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Housing bubble a real danger: ASIC

Property prices in Melbourne and Sydney are closer than ever to bubble territory, and investors would be wise to park their cash elsewhere, the Australian Securities and Investments Commission (ASIC) has warned.

In an interview with The Australian Financial Review, ASIC chairman Greg Medcraft said he was “quite worried” about the property markets in the nation’s two biggest cities.

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“History shows that people don’t know when they are in a bubble until it’s over,” he said.

“In housing, the long-term average income to average price ratio is four to five times but at the moment it is at historic highs.”

He said record low interest rates will only exacerbate the problem.

“There is always a danger when rates get so low. That’s when people start borrowing when they can’t afford it. What generally happens is rates start to rise which affects you ability to pay, and rate rises can actually bust a bubble, so you end up with a double whammy.”

A sluggish economy and rising unemployment mean there is an increased danger of borrowers finding themselves unable to make their mortgage payments.

This weekend the auction clearance rate in Sydney was 84 per cent, while in Melbourne it was 80 per cent. That compares with 46 per cent in Brisbane.

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