The Property Value Conundrum
7th October 2021
For the most part of the last 6 months, almost every conversation I’ve had both professionally and socially has started with “where do you think property prices are going?”
Due mainly to government largesse in unprecedented fiscal stimulus, this question is not as simple to answer as it once was but before we get to that let’s go back to a few basic things.
One of the primary drivers of an asset’s value in a free market is supply and demand, meaning where……
- supply is higher than demand = asset values should fall
- supply and demand are equal = asset values should remain static
- demand is higher than supply = asset values should rise
With this in mind, consider what (in terms of the housing market) then creates either side of this argument? If existing and newly available housing constitutes the supply side and population growth together with newly introduced buyers constitutes the demand side then what has changed so dramatically over the past 18 months to make prices spike as they have?
Again, from a very basic perspective and if we assume supply remains relatively constant…..
If someone in Melbourne for example, decides to move to the Goldie, this obviously makes a home available in Victoria and takes one off the market in Queensland. Supply and demand are equal. The differential then is where a new entrant meets or existing owner leaves the market. Traditionally this has been from either our own homegrown population growth in the form of first homeowners, increased immigration plus domestic and/or foreign investment.
Migration has stopped dead in it’s tracks, foreign investment has been somewhat curbed in recent times with the government imposing new restrictions and first homeowners have been gradually pushed out of the market since the mid 80’s when the price of housing began to separate from wage growth as seen in the graph below. The elephant in the corner here is debt.
The separation of wage growth and house prices occurred around the same time that banking de-regulation was introduced. This increased the number of banks in the market which drove up competition in lending which drove down interest rates. This made debt easier to get and cheaper to maintain.
So going back to the questions of what has changed and what has spiked prices?….. As CV-19 kicked in the RBA responded by dropping interest rates further to stimulate spending. First homeowners and new investors found an entry point that was previously out of reach, insanely cheap debt. Buying turned into a frenzy fuelled by cheap debt then finally the FOMO factor dropped a bomb.
Interestingly there seems to be an absolute conviction and the firm belief of many who are entering the market for the first time that property prices don’t go down and only ever go up so buying now is a sure thing regardless of the cost. House values like other asset values, can fall, do fall, and will fall again.
In the aftermath of the GFC circa 2010, house prices in the western suburbs of Sydney dropped by up to 20% in some places while here on the Gold Coast we saw a selective 10% decline. More interesting though is the more detailed graph below which shows the average number of house sales per quarter in the Sydney housing market since 2002 and what caused the historic slowdowns.
In the last week, the government and a bunch of regulators have decided things might be beginning to get out of hand and they’ve resolved to curb lending. This will come about in several ways, the first of which is an increase in the interest rate buffer used to assess loan applicants.
Frankly, I don’t know for certain where house prices are going but unless everyone gets a massive pay rise in the not too distant future, excessive debt, growing inflation and overly inflated values are enough for me to be patiently waiting for things to play out a little.
Thanks to Ashley Owen for inspiring some of this commentary and providing additional insight to the graphical stats.
As always, if you have any questions or wish to discuss anything further, please dont hesitate to let me know.