Exclusive: What are the signs of a property bubble? Property Observer asks the experts

With double digit annual price growth in Sydney, some wonder whether we risk a spectacular end to this year's stellar price growth. Is Australia's property market caught in a bubble?

Earlier this year, US forecaster Harry Dent predicted the Melbourne property market would eventually crash, saying: "Melbourne has been, actually, the biggest bubble in recent years and I would expect the biggest burst there." Melbourne wasn't alone – he also took aim at Sydney, Perth and Brisbane, apparently spotting a bubble in each city.

Our big banks are a good deal more skeptical about the presence of a bubble, though earlier this week, ANZ's Warren Hogan said while we don't currently have a property bubble, "we have the platform to form a bubble in the next few years".

Though many doubt Australia is currently experiencing a bubble, the prospect of a sudden fall in home values have some nervous.

Property Observer took the question to the experts: What are the signs of a bubble?

Shane Oliver - AMP Capital head of investment strategy and chief economist

The first one is the price gains themselves – if they've been rising rapidly for a lengthy period and they've diverged from underlying income levels or rents. In other words, the market's become overvalued. So rapid momentum in price growth and overvalued prices.

Another is a rapid rise in debt financing. Usually that comes with low interest rates, but when credit growth is running at double digit rates it's often a concern.

The last one is popular interest: everyone's talking about housing prices at dinner parties and every show on television is about property.

In Australia, lots of the markets get the tick in terms of overvaluation. That's why a lot of commentators have said a bubble is about to burst and that we should get ready for a 40% price decline, which just hasn't happened.

The issue is complicated by our undersupply of property, which keeps underlying demand going. We've got a bit more supply coming, but that's mostly units in certain capital cities. I would still give the "overvalue" criteria a tick.

Momentum is excessive in Sydney and there's no doubt about that. It might get a half tick in Melbourne. The other capital city markets? There's no sign of a bubble in any of them.

Credit growth has been quite modest in the past. I suppose what bothers me is credit growth at 10% for investors, although it's not near the 30% growth we were seeing a decade ago. So that gets half a tick.

Popular interest gets half a tick. People are certainly talking about property prices in Sydney, but in Hobart nobody's that excited about the market. You find the same thing in Brisbane and Adelaide – people there are bit skeptical of all the bubble talk.

So there are some signs of bubble – overall it's a bit "bubbly". Nationwide, I'm not prepared to say it's a bubble just yet.

Louis Christopher - SQM Research managing director

Massive speculation; sales prices going beyond fundamental valuations. Excessive and accelerated debt levels – so a massive debt boom is usually going on at the same time as well. These are normally the signals of what will be regarded as a bubble.

The problem is that sometimes you can have a recovery in the market, and it's just a normal part of the cycle, and it could be mistaken for a bubble, or vice versa.

So often it's very difficult to make a judgment until after the event.

At the Australian level, we're not seeing a bubble.

Number one, the market's not rapidly accelerating everywhere, just in very few areas – namely Sydney.

So what's going on with the Sydney market? Is it in a bubble? The answer is – we think – no. We can see a market which is still going into overvalued territory – but is it a massively overvalued? Compared to previous cyclical upticks, no.

2003 was a very dangerous time in Sydney and the fundamentals went way out of whack. It's not surprising that for the next few years it underperformed.

This recovery should be seen in the context of the last few years' performance. While we do believe a market has been moving into overvalued territory, we don't think it's enough to cause a massive overcorrection.

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Margaret Lomas - Author, television host and Destiny Financial Solutions founder

Property is considered to be in a bubble when rapid increases in the price of real property in a local area, country or even globally reaches unsustainable levels relative to incomes and rents, and then decline.  The degree of decline indicates whether the market simply stabilises, or bursts.

A property 'bubble' is not necessarily an indicator that a burst is imminent and many markets boom and then stabilise, rather than boom then crash.

As for the question being asked by everyone at present: "Are we in a property bubble?" Let's remember that this white hot market exists, at present, only in Sydney. Broadly speaking, Sydney came off a 9 year period of stable prices in 2012, making the measurement over the past 10 years (the common period that property price growth is measured) a very different picture indeed.

In addition, this situation of fast moving price growth isn't reflected as noticeably in other Australian markets, which comprise more than 80% of all dwellings.

More importantly, when considering the bubble question, it is to be noted that while housing has increased in price, many other common, every-day items, which comprise the cost of living, have dramatically decreased relative to incomes. 

While it may be true that the average home appears to cost seven times the average income today as opposed to three and four from many years ago, the proportion of disposable income available to the average person to spend on mortgage repayments has considerably increased.

In addition, homes today are larger and more luxurious than they were 30 years ago, providing more home for the additional price paid.

Andrew Wilson - Domain Group senior economist

I do think that a bubble is a little hard to spot, but we do have a few that are operating at the moment.

The classic examples are the markets of Gladstone and Mackay. We spot a property bubble really when we get a strong buyer interest or strong supply in a short period of time. That's what happened in those markets.

It wasn't just small investors that rushed in. It was followed up by developers under projections there would be strong demand in the areas, due to mining.

Prices got so high that optional alternative accommodation was sought by those who were there, the majority of whom were Fly In Fly Out workers. And the bottom hasn't been found in that market yet.

If we look at the cycle, when a bubble bursts we clearly see the market falling below its previous trough.

Gladstone prices went from $300,000 to $700,000 and back down again. When it returns to $350,000 people will start to think it's gone back to its fundamental values.

Classically, a bubble occurs when we see a rapid increase in prices and rents, particularly if there is optional accommodation available, and people will turn to that.

We've never had a bubble burst in this country in the capital city markets.

We may see falling prices in some of those mining towns, but in larger markets where there's diversity in the economy, we tend to just see an orderly correction phase.

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Robert Simeon - Richardson Wrench Mosman and Neutral Bay director

The term 'bubble' is without a doubt the most misconstrued term today that clouds the Australian residential real estate markets.

All along I have said (as others too have said) that there is no such thing. What makes up this so called bubble? In short, nobody was able to explain what metrics determine this imaginary term used to paint the real estate markets.

When I go to Wikipedia and search "Real estate bubble": "A real estate bubble or property bubble (or housing bubble)that occurs periodically in local or global real estate markets. It can be identified through rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline."

The point that needs to be made is that bubbles happen much more frequently than booms and only after a significant boom do we then see property prices in a free-fall, given next we enter a recession.

The last boom Sydney experienced was back in the late 1980's where prices doubled and in some cases even trebled. That was then followed by "the recession we had to have" in the early 1990s.

Of course we have seen many bubbles since then for example: in 2004, 2007 and recently in 2012/13 although the present bubble is being driven by overseas investors and local investors. It also should be noted that this does not include your average households, although it is inferred that they, too, are playing a significant part in this 'bubble'.

They say "if you want to make a mountain out a molehill, add dirt" – and that's exactly what's happening in the Australian residential real estate markets. An over reliance of using median price indexes skews the results to create unrealistic market data interpretations, given top-end sales will always do this to median prices.

Sydney has approximately 700 suburbs and only when you break them down individually one quickly draws the conclusion: nothing happening here, move on.

Booms cause massive economic destruction (as history has shown) the only problem is that the vast majority of commentators were not around when Sydney experienced its last boom. Cue the confusion about bubbles.