What is a property bubble and are we in one?

auction sign out the front of a house

Nina Hendy

Posted March 30, 2022

Talk of a property bubble is swirling through the housing market. But what does it mean, and how do you know if we’re in one? 

The Australian property market has enjoyed a strong run the past couple of years amid skyrocketing housing prices across the nation. 

Driven by record low interest rates and a pandemic that drove many Victorians to upsize their home or move out of the city in search of greener pastures, house prices rose by 10.7 per cent in 2020, and 18.6 per cent in 2021. The big banks have predicted more moderate price rises for Melbourne in Melbourne in 2022 of between 5 and 8 per cent.

Data shows that the median house price is fast closing in on $1 million, which is faster than at any other time in the past three decades. In some suburbs, prices have been rising by hundreds of dollars a day, pushing home ownership completely out of reach for many. But many are wondering whether we’re still in the boom, if the market could be showing signs of dropping, and whether in fact we’re in a property bubble.

What is a property bubble? 

Put simply, a property bubble is a term used to describe the economic theory that the property market has become significantly overpriced and is therefore naturally due for a significant downturn.

Licensed estate agent and director of real estate firm Kay & Burton Peter Kudelka adds: “A property bubble is a period of unusual growth in housing demand, coupled with an above-average rise in house prices.” 

In other words, a property bubble is an economic bubble caused by a rapid increase in market prices that raise to unsustainable levels relative to wages and rents, and then decline again. 

The most significant housing bubble was arguably in the early 1990s. Once that property bubble burst, property prices fell 10 per cent in Melbourne between 1989 and 1991.

What causes the bubble? 

Over time, property values can fall, or at least fail to match growth in wages. Other economic factors that cause the bubble can include low interest rates, government incentives to fuel the market, migration, investment dollars pouring into the property market and a demand and supply imbalance.

According to the Reserve Bank, an interest rate hike is plausible in 2022 as the complexities of global unrest threaten to increase inflation. 

In a recent speech, Governor of the Reserve Bank of Australia, Philip Lowe, says the bank was toeing the line between lifting rates too early and jeopardising unemployment figures, or waiting too long and suffering a supply shock.

But history shows that the balloon bubble does reflate again in time. 


boy running outsite of home with family in background

Moderate price rises of between 5 and 8 per cent are predicted for Melbourne in 2022.

Are we in a housing bubble now? 

Kudelka is adamant that we’re not. “No, I don’t believe that we’re in a bubble. The current period of strong growth is due to pent up demand following Covid restrictions coupled with low stock volumes.” 

Of course, the future housing market is hard to predict. But it’s fair to say that what goes up, must come down. 

However, Kudelka, for one, believes Victoria is in a very stable market. “Analysts appear to be predicting a range of outcomes, with the general consensus being a steady rise of between five and 10 per cent for 2022,” Kudelka says. 

How the market will change with the predicted immigration with borders reopening is yet to be seen. 

Kudelka says: “We believe that the lack of available housing coupled with the predicted immigration will be of benefit to sellers.”

But Domain chief of research Dr Nicola Powell says the property market is beginning to cool, with soaring house prices adding to ongoing affordability pressures, affecting buyers’ participation in the market. 

What does the data show? 

Commonwealth Bank analysis of the market suggests that the market will peak in 2022 before a drop in 2023 as borrowing costs rise. 

The data suggests that property prices in Melbourne could drop by nine per cent in 2023. 

RateCity.com.au analysis points out that if CBA’s forecasts are realised, the median dwelling in Melbourne could drop to $880,871 next year, down from just under the million-dollar mark where median property prices are hovering now.  


house with tiled roof and white picket fence

Data suggests that property prices in Melbourne could drop by nine per cent in 2023. 

Could the market be wavering? 

RateCity.com.au research director Sally Tindall says property prices were already wavering on the back of higher fixed rates, stricter loan serviceability tests by lenders and a fear among consumers of buying at the peak of the market. 

“This could be the beginning of the end for the current property price peak in Melbourne,” Tindall says. 

While falling property prices can be stressful for anyone buying at or near the peak of a market, if they keep their head down and their mortgage repayments up, they should be able to ride out any dips, she says. 

“People might not like the idea of losing equity in their home over the next couple of years, but it’s worth looking at the bigger picture. Any property price drops will be coming off the bank of monumental gains across the country over the last year and a half, which sent most homeowners’ equity skyrocketing,” Tindall says. 

What should I do if the property bubble bursts? 

If the property bubble does burst, Australians wouldn’t want to be up to their eyeballs in mortgage debt. So, make sure you don’t borrow more than you can afford to pay back.

However, remember that property price drops will provide reprieve for people hoping to get their foot on the property ladder in the overheated market. 

Tindall says: “If property prices fall on the back of rising rates, buyers might not need to stump up as much for a deposit. They will, however, need to make higher monthly repayments, which means they won’t be able to borrow as much from the bank.” 

She warns would-be first home buyers to crunch the numbers before they pop the champagne. 

“First home buyers should think carefully about overextending themselves in a market where rates are set to rise, and prices are forecast to fall. Make sure you have a buffer to ride out any bumps,” Tindall says. 


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