Date: Tuesday 9th June 2009
5 Things to Know
There’s passionate dinner party debate about whether Australian house prices will continue to fall or rise.
The confusion has befuddled some of the country’s best economists, with organisations like the Australian Bureau of Statistics saying house prices have fallen 2 per cent in the first three months of this year, while other property indexes – such as those from RP Data or Australian Property Monitors – showed price growth.
Pessimistic economists like University of Western Sydney’s Steve Keens argue Aussie house price will fall up to 40 per cent in Australia and JP Morgan economist Helen Kavans proclaims Australian house prices will fall by 14 per cent before the end of the year.
On the other hand, economic optimists like Macquarie Bank’s interest rate strategist Rory Roberston says there’s no way price falls will be so dramatic and Rismark International managing director Chris Joye says recessions can actually lead to increases in house prices.
So who do you believe? The bears or the bulls? The answer is: it depends. Read on to find out why …
STEP ONE: Property prices only matter at the local level
Whether Australian house prices go up or down is actually immaterial. It really only matters whether your home, investment or prospective property purchase will go up or down in price, doesn’t it?
Moreover, talking about the “Australian real estate market”, as though it behaves as a cohesive unit, is not entirely accurate. Real estate happens at the suburb-level (some real estate agents would even say street level) and Australia’s property market is actually a collective name given to literally thousands of local-level real estate markets happening all across our country.
While Australian house prices as a whole may rise or fall in price by five percentage points, some houses in suburbs may fall in value by as much as 30 per cent and others may increase by 10 per cent. These suburbs may even be next door to each other! It’s the nature of this stage of the property cycle that price volatility will continue during times of economic uncertainty.
STEP TWO: What stage of the cycle is your pond, err suburb, at?
Property markets behave a bit like a chain of ponds, with lower level, mid level and top-tier ponds that all flow into each other.
When prices start to boom, price rises occur like a ripple that filters out from one area and affects the entire pond.
But if they are only booming at the lower level, it’s very hard for those price increases to filter back up to the mid-level and top-tier ponds.
And it’s the same with price declines. Price declines – even if they are only in certain market segments or localities – have an affect on the entire market.
Right now, the Australian property market is generally doing well at the lower end, with first home buyer demand supported by first home grants, low interest rates and lots of pent up demand.
Conversely, expensive premium properties on the market are discounting prices as global economic weakness takes the gloss of years of booming prices.
Which pond is your property in? And what are the market dynamics affecting it right now?
STEP 3: Supply and demand is the key
Around Australia, there are thousands of property markets which all react differently yet still contribute to house price surveys. In fact, the ‘average’ house price is only a statistical average — it’s not a property that actually exists.
For example, there is a property market for first homes in the outer suburbs; another for slick inner city apartments, and so on. And on top of this, there is a property market for family homes. There are also property markets for farms, holiday houses and beach houses. All of these markets can react differently, in different areas depending on how many buyers are chasing the number of properties available.
If there are four buyers who want a four-bedroom house in the inner city but there is only one such house on the market, then the buyers are likely to compete to secure the property and that is likely to increase the price of the property.
Meanwhile, a new apartment development around the corner may have 10 properties for sale, but only three buyers. In this case, the developer will want to sell the properties so will keep dropping the price until all are sold.
STEP FOUR: Other influences on the market
The local economy, job growth, government policies and market sentiment will influence whether prices rise or fall in a particular location.
Are local incomes rising or falling? Can people work nearby in a job that will support the mortgage required to pay to enter the market? Are there any extra incentives like first home grants or tax exemptions that will further encourage people into the local market?
It’s obvious that falling incomes, unemployment and negative market sentiment could lead to softening prices. And if you turn that equation around and have rising incomes, jobs growth and population growth then it’s likely prices could rise.
STEP FIVE: What does the future hold?
The key reason for property prices increasing in the long term is an overall shortage of properties versus demand.
Experts are divided on whether Australia has an undersupply of homes – plenty of economists like BIS Shrapnel say that we do. Others, like real estate author Neil Jenman, say there are more than 6 million spare bedrooms in Australian homes so we are more than able to cope with more demand.
If population rises faster than the number of properties that exist and new houses don’t keep up with demand then prices will rise. Each local suburb has different supply and demand equations.
The state of the rental market also affects how the buying market works. When demand for rental properties exceeds supply and rents start to increase, this increased cost of renting makes purchasing a home a more attractive proposition and encourages people to look at this as an alternative.
The level of interest rates also has a huge impact on home prices. When interest rates rise and houses become less affordable, property values tend to drop, particularly in suburbs where young families live, as they are often the hardest hit by increasing mortgage payments.
At other times in the property cycle when interest rates drop, housing becomes more affordable and more buyers are out there looking for new homes, encouraging property values to increase.
So the answers are never as simple as we’d like them to be