Bubble bubble, toil or trouble?

​As the Sydney residential property market moves firmly into the recovery phase of the cycle, talk of a price “bubble” has re-emerged.

You may recall a story I wrote a couple of years ago called “Yes Virginia, there is a property bubble”. The point of the story was that price bubbles are normal, not to be feared or derided. In my view nothing has changed.

As the commentary heats up, it is really interesting to me to watch the different views and reactions various interest groups have in response to housing market activity.

The big end of town (bank treasury departments, the RBA and other macro economic types) seem to get it, taking a fairly objective view of the supply and demand equation and generally observing the market is behaving within long-term expectations. Pretty much the economic rationalists of the property commentariat. I have to say some quality research work has been coming out of the banks in particular in recent times.

At the other end of the spectrum, Gen Y (the prospective first-time buyers among us) would love to see prices move lower as they strive to gain a foot-hold in the market and it is this cohort that shouts loudest about bubbles and market distortions while waving the finger at baby-boomers for allegedly using up all the good times. Out of this group also comes the new world order devotees. They are the people who believe all the rules have changed, history doesn’t repeat and it is going to be tougher for them to achieve their goals than at virtually any time in human history. What a nonsense. Ironically, some of their parents believe them!

Interestingly, there’s another group who have sprung to life in recent months and that is impatient investors. I don’t mean investors buying, I mean investors selling. After years of waiting for Sydney to kick into gear, with obvious signs of life now evident in the market, some investors are seizing the opportunity to sell, apparently in the belief that the increased activity is a short-lived exit opportunity. I think anyone who sells residential property in Sydney now will probably regret it in a few years but such is the nature of human behaviour. There’s a chapter in one of our books called Always Buy - Never Sell which highlights some of the thinking that motivates people to go down that path.

It has been widely reported that investors are in fact driving the recovery in Sydney sales volumes and prices.

There are two main types of residential investor, yield-seeking and growth focused. Yield-seekers tend to be older and, motivated by falling returns on bank deposits, turn to rental property to provide income while also attracting capital growth to preserve the real value of their capital. Growth-focused investors are in the asset accumulation phase of the investment life cycle and are looking for markets where the prospect of increased prices is evident. Both those groups are out in force in the Sydney market at present.

In bubble terms, the group to watch are the growth investors. Their numbers will swell over coming months as it becomes increasingly obvious that the market is moving. As usual, the ones who wait until prices approach the cyclical peak are the ones at risk of taking a bubble bath. Whether that peak occurs in 3, 4 or 5 years time we’ll all know after the fact.

In the meantime – seasoned investors know it is better to enter the market too soon than too late.