Annual inflation, measured by the Consumer Price Index (CPI) was a very modest 1.5% per annum, measured to the end of June 2015. Although this was a rise of 0.2% compared with the year ended March 2015, it remains at the lower end of the Reserve Bank of Australia’s target range. The implication is that the economy’s growth is slow and not following through into greater rewards for business effort. Some suggest this is fuelling investments in property, with the desire for higher returns perhaps clouding judgements.
Headline CPI is shown in the chart below, over the last decade. There is only one period in that time, in 2H’08, that inflation pushed the upper boundaries of acceptability. For most of the decade it has moved within target boundaries, only dropping lower from the middle of 2014.
To go straight to the dashboard and take a closer look at the data, click here.
With lower reward for effort available; further good evidence of which is low interest rates; many investors have turned their attention to property, seeking both income and capital growth. This has in turn pushed prices up, exciting concerns about a possible pricing bubble that could burst to the national detriment.
As a recent article in The Australian stated about this scenario, “…building approvals appear to have peaked in the March quarter this year. The trend since then has turned negative and based on previous cycles we should expect approvals to fall rapidly from this point.” The article goes on to say, “But based on the market over the past 20 years — and with knowledge that there is nothing particularly unusual about this episode — it appears as though residential construction should peak in either March or June next year.”
Now this is at odds with the previous item in Statistics Count, which suggests that pent up demand will continue to be met because some of the market fundamentals have changed and that therefore, there is something unusual about this boom.
Whatever view you care to follow about the prospects for housing approvals, one thing is agreed by pundits for both arguments – prices are under threat in this low inflation environment. There is an important distinction between a market being over-priced and a bubble bursting. Over-priced markets re-correct and there is always something left. When a bubble bursts, there is nothing left.
So, the hyperbolic language aside, a price correction is distinctly possible. We will leave the last word here to The Australian, “Although there has been a clear undersupply of housing over the past couple of decades, that hasn’t stopped prices from falling during periods when the demand and supply dynamic shifted. A mining and income boom and favourable demographics didn’t stop house prices from falling in 2008 or 2011.”
