There is constant speculation in the media that the Australian Real Estate market is in a bubble. I swore off making economic predictions in 1992 when I retired the word Ecomonist from my CV. So don’t expect a lot of econometric data to support this post.

I don’t think current capital city prices make sense on historical or fundamental grounds. But this could be a shift in basic valuation. I think we need some unidentified factor to confirm any shift in basic valuation. Given many people in Sydney’s eastern suburbs could not afford (in this market) to buy the house they currently own. If they trade the stamp duty is another major obstacle.

Either way I don’t think Sydney in particular, nor Australia as a whole, is looking at massive devaluation in housing prices from current levels. Prices are at their current levels based on a generally robust economy giving stable employment, coupled with historically low interest rates and easy finance from traditional and new mortgage lenders.

The Reserve Bank has expressed concern at the speculative nature of housing price rises. It’s standard and preferred response is to raise interest rates. However interest rate rises place the rest of the domestic economy at risk. Meanwhile the rest of our trading partners look for their own economic recoveries. The Australian Dollar’s increase in value relative to the US Dollar is partly due to the interest rate differential between the US and Australia. While the US has cut rates, Australia has maintained them, increasing demand for our currency among “hot money” in global funds. OK so this means that the Reserve Bank really has little room to move upwards without risking significant destabilisation of the economy. That conclusion is not too rigorous, so don’t rely on it.

I expect a soft landing as interest rates move slowly up. The heat leaves the real estate market. Equities start showing good returns over last year’s low base. Housing price inflation abates as auction clearance rates slow. People who sell will be those who have bought within that market cycle or are forced to sell because of their leverage position. Speculators then unwind their positions, many at a slight loss.

Again remember William Goldman’s wisdom “nobody knows anything”, I certainly don’t. But here is a US site on the US housing bubble that might make you think.