What is a housing bubble and are we in one?

When I last updated this in 2021, interest rates were near zero; you could find home loan rates south of 2% p.a. pretty easily; the economy was still battling with the Covid wreck and coming to terms with the massive run up of debt (and later, inflation); and home prices at the median across Australia were just over $700,000.

In 2022 we saw rates rise dramatically, and there was a slight pullback in house prices, and there was much talk of a continued cooling in the housing market - maybe even the bubble pops? But that didn't last for long.

Since then, rates are north of 3% - home loan rates still in the 5-6% range - and the median home price is nudging $900,000.

In some areas, the growth in the median value out-earned the average/median worker.

Brisbane, Adelaide and Perth have pretty much overtaken Melbourne in the property price rankings because of their sharp run-up in values.

Sound unsustainable? Well it's been happening for 20-30 years.

Whether you're a property bull or a property bear, 'housing bubble' is a popular term. But there's fierce debate over whether Australia is in one or not. Australia went nearly 30 years without a technical recession until Covid, and in that time home prices went from a $121,000-odd median ($283,000 in today's money), to nearly $900k today.

In that time, the Reserve Bank cash rate went from nearly 18% to just 0.10% then back to a recent peak of 4.35%. So, what gives? Are we in a flipping housing bubble or not?

What is a housing bubble?

In its simplest definition, a housing bubble is the run-up of house prices driven by demand and speculation. The bubble can get so big so as to rate house prices 'overvalued'.

As bubbles are formed, they float through the sky all pretty like. However, they pop eventually, and in housing, that's generally due to stagnating demand, sometimes mixed in with increased supply.

The overarching law of economics is the supply/demand theory. Note, 'supply' isn't necessarily always part of the housing bubble definition. The latest Australian Bureau of Statistics (ABS) data indicates tens of thousands of homes are approved to build in any given month, yet home prices keep on increasin'.

Think of a housing bubble like a hot nightclub. There's people waiting to get in - they're the people yet to enter the market. They're all cold and shivering and moody standing in line. Then there's the people inside - they're the people who have at least paid a house deposit and have a mortgage. Most are having a great time.

If the nightclub gets too full (the bubble gets too big), the rowdier bunch get kicked out e.g. those who default on their mortgage or have to sell. Too many expensive Jagerbombs (mortgage rate rises) can also turn people off, and in addition, the people waiting in line get tired and give up (lower demand). And that is how a bubble could start to burst.

Identifying a housing bubble

Yale University economics professor Robert Shiller made a 'bubble checklist' in 2010:

1. Sharp increases in the price of an asset like real estate or shares

2. Great public excitement about said increases

3. An accompanying media frenzy

4. Stories of people earning much money, causing envy among people who are not

5. Growing interest in asset class among the general public

6. "New era" theories to justify unprecedented price increases

7. A decline in lending standards

Australia arguably ticks at least six, or even seven of these points. So, the question on everyone's lips - is Australia in a housing bubble? The answer isn't so simple.

See Also: Australian House Prices Over 50 Years: A Retrospective

Is Australia in a housing bubble?

Many academics agree that Aussie housing is overvalued, but whether it's a bubble or a sustained rise of values over 30 years is up for debate.

In 2014, economists at the Reserve Bank of Australia (RBA), Peter Tulip and Ryan Fox, released a paper examining if Australian property was overvalued. Mr Tulip and Mr Fox used the yardstick of whether or not it was more expensive to own a home than to rent.

The RBA paper concluded that Australian housing was not overvalued.

However, there are many measures you can use to determine if the housing market is in a bubble.

• The Economist in 2013 used a price-to-income methodology, and concluded that Australian housing was 24% overvalued.

• When the publication looked at price-to-rent ratios against long term averages, it found prices were as much as 46% overvalued.

Imagine house prices halving! However, 2013 and 2014 was ages ago - how about now?

In 2021, David Smith, then the chief customer officer for retail financial services group Aussie, told Savings.com.au there were no "apparent signs of any bubbles yet".

