Housing prices are going up significantly. Sellers are rejoicing and buyers are being left behind. Will the craziness continue? Will there be an almighty crash?
Think back to just a year and a half ago, March 2020. Covid had just hit the world and we were all in lockdown. Predictions for the property market were dire, with economic havoc, job losses nationwide, and all open homes cancelled. Fast forward 18 months, and the situation couldn’t be any more different!
So, what is driving it and when will we get to the top?
In very simple terms, it is economics 101: Supply and demand. There are more buyers than sellers.
- The combination of historically low numbers of properties for sale and record low interest rates are a formidable combination.
- Confirmation from the Reserve Bank of Australia that rates will remain low for an extended period provided some confidence for those looking to borrow and encouraged some to extend themselves further than they otherwise might.
- People are on the move, upsizing due to spending large amounts of time cooped up all together. Moving to be able to work from home more easily, or relocating to achieve a better lifestyle.
- Early access to super, lockdowns have led to many people generally spending less, and a reduced ability to spend larger sums on travel are also contributing factors.
We are seeing similar trends in other markets such as new and used car prices. Low stock levels and long waits for new cars as well as strong pricing in used cars are also part of our new normal.
Are we close to the top of the market for property prices?
This is a bit trickier to understand. In fact, I believe this is almost impossible to answer, until after we’ve already seen the top.
Most of you will have heard me say many times, “trying to time the market is a fool’s errand”, and this is as true of the property market as it is the share market.
Having said that, we can look to the past for some insight into the future. This article (CLICK HERE) from Firstlinks (a Morningstar company) highlights where price rises have historically come from. They identify three areas:
- growth in wages, and
- growth in debt
According to the article, between 1900-1980 growth in property prices mainly came from the first two, with very little growth in debt relative to income. However, between 1980 and today prices have grown by 8.3% on average, with a whopping 3.4% of that coming from increases in debt levels. No wonder banks make such huge profits.
What does this all mean for the future?
According to the writer, inflation and wages growth are unlikely to be large drivers of prices rises in the future. They argue that interest rates can’t go any lower (debateable but highly unlikely) and debt levels can’t go much higher – due to a lack of wages growth to pay the debt back. All this begs the question, where will the growth come from?
There is of course, international migration, the repatriation of Aussies who have been stranded overseas as well as supply restrictions which will all play out over the coming years.
My personal opinion is that prices will continue to grow into 2022, albeit at a slower rate than we have previously seen, before remaining static for a period of time. Let me know what you think.