Housing bubble in Melbourne

Government has done nothing effectual to correct the housing bubble in Melbourne, Australia that has been going for years. Do the Australian and state governments have a detailed plan on how to deal with it? Not that I have heard of - yet large mortgage payments are taking money out of the pockets of Australians every day. A popular misconception is that supply and demand is the only factor that determines house prices. I say that the housing boom is fed by three factors.

• Demand. Due to high immigration, demand has been strong.  Added to this, investor demand is strong based on their notion that prices will continue to rise.  This is despite government reversing permissions for foreign investors and supply keeping up with population housing needs.

• Banks giving high credit for mortgages. Banks are giving credit based on property prices increasing. If property prices appear to be leveling off, banks will not lend money without 20% deposit, and buyers will be cautious before sticking their hands up at auctions.

• Australians' love of property. Australians talk about property all the time. It is the main vehicle that Australians use to invest and gain wealth. However, canny investors know that property prices in Melbourne are 30% above long-term trend and cannot go up indefinitely. How many bubbles burst (eg USA, Thailand) before we realise?

Housing booms make property owners feel richer. But this is only better if you already have a place to live and an investment property. It is worse for people wanting to upgrade their house as the differential between the old and new house is larger.

I predict that the housing boom will run until mid 2010. The end of the housing boom will occur after the following:

1. Prices will reach a level that new entrants will not be able to bid at; and

2. Rising interest rates will tip a critical mass of people into going into foreclosure - this will change bank lending practices.

When this happens, prices will stabilise and may drop.

Update 13/5/2011 As predicted, the bubble is now contracting.