A simple theory for the support of housing prices.
Assumptions:
(1) Inflation stays at or below 3% (if it goes higher, expect a housing price spike leading to rising house prices and greater equity)
(2) Interest rates don't move much above 7%
(3) Wages rise at around 4%, made up of 2.5% CPI increases and afforded by 1.5% productivity increases.
We have therefore the following scenario - servicability rises on average by 30% of 4% annually, or 1.2%. The average homebuyer borrows at 7% P&I, which very roughly equates to 10% IO. This therefore means that 10 times the servicability can be supported, or a 12% ANNUAL house price increase. Note that this assumes that the worker is dedicating nearly the entire real increase to housing payments. This may not be too far from the truth, but sooner or later people get sick of belt tightening. It also ignores credit fuelled spending (I told you it was a simply model).
Getting back to matters at hand, however, under the above assumptions, a sustained average 7-10% increase in house valuations looks eminently feasible.
What do others think?
Assumptions:
(1) Inflation stays at or below 3% (if it goes higher, expect a housing price spike leading to rising house prices and greater equity)
(2) Interest rates don't move much above 7%
(3) Wages rise at around 4%, made up of 2.5% CPI increases and afforded by 1.5% productivity increases.
We have therefore the following scenario - servicability rises on average by 30% of 4% annually, or 1.2%. The average homebuyer borrows at 7% P&I, which very roughly equates to 10% IO. This therefore means that 10 times the servicability can be supported, or a 12% ANNUAL house price increase. Note that this assumes that the worker is dedicating nearly the entire real increase to housing payments. This may not be too far from the truth, but sooner or later people get sick of belt tightening. It also ignores credit fuelled spending (I told you it was a simply model).
Getting back to matters at hand, however, under the above assumptions, a sustained average 7-10% increase in house valuations looks eminently feasible.
What do others think?