"The housing market moved through one of the largest and longest periods of economic uncertainty seen in generations - possibly one of the most defining moments in property we will see in a lifetime. But even during enormous uncertainty, the Australian housing market has remained buoyant."

- David Smith, then-CCO for Aussie Home Loans, 2021

But how could Australian housing withstand a global pandemic and the worst recession 'on record' (data goes back to the 1950s)?

See Also: Which generation had it harder when buying a home?

Not to confuse a bubble with overvalued property…

The old mantra in Australia is 'housing prices double every seven to 10 years'. Stop and think about that for a second.

Is the median house price going to cost in excess of $44 million by 2100? Don't think so. Unless you're willing to pay me $7.3 million a year median wage (house price six-times income) by then.

Deakin Business School associate professor of property and real estate Adrian Lee told Savings.com.au in 2021 it could be more of a case of simple house price rises than bubble economics.

"House price increases may not necessarily be bubble activity. If it is a bubble, then it's been … a 20 year bubble. It's been an incredible trajectory we've had in the past two decades," he said.

Assoc Prof Lee also said the strongest growth is in the cities, and as Australia is a heavily urbanised country (i.e. most people live in big cities), strong price growth in cities could be misconstrued as a bubble.

"This is not a unique case to Australia. So many other big cities have experienced this. In China, Singapore, in the US, London … Toronto in Canada have all these big house price increases so it's not an isolated event," he said.

"Cities are very attractive to people to live in… 'agglomeration' it's called - big cities have a lot of benefits and people will try to make it work there."

Chief Economist of fund manager BetaShares David Bassanese hinted that Australia is not in a housing bubble currently, as of 2021.

"Based on current interest rates, national house prices would have to rise by 25% from June quarter levels to reduce mortgage affordability to the average level since mid-2004.

"For affordability to be reduced to the recent lows in 2010 and 2017, house prices would have to rise by 35%," he said.

"History suggests that the way the market will find equilibrium under these circumstances is through a lift in house prices, until mortgage affordability for the marginal buyer is reduced to at least the long-run average - if not pushed to previous trough levels if a bubble mentality develops."

In the four years since this conversation, home prices have increased nearly 30%.

The average variable mortgage rate for owner occupiers has gone from 2.72% p.a. to 5.51% p.a. 

As the old saying goes: Markets can stay irrational far longer than you can stay solvent.

While Australia might not be in a property bubble in the classical sense, 'overvalued' property seems to be more of an issue affecting homebuyers.

A quick word about bricks and mortar

The price-to-income ratio of housing really took off after the year 2000, particularly in Sydney. One could argue the quality (at least the size and amenities) of housing also improved. ABS data indicates floor area increased 6% from 234 sq m in 2005, to 248 sq m in 2020.

We're also building bigger houses on smaller blocks. The average block size in Sydney for example decreased 42% from 654 sq m in 2005 to 447 sq m in 2020. Even the 'slowest' decliner, Adelaide, declined in block size by 16%. CommSec also said the average floor plan size of a new build was at an 11-year high at 235 sq m as of 2021.

Australian houses are some of the world's biggest.

What do governments do to 'protect the bubble'?

There are various government policies that are designed to address housing affordability, but could instead fuel speculation, induce demand, and promote the financialisation of housing as an asset class:

• Allowing concessions such as capital gains discounts and negative gearing to be deducted against total income, not income from the asset/s.

• First home buyer grants and stamp duty concessions

• Withdrawing super to buy a property
• 5% Deposit Scheme
• Shared equity schemes
• Lax developer land tax rules promoting land banking
• Local and state government planning restrictions and delays of unlocking new supply/greenfield estates or densification of suburbs

How good is that! Free money! Hold your horses, not quite. While these policies at a micro level obviously provide a leg up for home buyers and promote investors propping up rental supply, at a macro level they induce demand.

Touching on the RBA's 2014 paper again, it assumes government programs and policies are "small enough to be ignored". Indeed, government tinkering throws another spanner in the 'value' equation, which is complex enough for RBA economists to gloss over.

It's difficult to truly quantify how government 'handout' policies actually influence house price speculation, but that doesn't stop the pundits from trying.

