quote:

House prices: When will we get to the point that we just say NO?

By Lucia Stein
Posted about 9 hours ago

House prices can't keep rising forever. At some point, everyone will just calm down and refuse to pay way too much for a tiny place that isn't even in the area they really wanted to live.

Right?

We talked to two experts about how prices can keep rising, if a price drop is inevitable — and whether it will cause a US-style collapse.

People are acting irrationally

Any rational person might look at what's happening in the housing market on face value and refuse to buy.

But this just isn't the case. The latest house price figures for February shows prices — particularly in Sydney and Melbourne — rising. Again.

"We're in a pit of irrational exuberance," LF Economics property economist David Lindsay says.

Basically, he thinks people aren't acting in the way you would normally expect and so, despite house prices becoming increasingly unaffordable for most Australians in some areas, people are still buying property.

Why? Mr Lindsay says the problem lies squarely with the banks.

"[Not only] have you got a very irrational, exuberant population when it comes to housing, [but you've also got] a banking system that is running like a Ponzi finance scheme," he says.

"These things keep on going until a) these banks cannot keep lending to speculative home buyers or b) we get to a point where people say 'this is crazy, I'm not going to buy in this housing market'."

But maybe this isn't the doomsday scenario some think it is

But it is important to note that not all economists are agreed on this point.

RMIT property economics professor Chris Eves says the situation is not the catastrophe that some say it is.

"One of the things that sets Australia apart is that there are sectors that are currently oversupplied [too many houses] and there is potential that there won't be much market demand for those types of properties, which could lead house prices to fall," he says.

"But it's not going to be across the board."

Instead Mr Eves thinks this is just a part of the nature of housing prices — which go through ups and downs.

He says the Gold Coast is a typical example of an area where there are regular changes in demand.

When foreign buyer demand goes down because prices have maybe gone too high or there is not enough supply, buyers withdraw from the market.

This can have some impact on the market, which then forces developers to pull back for a while, but once prices have fallen you get people coming back into the market and prices rising again.

This is known as the housing cycle.

What are the signs that we're coming to the end?

It is mathematically impossible to predict when this housing boom will end, according to Mr Lindsay.

The problem so far is that while first-time buyers have been priced out of the market, investors are able to use their existing house to get another loan.

That is, if you buy a $1 million house and you're not making a profit from it and the bank re-values your house and says it is now worth $1.1 million, that extra $100,000 of your unrealised capital gains can be leveraged against now.

You also have foreign buyers who may be seeing the boom in Australian housing prices as an investment opportunity.

If, as some have called for, the banking regulator steps in and tightens the investor market and the foreign buyer market, this might see a slowing in house price growth.

In this case, Mr Eves says that those pockets of cities where housing prices are too high will be balanced out by more reasonable prices in other suburbs.

"It's not going to be across the board. If you look at a lot of the areas where house prices have gone up, they've gone up in relation to people's ability to afford and repay," Mr Eves says.

"There will always be high-priced areas that will remain high priced. We've seen some movement in middle-priced suburbs through trends that some may become less popular, but again if something becomes a little less popular what you see is a bit of movement in the market."

So is this like what happened in the US?

Mr Lindsay warns this has the potential to be like what happened in the US — maybe even worse.

"In Sydney, Brisbane and Melbourne it's nothing but a speculative, credit-fuelled housing bubble. It's what happened in Ireland and what happened in a lot of parts of the US in the past decade," he says.

"A lot of people thought the housing market was invincible and it could only go up and one day it crashed and it burned a lot of people, and the financial system along with it."

But Mr Eves offers a more tempered view.

"No, basically the underlying factors in Australia when compared to the US are completely different," he says.

"One of the biggest differences is the fact we don't have no-default loans. There were developers in the US building stuff willy-nilly and banks even giving unemployed people loans before the housing price collapse there.

"So what happened with no-default loans is that if you owed the bank $400,000 and you purchased a home for $450,000 and then that value dropped to $350,000, then you could just walk away and the bank couldn't chase your remaining debt.

"That doesn't happen here."

Should we still be worried?

Absolutely.

A lot of property is still being developed, particularly in CBDs and inner-city areas, for the foreign investor market.

"The issue there is that if they leave the market, would the domestic market be able to take over that demand?" Mr Lindsay says.

"And the bottom line there is, it's not."

If there are fewer people buying properties, and more supply, then it follows that prices will go down. This is problematic if you own a property in one of these areas — it is basically worth less.

The problem also extends to those suburbs where housing has become unaffordable, and not just because of the gentrifying process that is going on in some Australian cities.

Eventually prices will reach a point where people won't buy and then you will see a slow-down in growth.

But this might not happen for some time and, as Mr Eves suggests, what it means for first-time homebuyers is that they may be renting for the foreseeable future.