Fear & Loathing in the Property Market


Today’s Hometruths article is a response an article by The Age’s Economics Editor Peter Martin, whose article “House prices are inflated and a fall seems certain – the only question is when”, which asserts that Australian house prices are unnaturally inflated and heading for a fall … sometime soon. I put it to you that this is not only an unlikely circumstance, but that his recommendation to wait ’til prices fall is advice best taken at your own risk.

As I read Martin’s article over my tea, I wondered at his perception of the driving forces behind our growing property market – as they’re polar to my own in-market observations. Martin remarks that house values falling is undoubtedly on the cards:

“Nothing is more certain. Here’s why. House prices can’t keep rising faster than incomes and population growth. Both were strong a few years back. Now only immigration is strong and there’s every sign that’ll wind back. High population growth and income growth push up rents. Higher rents push up prices as it becomes even more economical to buy than rent as would-be landlords discover they’ll make more money by buying.”

House prices have consistently risen faster than incomes, which hasn’t dampened enthusiasm for property purchase – in fact, for many Australians it is our only form of enforced savings for the future (outside of sluggish superannuation). With interest rates currently at all-time lows, buyers with healthy deposits have better access to larger loans than ever before. Buyers are confident, ready to compete and asset-rich, usually being property owners already. To my mind, there is nothing more certain than property prices continuing to rise due to our city populations growing, rental demand increasing and those who are able to buy placing a higher value on the limited amount of property which is available for purchase. I do not see that immigration (in its true sense) fuels our rising rental market – it is Melbourne’s ability to provide employment which is bringing new members to our community from interstate and rural areas (rather than immigrants).

Moreover, how many tenants do you know who find it easy to segue from renting to home ownership? Rental prices increasing does not make it more economical or possible for individuals to buy housing. There are many barriers to buying (in the form of high deposits required from banks, and the time it takes to save or acquire these deposits) – and in urban areas even as rents rise, they are not comparable to the costs of owning. Tenants becoming homeowners (i.e. first home owners) are not a big portion of our current wave of buyers (although they wish that they were). Tenants discovering how affordable it is to own a property are not pushing up the value of property. Those with existent funds and the ability to loan continue to confidently purchase property, recognising that property close to amenities is finite. Finite resources are valuable. Property (in areas which enjoy hot competition and demand) is finite, and will continue to increase as a valuable commodity.

Martin’s article reinforces an age-old paranoia amongst nervous purchasers (those who probably most need to make the leap now and buy property before being locked out of the opportunity indefinitely), who may choose to wait for a fall in value that may simply never come. As an estate agent for over six years and a keen property investor and observer, I’ve seen many buyers (in many different cycles of the market) reserve their decision to purchase, waiting for that ‘bubble to burst’. Reader, they are still waiting – and they’ve been priced out of the markets they wished to purchase within. Another excerpt from Martin’s article below:

Here’s how it works in the labour market: If there’s a shortage of engineers and their wages climb, more students enrol in engineering degrees. Four years later they graduate and find there are too many of them. Wages fall back. On a graph the to-and-fro looks like a cobweb.In the housing market rents push up prices with a delay and by the time they’ve risen more houses have been built and more renters have bought, pushing prices back down.  Except that the market gets ahead of itself.

The key error in this explanation of the property market as compared to the labour market is that property is finite. Unlike populations which continue to grow infinitely (or to use Martin’s analogy, continue to enrol in education degrees to fulfil market demand), suburbs do not get bigger. There are only so many double fronters in Carlton North. Only so many workers cottages in Collingwood. If you are priced out of these markets, that’s it. You can get back into these markets by buying something a little further out and stretching yourself, before attempting to buy a modest property in your desired postcode again. But you won’t be getting into coveted suburbs because of the market sky falling, chicken little.

Not all property is equal – buying in Fitzroy North is not like buying in Wallan or another outlying suburb which is challenged by poor access to public transport, ready employment and services. Certainly, should you buy ‘off the plan’ in areas where land value is low and plentiful, you risk overinvestment and a plummet in value. In some CBD developments you may also have this problem when purchasing ‘off the plan’. But when buying property in desirable areas which are close to the city – you can be sure that competition will continue to be fierce as Melbourne further refines itself into an increasingly European city.

My message to property purchasers? The time is now (if you’re fortunate enough to embrace it).


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