Any hurdle knocked down for you, could subsequently be a hurdle for someone running behind you to jump over.

To quote urban planning expert Dr Cameron Murray: "If you want more housing, you build it. Instead, governments tweak the funding settings for social housing, tweak rules about town planning, buy equity in homes, and provide cash gifts to homebuyers."

A research paper by Housing Australia released in 2020 found: "A lower period of housing demand due to the global pandemic presents an opportunity to revisit housing policy frameworks - particularly planning frameworks - to ensure that policies can accommodate future population growth without adverse consequences for affordability."

Since then, government stimulus has only ramped up, leaving questions as to what frameworks they are particularly addressing.

Imagine for a second

Could you imagine the Government releasing a 'First Share Builder' grant? Hypothetically, they'd give you $10,000 to purchase any shares … say from BHP. Think about how fast that share price would skyrocket.

And to double down, imagine if you could leverage your shares by taking out a loan. Your $10,000 investment could be leveraged to buy $200,000 worth of shares (you can leverage shares using derivatives or margin loans, but that's another story). When painted like this, government meddling in the housing market sounds truly bananas.

But you can't live in shares, so there's always going to be intrinsic value in housing. This is why the government seems intent on propping it up.

If the housing industry were to truly tumble, it would take a huge bite out of Australia's economy. According to the Property Council of Australia, over one in four wages in Australia rely on the property industry, with the sector employing more people than any other, whether that's tradespeople, real estate agents, construction workers, mortgage brokers, banking staff, insurance workers, solicitors and so on.

Conversations with acquaintances at barbecues and work functions would also dry up, fast.

Not to confuse mortgage serviceability with housing affordability

Policymakers - and pundits - far and wide like to deliberately conflate affordability with the ability to save for a deposit and service a mortgage.

However they are symptoms of a larger issue.

"[Housing Australia] analysis shows households in the third income quintile living in the greater Sydney region can now only afford 10% of properties, compared with 25% in 1998," a Housing Australia report found in 2020.

Indeed, Housing Australia occasionally publishes this research in order to quasi-justify any further 'first home buyer help' it dishes out; the cognitive dissonance not quite making the research land.

Research periodically released from Domain shows Aussies take upwards of 10 years to save for a 20% deposit for a starter home in many markets, and it's only getting worse in a lot of cities. 

Ostensibly, programs such as the 5% deposit scheme slash the time it takes to save for that deposit and get their foot in the nightclub door. At the expense of other punters who turn up to the nightclub later.

Once you've paid the exorbitant cover charge (house deposit), you get $3 basics all night (a cheap mortgage compared to years past), potentially at the expense of other club-goers waiting to get in.

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Effects of low interest rates on house prices

Without a doubt, the mac daddy of levers to pull is the RBA cash rate. This lever arguably fuels demand, hype, and speculation more than any hunks of flesh the government throws out to the rabid dogs in the housing world.

BetaShares' Mr Bassanese said cutting the cash rate can help fuel speculation.

"What we know from history is that when mortgage rates drop, new home buyers don't just pocket the savings - they simply bid more for properties as their affordability limit has improved," he said.

"Helping support a likely lift in house prices, moreover, is the RBA's commentary that they will not to lift interest rates for up to three years - or not before there's been a notable rise in consumer price inflation into the 2 to 3% target band."

Assoc Prof Lee also said it's the flipside of the interest rate coin that can push people into property.

"There's nowhere else to park your money … people will will look for other places if their transaction or savings account doesn't earn any interest. There's not many other alternatives," he said.

Again, even the RBA has explored the topic in-depth. RBA researcher Gianni La Cava in 2016 released a paper (here - PDF) exploring the topic in the context of the United States.

"The fall in nominal interest rates over the 1980s and 1990s raised the demand for housing and pushed up housing prices and rents (relative to non-housing prices) in supply-constrained areas," Mr La Cava argued.

"I estimate that the long-term decline in interest rates can explain more than half the increase in the share of nominal income spent on housing since the early 1980s. It is surprising how little research there has been on the link between monetary policy and inequality via the housing sector."

