How to spot a housing bubbleSeptember 26, 2013 - 11:49AM
Glenda Kwek
The recent strong growth in the housing market, coupled with record-low interest rates, has raised fears about a real estate price bubble.
House prices are at their highest in three years. Mortgage lending is picking up. There has been increased demand from investors, prompting the Reserve Bank to warn on Wednesday in its Financial Stability Review (FSR) that "it is important that those purchasing property do so with realistic expectations of future dwelling price growth".
Fears of a housing price bubble - a factor in the global financial crisis, are not isolated to Australia. New Zealand has recently tightened lending conditions, while the Bank of England said it was closely watching property price rises in Britain.
Last week, the Reserve Bank hosed down fears of a housing price bubble as "unrealistically alarmist", with its assistant governor Malcolm Edey saying prices were rising in line with incomes over the past decade.
But what constitutes a housing bubble? How do we know if we are approaching one, or already in one? Can a bubble only be identified in hindsight?

There's no definitive checklist, but here is a list of factors analysts say are central to determining whether a bubble is forming.
1. Property pricesA sharp rise in housing prices is one of the first indicators that a housing market is approaching bubble territory. RP Data-Rismark figures show that the capital city house prices rose 4 per cent in the three months to August, the largest growth since April 2010.
The forecasts for housing price growth is more bullish. For Sydney, home prices are projected to soar by 15 to 20 per cent next year, and that's after growth of 9 to 12 per cent this year, data firm SQM Research said last week.
As a comparison, the European Central Bank estimated at between 1995 to 2005, homes prices in Ireland more than tripled while in the US they soared by 70 per cent. The prices then sank by more than 30 per cent when the financial crisis hit. With the benefit of hindsight, such steep price rises can be see as signs of a bubble about to bust.
House prices in Australia are considered to be expensive, experts agree. In a housing bubble, they also have to be seen as unsustainable.
At this stage, analysts say Australia's above-average population growth, an actual excess of demand over supply - and only a gradual lift in construction, coupled with low vacancy rates and rising rents, are legitimate factors feeding the strong rises.
2. Credit growthStrong credit growth has been cited as a key factor in fuelling a housing bubble that would eventually burst. It can be driven by low interest rates and loose lending standards, which could then lead to mortgage borrowers being over leveraged.
If more and more people are taking on debt, and become heavily leveraged (level of indebtedness), a sudden change in the wider economy such as a rise in unemployment could see these mortgage holders struggle to repay their debt.
"The word bubble somehow implies artificial. A clear source of artificially inflated housing prices is leverage, [or] borrowing. If money is freely available in the economy as was the case in the US in the run up to 2007, then of course people can borrow freely at very low rates," NAB chief markets economist Rob Henderson says.
Australia's cash rate is at 2.5 per cent - a 60-year-low. The low interest rate level is driven by the Reserve Bank's attempts to boost the economy - by growing the housing market - as the economy rebalances away from mining-led growth.
But is the low interest rate environment stoking a rush into the property market?
Not quite, according to housing credit growth figures. Credit growth has lifted off its historic lows from earlier this year, but remain very soft relative to previous years.
Housing credit growth lifted by 4.7 per cent in the 12 months to August. Part of the reason why credit growth is growing at a slower pace is that about half of households, according to anecdotal evidence, are not reducing their regular mortgage payments as interest rates fallen, the RBA said.
However, this slow growth should be viewed together with Australia's high household debt-to-income ratio, which the RBA has warned about. It is at 147.3 per cent, lower than the record-level of 153 per cent which it reached before the financial crisis, according to data from the central bank.
As Bloomberg has pointed out, that's still higher than the 133 per cent household debt-to-income ratio for Americans at the peak of the subprime mortgage boom, according to Federal Reserve Bank of San Francisco data.
3. Lending standards
4. Speculation
Read more:
http://www.smh.com.au/business/the-economy/how-to-spot-a-housing-bubble-20130925-2ue44.html