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Boom and bust …
"Australian Property Monitors' prediction is that national house and unit prices will fall by 10% over the coming year."
- Ross Gittins
- August 5, 2008
Illustration: Dyson
Houses are going to become more affordable, but is that a good thing?
I'VE always been taken by the catchcry of the great American con man Bernie Cornfeld: do you sincerely want to be rich? Most of us would like to be rich, but only a very few of us — and certainly not me — sincerely want to be rich.
To be fair dinkum about getting rich you have to be prepared to make the sacrifices involved: to find an occupation that's lucrative rather than satisfying, to give up your leisure and neglect family and friends as you work day and night to amass and reinvest your fortune. Above all, you need to want to be rich for the sake of being rich, not for the sake of being a big spender.
No, most of us don't want to be rich that badly. But let me ask you a question: were you pleased to hear the latest news that house prices are falling nationwide?
If you weren't, I suspect you don't sincerely care about the deterioration in housing affordability — as most of us imagine we do care.
Most of us care about the plight of first-home buyers only to the extent of believing the Government should do something about it. Were it to do something that adversely affected the interests of us existing home owners, however, it would quickly feel our wrath.
And since there isn't much governments could do to genuinely assist first-home buyers that wouldn't disadvantage us, the pollies share our lack of sincerity on the subject.
But the politicians do have the advantage of the econocrats quietly advising them of something the rest of us keep forgetting: housing affordability moves in cycles.
The affordability of home ownership is a product of three factors: the price of homes, the level of incomes and the level of interest rates. Whenever the property market booms, house prices rise a lot faster than incomes and so affordability worsens.
Property booms generally start at a time when interest rates are low. They reach a peak at a time when the rest of the economy is booming and the authorities start worrying about mounting inflation pressure.
That's when the central bank acts to cool things down by raising interest rates. Initially, that makes affordability even worse. This is the point where people, having been sitting back gleefully watching the value of their homes soar, start worrying about how their kids will ever afford a home of their own.
Eventually, however, the authorities achieve — or, more usually, overachieve — the desired slowing in the economy. They then start cutting interest rates, which improves affordability.
But by then the property boom has turned to bust, the banks are more reluctant to lend and many people, being uncertain about hanging onto their jobs, are reluctant to take on the onerous commitment of a mortgage.
In the good old days, house prices would stay pretty steady for a few years, allowing people's incomes to catch up and thereby further improving affordability.
It was this pattern that entrenched the popular conviction that house prices never fall — although they always used to fall in real terms as inflation rolled on.
But that pattern ended with the severe recession of the early 1990s, which saw house prices actually falling, not just marking time.
And now, according to the more reliable figures produced by Australian Property Monitors, we see house prices falling in the three months to June in all capitals bar Adelaide. In Melbourne they fell by 0.6%, in Sydney by 2.1%. In the mining boom towns of Brisbane and Perth they fell by 1.3% and 2.8%.
In the two cities where prices rose highest, the softening has been greatest. Over the year to June, prices rose by just 1.1% in Sydney and fell by 1.6% in Perth.
The bigger they are the harder they fall. And since the past decade has seen by far the biggest property boom in memory, I won't be surprised to see prices fall back a fair way. Australian Property Monitors' prediction is that national house and unit prices will fall by 10% over the coming year.
This, of course, would do wonders for housing affordability — more than the falls in interest rates we can expect in coming months — even if few first-home buyers are likely to take advantage of it until the economy turns back up.
Still don't like the thought of falling house prices as the solution to affordability? Prices rose to such unprecedented levels relative to average incomes that only a significant fall in them could get affordability back on track.
Falling house prices are, however, a two-edged sword. As home owners perceive their wealth to be diminishing, this can encourage them to cut back their spending, contributing to the downturn.
And were the fall in prices to be too precipitous, it could give a lot of home owners — particularly those with big mortgages — a bad scare.
I think people with negatively geared investment properties are particularly vulnerable. They've structured their investment to run at a cash loss in the hope that big capital gains will make it all worthwhile in the end. But when prices start falling, why hang on?
Why not cut your losses and sell before prices fall further? Trouble is, the more investors who head for the exit, the more prices fall.
It's possible owner-occupiers who bought at the peak of the boom may find themselves facing "negative equity" — owing more than their house is now worth. This is unlikely to induce them to sell up and crystallise their loss, however. Only
if they lose their jobs and can't keep up their repayments are they likely to be forced out.
I have a feeling the next few years aren't going to be terribly pleasant. Long before they're over, however, people will have stopped worrying about housing affordability.
Ross Gittins is a senior columnist.
