Is the property bubble about to burst?

Even more investors are diving into the market, reports Pam Walkley

The talk of a house price bubble has not scared off property investors, who have continued to plough into real estate.

In February, the total value of investment finance commitments reached fresh highs, according to RP Data, hitting $10.7 billion, a 4.4% monthly increase and a 32.3% year-on-year increase. "As a proportion of all lending, investors accounted for 38.8% in February, which is at the highest level recorded since late 2003," RP Data says.

Indeed, some commentators, mainly based overseas, are predicting the price bubble will burst. The US forecaster, economist and demographer Harry Dent predicts prices could fall as much as 50%.

Part of his rationale is that house prices in Sydney and Melbourne have reached almost 10 times income levels - the same point they were in California when the US market peaked before bursting.

But local analysts have hit back.

Dent's prediction does not reflect the history or underlying strength of the Australian housing market's dynamics, Andrew Wilson, senior economist with Australian Property Monitors, told the The Sydney Morning Herald. Wilson said that while Sydney's current price growth of 15% was unsustainable, it was not a bubble, and he expected growth to flatten this year.

Michael Yardney, a director at Metropole Property Strategists, also rejects Dent's bubble theory, saying it is not the first time Dent has predicted a bust. "Remember, for a property market to crash, you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them."

For our property bubble to burst - which is different from a slowdown or the normal cyclical correction - Yardney says you need one or more of four things to happen, none of which is on the horizon: a major depression, massive unemployment, exceedingly high interest rates and an excessive oversupply of properties. But for investors, particularly those buying in Sydney, it is a time to be cautious and maybe sit back until prices moderate.

The other factor that investors must always take into account when selecting properties is demographics. After all, the main requirement for the success of an investment property is that it is in strong demand from rent-paying tenants.

First, pay attention to overall population growth patterns. The latest Australian Bureau of Statistics figures show that at June 2013 the rate of population growth in capital cities was significantly greater than that of regional markets. Almost two-thirds (66.3%) of all Australians live in a capital city, up from 64.6% in 1991. And almost two out of every five (39.4%) live in either Sydney or Melbourne. Perth and Brisbane have also experienced strong population growth between 1991 and 2013, whereas Adelaide and Hobart have gone backwards.

Second, pay attention to household sizes. "Living in compact housing is becoming more popular across Australia due to our changing demographic make-up and lifestyle expectations," says real estate commentator Michael Matusik. He points to the fact that every second household now supports just one or two people and that this proportion will rise.

Changing lifestyles also mean that long commutes to work are becoming less acceptable, Matusik says. "We, as a nation, seem happy to trade space for place."

Could you save thousands?

Juggling loans, credit cards and banking accounts can feel like a circus sometimes, but package home loans have become a very popular option for helping households manage their finances more efficiently.

More and more people are opting for their home loan to be taken as part of a package that can include home loan interest rate discounts, credit cards, offset accounts, earning additional interest on savings accounts, and possible benefits on other products such as insurance and car and personal loans.

There are a range of benefits when considering whether to manage your loan this way, including often having lower interest rates than a standard home loan, redraw options, increased flexibility and 100% interest offset accounts, which help to manage your cash flow and reduce the interest you pay on your home loan.

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