Understanding a housing ‘bubble’

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Federal Treasurer Joe Hockey has caused a stir by saying that people looking to buy their first home should ‘get a good job’. 

It has prompted the Opposition to label him as out of touch. 

“The starting point for a first home buyer is to get a good job that pays good money,” Mr Hockey said. 

“Then you can go to the bank and you can borrow money.”

The comments come amid the federal Government’s efforts to reassure the Australian public that the price of residential property is not being driven up by foreign investment. 

Mr Hockey admitted property prices were inflated in Sydney but stopped short of saying they were unaffordable for first-home buyers. 

“If housing were unaffordable in Sydney, no-one would be buying it,” he said. 

Treasury secretary John Fraser warned recently that Sydney was ‘unequivocally’ in a housing bubble.

So what exactly is a housing bubble and how do they form and operate? Investopedia have put it together in its simplest terms and is a great way to understand how housing bubbles work, remembering that they often only exist depending on who you talk to! 

The life cycle of a housing bubble 

  • Low interest rates, loosening lending standards bring borrowers into the market
  • Demand for property increases in the face of limited supply
  • Supply takes a relatively long time to replenish and increase
  • Speculators enter the market believing profits can be made through short-term buying and selling
  • Demand increases further
  • Interest rates rise, lending standards tighten
  • Demand decreases, or stagnates; supply increases
  • Prices drop sharply
  • The bubble bursts


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