Daily Bulletin

The Conversation

  • Written by The Conversation Contributor

The price gap between houses and apartments in many Australian cities is closing as property investors exhibit a significant degree of herding behaviour, according to new research.

The research comes amid speculation that Australia is in a housing bubble. Herding behaviour is leading to excessive borrowing, further fuelling apartment prices, particularly in Sydney.

A major cause of the sub-prime crisis in the US was a herd mentality, in which home buyers were influenced by purchasing behaviour of others. More recently a widely publicised 2015 report by global fund manager PIMCO suggested that low interest rates and rising house prices in Australia were driving similar behaviour.

We examined whether there was formal evidence of a herd mentality in Australian metropolitan property markets. To do so, we looked at the dynamic interaction between house prices and apartment prices in Australian capital cities using monthly CoreLogic RP Data from December 1995 to June 2015.

image Figure 1. Monthly house and Apartment prices (December 1995- June 2015) Note: Green dotted lines show the narrowing of the pairs over time. CoreLogic RP Data

Figure 1 shows house and apartment prices exhibit a strong degree of co-movement and both prices tend to deviate from each other quite often. Nevertheless, every now and then the price gap has narrowed.

Except for Canberra, in all cities the narrowing takes place after a long period of widening. There are at least two reasons why there is a long-run relationship between house and apartment prices. First, houses and apartments are considered as substitutable investments. Second, negative gearing and capital gains provisions encourage people to borrow against the equity in their home to purchase an investment property, which is typically an apartment. When the price of the family home increases, this boosts demand for apartments, pushing up their price as well.

We found that in some cities such as Sydney, investors can equally profit by purchasing apartments because rising house prices eventually push up apartment prices and vice versa.

We found house prices significantly affect apartment prices across all cities. But in only four cities (Adelaide, Melbourne, Perth and Sydney) apartment and house prices influenced each other equally. However, when apartment prices are on the rise (i.e. the market is bullish), the positive impact of house prices on apartment prices is substantially larger. This implies that investors exhibit a significant degree of herding behaviour. Such evidence of herd mentality is highest in Sydney and lowest in Darwin.

Our finding for Sydney is consistent with a widely accepted view by RBA officials who argue that prices have grown too fast and there is a housing bubble threatening to burst. Vernon Smith, who won the 2002 Nobel Prize in Economics and visited Australia in July 2015, also recently said Sydney house prices are in a bubble.

There are various ways in which this herd mentality might be reined in, including adjusting interest rates, tightening lending criteria, changing negative gearing and reforms to self-managed superannuation. Some of these initiatives have already been introduced.

In order to address a similar problem, in February 2014 Canada decided to ban rich foreign nationals from purchasing property and, as a result, some turned to Australia as their next favourite destination.

Although Australia has partially recognised this issue by prohibiting the purchase of established properties by foreign investors, there still remains several loopholes that go undetected, making housing extremely unaffordable for young Australians. This has increased intergenerational inequality between millennials and baby boomers that policy makers must be brave enough to make hard decisions about based on evidence rather than election outcomes.

Authors: The Conversation Contributor

Read more http://theconversation.com/the-herd-driven-housing-bubble-that-could-trigger-an-apartment-bust-57626

Writers Wanted

Record year of growth for Tweed based business The Electrical Co


Former US presidential candidate and acclaimed Gold medalist to headline Brisbane’s 2021 Asia Pacific Cities Summit


The Conversation


Prime Minister Scott Morrison's interview with Ray Hadley, 2GB

RAY HADLEY: Prime Minister, good morning to you.   PRIME MINISTER: G’day, Ray.   HADLEY: Gee, you’ve had a week.   PRIME MINISTER: Well, there's been a lot of weeks like this. This time last...

Scott Morrison - avatar Scott Morrison

Ray Hadley's interview with Scott Morrison

RAY HADLEY: I'm going to go straight to the Prime Minister, Scott Morrison is on the line right now. Prime Minister, good morning to you.    PRIME MINISTER: Good morning, Ray.   HADLEY: Just d...

Ray Hadley - avatar Ray Hadley

Defence and Veterans suicide Royal Commission

Today the Government has formally established a Royal Commission into Defence and Veteran Suicide following approval by the Governor-General.   Prime Minister Scott Morrison said the Royal Commi...

Scott Morrison - avatar Scott Morrison

Business News

Record year of growth for Tweed based business The Electrical Co

While many businesses struggled to stay afloat during the COVID-19 affected 2021 financial year, Tweed Heads based The Electrical Co. completed more than 50,000 smart meter installations across Aust...

a contributor - avatar a contributor

The Most Common Reasons why Employees End Up Leaving a Company

It is important for businesses to make sure they find the right people for their open positions. That is why a lot of companies are relying on professional outplacement services. A lot of companie...

NewsServices.com - avatar NewsServices.com

The little Aussie face sock startup is riding the personalized gift game

In a world where everybody has different desires, interests, and goals, what can be better than giving them things that meet their individual requirements. Personalized gifts have taken on the mar...

NewsServices.com - avatar NewsServices.com