It appears Australia rapidly fell to its nadir of housing unaffordability from 2010 to 2017, coinciding with Reserve Bank cutting the cash rate more than three percentage points from 2011 to 2019. This also coincides with a solid economic run for Australia.

When the cash rate was at 0.10% in 2020-21, the RBA didn't have many more levers to pull. This resulted in a few more exotic policies the RBA has enacted to keep the economy liquid, but we won't get into them today. (Cough… quantitative easing and the term funding facility … cough).

What happened to housing affordability in 2025?

Three rate cuts in 2025, taking the cash rate from 4.35% to 3.60% also coincided with a median home price rise of nearly 9% from January through November 2025, according to Cotality data.

Assuming you are saving for a 20% deposit, you would need to gone from a kitty of about $164k to nearly $178k. Can you save an extra $12k in less than a year?

If you borrowed 80% at the median in January, at the average mortgage rate of 6.25% p.a., you'd be repaying $4,026 a month over 30 years.

Fast forward to November, with the new median property value and an average mortgage rate of 5.51% p.a. means $4,041 a month.

So even though mortgage rates came down, you're paying more for the mortgage at average levels AND having to save more for a deposit.

This goes to show that even if mortgage affordability is 'better', it often coincides with a run-up of house prices and extra deposit hurdles, nullifying any benefit.

Examples of housing bubbles around the world

The two most prevalent and recent housing bubbles to occur were in the United States between 2006 and 2011, and Ireland between 2007 and 2013.

In the US' case, aggregated prices in the five years prior to Q1 2006 rose 54.1%, according to an NTNU Business School paper released in 2017 (here - PDF). In the five years after, to Q4 2011, prices had declined 37.1%.

Swings were harsher in Ireland. Prices there in the five years up to Q1 2007 rose 52.9%. By Q1 2013, prices had declined 51.6%. There were different factors at play in each country's bubble, but they coincided with and were catalysts for the global financial crisis.

What happens to house prices in a recession?

A recession - at least in Australia - isn't really a useful precipitator for a house price crash. In the 1990s recession, prices were broadly stable; in 2008 prices dipped a little; and in Covid, prices dipped before rocketing upwards.

The 2008 crisis wasn't technically a recession Down Under because we didn't record two consecutive quarters of negative GDP growth, propped up by China's insatiable demand for iron ore. 

1990s Recession

According to Propertyology, the median house price in Brisbane grew 6.8% in the 1991 recession year, while house prices in Hobart grew by 4.3%.

But the biggest exception was in Melbourne, where the median house price fell -2.3%. Melbourne prices didn’t seem to recover until the mid to late 90s.

PRD chief economist Dr Diaswati Mardiasmo says house prices remained relatively stable during the 90's recession because the stock market crash resulted in an increase in interest rates from other countries.

“Because of this, many pulled out their monies from the stock market to avoid further volatility and put it into the real estate market,” Dr Mardiasmo told Savings.com.au.

“We have to remember that we had a real estate boom prior to our recession – Australia had a big economic reform in the 1980s and, most importantly, credit was quite readily available from banking deregulation.

“We had a significant increase in property prices in the 1980s, to the extent that the government had to introduce capital gains tax and higher interest rates.”

Global Financial Crisis

In the months preceding the GFC, the Reserve Bank of Australia (RBA) raised the official cash rate to 7.25% (unthinkable these days!) and held it there until mid-September 2008 when the crisis hit.

The RBA’s sharp cuts to the cash rate - along with a boosted first home buyer grant and other federal government stimulus - helped stop the rot in property prices, seemingly turning them around and sending them on a bull run for several years.

According to Cotality data, the average capital city property price fell 7.6% over 13 months from peak to trough (mid-2007 to early 2009) during the GFC.

Covid

Despite talk of house prices plunging 30%, they basically did the opposite, aided by cheap funding, enhanced stimulus, and a roll-out of new first home buyer handouts. 

In March 2020 the median home price was just under $590k, dipping slightly to just under $580k in July. By April 2022, however - right before RBA rate rises - prices surpassed $771k. 

