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Co-founder & CEO of AllenWargent property market & hedge fund advisory.
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Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
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Monday, 30 September 2013
What is a housing bubble?
A lot of debate at the moment about what a housing bubble actually is.
I guess it is one of the terms that is open to debate.
Here is what Investopedia says:
"A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts.
Traditionally, housing markets are not as prone to bubbles as other financial markets due to large transaction and carrying costs associated with owning a house. However, a combination of very low interest rates and a loosening of credit underwriting standards can bring borrowers into the market, fueling demand. A rise in interest rates and a tightening of credit standards can lessen demand, causing a housing bubble to burst. Other general economic and demographic trends can also fuel and burst a housing bubble."
Note the highlighted text (my bold) which suggests that a housing bubble must involve a sharp drop in prices resulting in a bubble bursting.
Does it follow, therefore, that a market which does not burst, cannot by definition be a bubble (and therefore we can only identify a housing bubble in retrospect)?
There are plenty who say that Australia is in a housing bubble, but the bubble won't burst, rather it will just stagnate, or gently rise slower than incomes.
Is that a bubble then?
A debate which will no doubt continue (and how)...