Shareswatch Australia

Back in the 2008/2009 when home prices in parts of Europe and the United States were tumbling there were plenty of “experts” saying Australian house prices would also come crashing down. But alas the residential property market remained fairly robust during the global financial crisis and the experts who predicted a crash in property prices were wrong.

But the question we need to ask ourselves now is: can Australian home prices really keep rising?

Of course the answer to this question will depend on if we are talking about a time period of one month, one year or ten years. We also need to remember that the further we try to look ahead and forecast how house prices will perform, the less likely we are to be right. (unless we are very vague about our forecasts, a trick used by plenty of market commentators and self anointed financial gurus)

As it stands today we know that generally speaking average house prices across Australia have held up fairly well and even risen over the last coupe of years. Some luxury homes and developments have not fared so well, but the home price data appears to indicate that most home owners have come through the last few years in fairly good shape.

Many property investors however did not make it through the last few years in good shape and quite a few high flying Gold Coast property developers saw their little empires collapse similar to what happened back in the 1990′s.

So although it appears on the surface that the Australian residential property market looks bullet proof, the fact is that there have been some areas where prices have fallen and even dare I say it, crashed.

As a result a little heat has been taken out of the housing market and since many property developers have been finding the going tough, the supply of new housing has also been slowed.

But the demand for housing has held up fairly well, thanks largely to lower interest rates, continued high immigration and the money made available via the first home buyers grant.

Now if Australia were an economic island where money grew on trees then property prices would continue to rise, but what we need to take into account the following:

• that much of the money we use to fund our lives in Australia is borrowed offshore and that Australia does not control how much interest needs to be paid on this debt.
• that the RBA is focused on fighting on inflation and therefore interest rates will probably remain at current levels or creep higher this year.
• that people can only afford to pay so much for housing. (i.e. there is not an endless amount of money sloshing around)

Back in September I wrote that I thought home prices in Australia would fall by around 10% in the next 12 months and at present my short term residential property market outlook remains pretty much the same.

I am not suggesting there will be a crash in the housing market, but rather I simply don’t see how prices will keep rising in 2010 as interest rates go up and with the first home buyers grant back down to “normal levels”.

As for the long term outlook for the housing market the simple truth is that nobody has a clue. There are simply too many variables to take into account not only within the Australian economy, but across the global economy as a whole.

We have no way of knowing what measures governments may take to address problems they see with the housing market. How would a massive increase in public housing for example affect property prices? Or perhaps steps will be taken to release more land for housing and/or existing areas will be rezoned to allow higher density dwellings to be constructed?

In addition we need to be careful when we make the assumption that a rising population will support house prices because this is not entirely correct. If people moving to Australia for example cannot find good paying jobs then house prices may actually fall.  People alone don’t make house prices go up, because at the end of the day prices are driven by the interaction of buyers and sellers, and the buyers need money. (plenty of it)

If Australia does not become more productive over the next decade or so then it is quite possible house prices will remain flat or even trend downwards. I am not saying this will happen, but what I am trying to highlight is that the long term trend of house prices heading upwards is not set in stone. An ever increasing population alone does not guarantee an economy will keep growing or that house prices will keep rising.

When you think about it, for Australian home prices to keep rising over say the next 10 years or so then we need to have a growing population and an economy that is able to keep growing while also creating new well-paying jobs. This might sound easy to do, but in practice it is quite tough to achieve.

Perhaps if the Chinese economy keeps growing then we have little to worry about in Australia, but there is also plenty of room for the Australian economy to contract if things don’t work out quite the way most people seem to assumed they will.

As I have written before, it has been over a decade since the last recession in Australia and many people in the workforce today with mortgages have never experienced an economic downturn.

The chances are that many of these people are also unprepared for a few lean years so the next recession in Australia could have a more severe impact on the housing market than would otherwise be the case.

Over the next 12 months or so I expect house prices to ease back (around 10-15%) and remain fairly subdued for maybe 18-24 months. I am aware that there is apparently a housing shortage (although I am not sure it is quite as large as commonly reported) but I just can’t see where the extra money will come from to keep pushing prices up.

Over the longer term (say 5 years plus) I believe it is almost impossible to make an accurate forecast, the best we can do as investors is make assumptions and adjust our outlook as conditions change. I know this does not sound particularly insightful, but it is simply the reality as I see it.

But perhaps I have everything backwards? Maybe house prices will rise in the short term and enter a period of long term decline? Or could Australia become a nation of people who prefer to rent and live without the life-long burden of a mortgage? If so how would that impact house prices?

Then again maybe prices will rise in 2010 and keep heading upwards for decades? Maybe the GFC has just spooked me a little and I am starting to see asset bubbles where they don’t exist?

Anyway I certainly don’t have all the answers so I invite readers to share with readers of this blog and myself their view of how the housing market will fare over the short and long terms and if needed, set me straight on a few things!

Over to you…..