The housing bubble – is stricter lending really the right response? (my humble suggestion)

You would have had to be hiding under a rock to have not heard about the purported ‘housing bubble’.

Put very simply, a housing bubble is a temporary condition that generally occurs in low interest rate environments when speculators/investors enter a market where demand is high and attempt to profit through short-term buying and selling, further driving demand.

The main markets posing concerns are Sydney and Melbourne. New and existing investors may be speculating to try and capitalize on ‘boom’ conditions.

The media has been ‘warning’ these types of investors to be careful, as entering the market in times of low interest rates exposes borrowers to increased interest expense when rates start to rise. There have also been moves to tighten lending to these investors to ‘slow down’ the booming capital city markets and avoid borrowers getting caught on the upside.

I believe that there should, of course, be a responsible approach to lending. However, I am uncertain as to whether market intervention in regards to lending is necessarily the most effective way to ‘control’ the property market. Although Sydney and Melbourne markets may be posing a concern; there are many other property markets in Australia (like the Gold Coast and Brisbane!) that are very strong that that will continue to experience strong capital growth over the next 5 years. My concern is that stricter lending requirements will see an inability for investors to buy into these other property markets.

Perhaps the better way to go is to educate investors?

A great way to do this would be to have the various government departments (like APRA, the RBA and ASIC) develop an investor education program to deliver up to date information about property investment and all the industry regulations that may go with making property investment. This could be a ‘protective’ mechanism whereby consumers will be well advised in regards to their investments.  These sorts of mechanisms are in place when people invest in other areas – but not in property.

What do you think?

Housing Bubble Australia