Housing myths

1) House prices will never fall.

2) Because current demand exceeds new supply house prices will continue rising.

The truth is incorrect in both instances.

Australian house prices will and can drop. The last year has seen house prices in Ireland reduce by 9.5 per cent and in Britain by 8.7 per cent. In the United States price falls of 15.3 per cent for the year were experienced. Predictions for the coming year expect a fall of 30 per cent in US and British house prices and a 15 per cent price fall in Ireland.

Housing starts in the US and Britain has dropped about 30 per cent.

In Ireland new housing starts have halved.

Recently some economists proclaimed that in their opinion Australian house prices have never fallen, and further, there was no reason for them to. They are economists not historians, and it is difficult to see how they base their information on data from the mid-1960.

Nigel Stapledon from UNSW has price data since 1880.

This shows that on several occasions house prices fell sharply. Just because a drop in house prices has not occurred in our lifetime does not mean it cannot or will not happen.

However, previously Australian house prices have fallen, as have overseas prices.

That does not mean that Australian prices will fall now but neither is there any law of nature that says they cannot fall.

The optimists conclude that as the underlying demand is for 180,000 yet new starts are only 150,000 this they say will cause prices to rise.

However to determine demand information from theoretical underlying demand has been used whereas in practice kids would stay home longer, students would share houses together etc.

What the actual data reveals is that actual demand for new houses is currently below underlying demand.

Owing to people bidding up of existing houses as interest rates fell making access to funds easier.

Home loan approvals have dropped 23 per cent in 4 months. This shows demand is following and rates are rising.

There is now an increase in rates and tightening of credit to reverse the trend to trade up to better housing.

The number of new houses built is not always equal to the number vacant at any time. About 10 per cent of houses are unoccupied e.g. holiday homes.

As share prices fall financial pressures push empty houses on to the stock. The number of unsold houses is rising.

We have a rapid population growth. Most of the growth comes from low income and also mining is boosting the growth.

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Published on July 7-rd, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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