The Housing Bubble

Lets recap:
1. Clearance rates and selling prices for the last 3 months have been fantastic
2. Rental vacancy rates have dropped
3. Rental yields have also dropped

The disconnect between #2 and #3 is important (in Economics 101, I was told that rentals (yields) should rise when availability drops).

This leads me to the following conclusions:
1. First-home buyers are being outbid by investors. I'd probably go further and say that investors/speculators are outbidding each other as well - and since they are using their other properties as collateral, this has all the makings of a nice, big bubble. If "housing" was traded on the stock market, the indicators would be yelling 'overbought'.

2. Renters are probably extending their leases, with a marginal increase in rent, and reducing their mobility - this explains why vacancy rates are low - and consequently, why yields are also low. My Woman and I live in inner-city Melbourne, and in January we extended our lease for another year and agreed to pay $10 a week more for rent, rather than look for another house and deal with real estate agents. Meanwhile, a house down the street sold for $525k, giving any buyer of our property a yield of only 2.7%. To generate a yield of 5% on that price, our rent will effectively have to double - and even in the inner-city, I don't see that happening without riots breaking out.

Would I like to own my house - sure! In fact, that's what this rigmarole with CFDs is all about. Would I like to own it at these prices, and pay 50% of my income in mortgage repayments? I'm not nuts.

When the music stops, I wonder who'll be left holding the parcel.....

Came across this commentary from AMP Capital. The main points it makes are:

1. Australian housing remains very overvalued:

• Average Australian house prices remain very high relative to average weekly wages and need to fall about 19% for the ratio to return to more normal levels.
• House prices need to fall about 29% to bring the ratio of house prices to rents (the PE ratio for housing) back to its long-term average (after adjusting for inflation).
• National average house prices remain well above their long term trend. Since the 1920s, Australian house prices have risen on average by 3% per annum after inflation, i.e. in line with real GDP growth. To revert to their long-term trend, average house prices still need to fall 19%.

2. Housing affordability remains too poor to support a strong and sustained rebound in house prices.

3. Despite rising rents, housing rental yields remain extremely low making them unattractive to investors. The average gross rental yield is just 3.2% for capital city houses and 4.3% for units.

So, will next month's expected rate rise be the straw that break's this camel's back?