The debate about where Australian home prices are heading appears to be getting more intense these days. Commentators who have been predicting home prices will crash have seized on falls seen so far as proof they are right, whereas those who believe prices will not crash pounce on the same data and says it supports their view. Confusing isn’t it?
One major problem that I see with a lot of the housing prices number crunching that is going on is that it is done by people who have good intentions, but seem to have forgotten that at the end of the day a property transaction is between a buyer and a seller, not between economic models.
In other words home price graphs and statistics are great to look at and can tell us much about the state of the real estate market, but there are plenty of home buyers who will not be influenced by this data at all. I wonder for example how many people looked at a home prices versus disposable income graph when they purchased their first home?
One of the more well known property bears is Steve Keen who is an Associate Professor of Economics & Finance at the University of Western Sydney. His website (Steve Keen’s Debtwatch) contains a lot of very useful data regarding home prices and he makes some very valid points regarding the dangers posed by high levels of household debt.
His view is that property prices are set for a major correction (in the vicinity of 40%) is pretty extreme and is not a view held by economists at the Reserve Bank of Australia. (who I suspect are equally as smart as Professor Keen)
For example back in April this year Dr Luci Ellis from the RBA outlined a number of reasons why home prices had not collapsed in Australia (see
Wage growth averted house price collapse) and other prominent figures from the RBA have also been out and about basically pushing the view that Australian prices will not fall as much as they did in the U.S and U.K.
The economists on both sides of the debate roll out charts, statistics graphs etc., while in the real world the daily business of buying and selling property goes on. Sometime in the future we will find out who was right although there is plenty of room for both sides to claim victory in a few years time! At this stage there is no clear winner.
The problem with much of the debate about home pries is that sometimes prices and demand are driven by changing preferences in the market, not by purely economic reasons alone. For example there does not have to be a sound economic reason why a person decides to buy a new sports car instead of opening a term deposit account at the bank If that persons decides they want the car and can afford it, then they will probably buy the car. They may have to give up a few nights out but that is a sacrifice they are willing to make so they can cruise around with the car roof down on a sunny day.
Have a look around the next time you are on the road and see how many large “people mover” type vehicles you see with just 1 or 2 people in them. Is there a real need for so many 6 seater vehicles in Australia? No. Is there a market demand or preference for these vehicles? Obviously yes. When I was a young nipper our family of five squeezed into a small Holden Torana! (2 door model) How times have changed.
Of course buying a home involves a lot more money, but we are still motivated to buy a home more because of our preferences rather than the basic need for shelter. How many people for example buy a home simply because it has four walls, a roof and doesn’t leak?
Spending trends can be very misleading. A simple example is the amount of money we spend on communications i.e. phone, mobile and internet connections. If you looked at the ratio of household disposal income versus spending on home communications over the last 10 years you would see that this spending has greatly increased. Does this indicate we are entering a home communications spending bubble? No of course not, we are simply spending more in that area as opposed to playing video games at the arcade or using public phones.
When it comes to housing people seem willing to hand over more money because they are prepared to sacrifice more of their income to pay for that preference. You or I may not feel the same way perhaps, but the one thing that the housing price data does show us is that in general, Australians are willing to spend more on homes. Steve Keen may have decided to sell his home and rent because he thought property prices were too high and about to crash, but his personal preference and number crunching does not mean others will feel the same.
Could a change in housing preferences result in less disposable income being spent on homes? The simple answer to this question is yes..it could happen. There is no law of economics that says people cannot decide to spend less on housing. A new trend towards smaller, more affordable housing could develop and this could push average prices down over the longer term. Will it happen..who knows?
Can anyone really speak for future home buyers some of whom are not even born or may be currently digging in the sandpit? Can we even speak for those people who may be looking to buy a home in the few next years?
I have no idea which way property prices will move in the future because I am unable to probe the minds of millions of Australians to find out what their intentions are. The simple truth is that nobody involved in the home prices debate has mind probes either, so past data is being analysed in an attempt to model what might happen.
If economic models actually worked reliably we would not be in this mess now and the world’s richest people would be the economists who created them. My apologies to all the hard working economists out there I mean no disrespect, but sometimes the profession needs to be whacked around the head with a cold fish.
I am not taking up or down property. I have posted on this blog before both sides of the argument but what I always question is extremes. If someone was to suggest that home prices will rise 40% in the next five years I would be just as sceptical of that prediction as I am of Steve Keen’s one, simply because it appears a little extreme. Could prices fall 40% in some areas? Of course they could and probably have already, but a 40% fall in average home prices across the nation….that is quite a fall!
However as I mentioned earlier I am unable to probe the minds of others, so maybe people reading this blog can help me out. Are people looking to spend less on housing in the future or are they willing to keep making sacrifices to get the home they want? Would you sell your home because prices fell say 20% or would you hold onto your home no matter what?
Is home ownership still preferable to renting or do people feel that renting offers much more freedom and is a better choice? What other factors (not statistics) motivate home buyers and sellers? Please let me know your views….