In 2010, the media was reporting that house prices will keep rising indefinitely due to population growth and the supposed housing shortage. More recently, they have been saying that there will still be growth, but it will slower. Well it looks like they’ve changed their tune again. No, they are not yet brave enough to predict falls. Here’s what they said:
The Age reported that:
“Australia's home prices are expected to remain flat this year” and that “house prices will plateau this year, at just over $550,000 on average”.
The Australian took it one (albeit tiny) step further:
“National house price expectations have now turned negative, with falls of 0.5 per cent over the next 12 months likely.”
Hahaha, did they put their decimal point in the wrong spot? Half of one percent? I would hardly call that a fall – it sounds more like a plateau to me.
But regardless, here’s the problem with their findings – house prices cannot simply plateau. Look at any chart (shares, economic growth, mixed lolly prices) and you won’t see a horizontal line in sight – markets are either going up or they are going down. That’s just how they work. It’s due to the human conditions of fear and greed.
But here’s the interesting part; it’s this belief that prices have now flat lined, that will cause them to fall. Here’s why:
Potential home buyers will now feel less pressure to buy (witnessed by my better half’s reaction to the above articles - that maybe we could hold off for another year). This causes demand to drop.
For property investors, rental returns are well below what you can make in the relative safety of a bank. Therefore, most investors are not buying for income. In fact, after costs, the majority of Australian landlords are making a loss. But they haven’t minded – firstly because the tax man gave them a nice tax deduction and secondly because the value of their property has been increasing faster than they could lose money. (Anyone see something strange about a loss-making investment continually going up in value?) But now, with predictions of no capital growth, many potential investors would be turned off the idea of negatively gearing into property, which would further reduce demand.
And those investors already in the market, who were relying on capital growth and now realise they will not get it, will become skittish and sell. There won’t be a stampede for the exits, like you might get in the stock market. However, there will be slow jog for the exits as sentiment turns and people start to realise that Australia is not different and that our house prices do not always go up.
Finally, we’ve got the property flippers – these are the people who buy a knock-down job, knock it down and re-build with the hope of selling for a profit. This is fairly easy to do during a boom. But it becomes a much more difficult task when prices stop rising. Again, this will reduce demand. But also, as flipping activity reduces, suddenly all of those vacant blocks that were being built on will become available, increasing supply.
Lower demand and higher supply will trigger prices falls, which will in turn cause even lower demand and higher supply, and so on.
They say there is no warning bell to signal when sentiment turns and the bubble bursts. But I’d say the above headlines claiming that house prices have flat lined is as close as you’ll get.
Comments and queries welcome.