This is despite the underemployment rate hitting 14%, unemployment surpassing 7%, and real wages (wage growth minus inflation) at some of the worst levels in more than a decade.

Does Aussie housing beat inflation?

From October 2024 to October 2025, Aussie housing's median value went from $819k to about $873k or about 6.5% in growth.

In that time, prices in the ABS' consumer price index basket of goods increased 3.8%.

Aussie housing comfortably beat inflation.

This naturally changes depending on your preferred measured timeframe, but historically, at a national level, Aussie housing has outpaced inflation for much of the past 30 years.

However, results are mixed when you look at it on a more granular level - for example, Melbourne over the past decade, or Darwin or mining boom/bust towns.

It also fails to take into account holding costs of property - taxes, mortgage costs, property maintenance/management, which tend to be affected by inflation as well.

PRD's Dr Asti Mardiasmo believes that, in general, property tends to be a more inflation proof asset, for several reasons.

1. Inelasticity

Elasticity is an economic term for how much demand for a product or service changes with its price. Since people will always need a roof over their heads, property is also like this. 

This means inflation has less of an impact on property prices than other assets. While inflation can see assets like shares or bonds devalued, this is partly due to people with less money in their pockets choosing to invest less of it. As property is a necessity, with reasonably constant demand, this downward pressure is less intense. 

2. Availability of supply

Trading in stocks is as simple as it has ever been. Anyone with a spare $50 can trade on the ASX or even international markets. Some platforms will also allow you to buy bonds or gold. On the other hand, finding both a property that suits you and an owner willing to sell is more complicated.

This is one of the reasons why demand for property is constant, because the supply is limited. When people are looking to buy property, they will have specific needs in terms of location, size, number of bedrooms, etc. Buyers will typically have limited options that suit their needs, so are less likely to be able to switch to cheaper alternatives during times of inflation.

Levels of construction are also not keeping up with demand for housing. There also remains the cultural and emotional phenomenon that can't be explained by economics: Aussies' love for detached housing. 

“Units tend to feel the shocks due to higher levels of supply, especially now that in most places the tendency is to build up than wide,” Dr Mardiasmo said.

"In Queensland, Victoria and New South Wales, incoming unit builds are in the tens of thousands, but incoming new house builds are in the thousands, almost only a third of the number of units."

Put simply, houses are generally harder to build and find land for. There's also the subjective quality of where people choose to buy, with prices generally going up the closer you are to a CBD or major centre.

3. The size of the investment

Let’s say you have a property that is worth the median dwelling value in Australia. As of October 2025 that's nearly $890k according to Cotality.

Now imagine the alternative portfolio you could have built up with that amount of money. It is likely heavily diversified, made up of lots of small investments. In this second scenario, if one of the stocks you hold is underperforming due to inflation, you might decide to cut your losses and reinvest elsewhere.

This can easily be done with the tap of a few buttons, and at low cost, in your share trading app.

Diversification and liquidity is much harder when it comes to property.

Prices on property are also analysed less frequently, while you can check the price of your shares multiple times a day.

While this might seem like a negative, when you consider this on a macro scale, you realise it means that during down periods, property owners are less likely to dump their investment and sell, which would devalue the broader market further.

Cotality data shows that recent higher rates - rather than forcing people to sell - has coincided with a far lower than average rate of properties going to market. It seems property owners are choosing to hold their investment while prices are lower rather than cop a loss on such a big investment, which in turn protects the market as a whole.

Savings.com.au's two cents

It's difficult to say whether Australia is in a housing bubble or not. If it is in a bubble, it's a bloody long one, starting around the year 2000. Australia's housing bubble, if there is one, might ultimately be 'too big to fail'. Too many jobs, livelihoods, and wealth are tied up in bricks and mortar.

In Australia we can also see that 'overvalued' does not necessarily mean 'bubble', and the market seems unlike recent bubbles seen in other countries.

Additionally, mortgage serviceability is not to be confused with housing affordability. Nonetheless, the next decade will be the one to watch when it comes to house prices. As always.