buy because it will provide an indication of whether they are buying in a bubble, when the bubble began and how long it has been present, and therefore whether a large portion of the price will be due to the inflated expectations of market participants.
It could also act as a risk indicator that could trigger policymakers to act to prick the bubble so that house prices could potentially reduce or level off, she said.
However, Professor Shi said it is virtually impossible to forecast how long a bubble would last.
She concluded: “It’s very different for different markets. Forecasting a bubble crash is usually mission impossible because it needs a trigger, which will usually be a policy decision or a significant event that could alter market participants’ expectation.”
[Related: 1 in 5 borrowers lies on loan applications]
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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