House Price Bull Heaven: Australian property bubble inevitable say top economists; House prices continue to move solidly higher. It is nearly as good as it can get for housing bulls.
Tweet Topic Started: 18 Sep 2013, 09:35 AM (2,276 Views)
Bubbles are caused by overly exuberant behaviour. If we have an undersupply of properties we would expect to see some price rises, but the argument that ‘bubbles only occur when supply exceeds demand’ relies on a premise that in an undersupply situation 100% of all price rises must be based on that shortage.
But why? The fundamentals of a shortage might actually explain 50%, or 10%, or 90% of the price rises. In fact the chances of it explaining 100% are nil, as obviously a supply shortage is a market signal for future pressure on prices, which increases speculative demand today (speculative demand which may be watching for a downward turn and jump off the moment it sees one).
What I’m splitting hairs about, is that the real question is how much of these price rises are based on fundamentals (buyers who want a home to live in and will continue to own the property regardless of where the prices of the market go) and how much is based on speculation (buyers who are looking to maximise capital gains and would rationally sell if they believe capital gains will not continue or that they might even suffer losses). By absolute necessity, the more of the second kind of buyer you see in a market the more volatility will be in that market.
The existence of a housing shortage does not give ANY indication to answer this. The number of investors buying DOES, and that is at record highs.
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