Heya,
There's a fair bit of debate across SS on what?s going to happen to property prices. There seems to be a view that what?s transpired over the last 30 years may happen again. Fingers crossed!
Digging a little deeper though, thought it'd be worth getting people?s views (especially the long timers) as to what?s driven the 3 decade + success story?
There's been an incredible rise in house price over the previous three decades, especially when we compare Australia to the rest of the world. Housing has obviously been an incredible vehicle to create and store wealth for the large majority of Australians.
Breaking it down into periods, this is how I?ve seen some of the drivers play out.
30 year history: Financial Deregulation, Macroeconomic shifts, Strong growth
There has been a very large increase in the price to income ratio since 1980s (1.5 to 4.5-5?). This part I think was driven by structural changes to the economy and housing market.
1. Financial deregulation, allowing for greater leveraging and access to funding. As an economy, this allowed Australia to go from a ?low debt? economy to an ?average? debt economy. With much of this leverage invested into property, prices accelerated at an exponential rate for a 5 year+ period.
2. Macroeconomic shifts. Since 1993, we?ve shifted as an economy from ?a high inflation? to ?low inflation economy?. This was largely due to the ?anchoring? of inflation expectations by the RBA (inflation targeting).
In terms of its impact on property prices, when we?re a high inflation economy, we need a higher nominal interest rate (so the real interest rate is positive). This led to lower borrowing capacities and lower levels of mortgage debt. In the low inflation environment, we need lower nominal interest rate to have the same real economy effects, leading to higher borrowing power and mortgage values.
10 - 15 year history: Supply bottlenecks driving price growth
Once we had the ?shift? in house prices in the 1990s, we?ve still seen a run up in prices over the last 15 years. What drove values during this period?
I think it was less about financial market changes (previous 15 years).
A big part of the story here, particularly in Sydney, is the supply side. We?ve essentially been building the same number of houses (supply) for 15 years, while there has been ~30 per cent increase in population over the same time period.
Naturally, that puts continued upward pressure on house prices and drives up values.
Last 24 months: Cycle, cycle, cycle
The recent growth in house prices is probably less structural and more part of the debt cycle.
Low rates have fuelled an increase in property values across Australia?s two largest cities. There?s been a noticeable ramp up in investor credit growth (10 per cent p.a.).
Next 30 years - who knows?
Fingers crossed it?s as good as the preceding 30!
There's a fair bit of debate across SS on what?s going to happen to property prices. There seems to be a view that what?s transpired over the last 30 years may happen again. Fingers crossed!
Digging a little deeper though, thought it'd be worth getting people?s views (especially the long timers) as to what?s driven the 3 decade + success story?
There's been an incredible rise in house price over the previous three decades, especially when we compare Australia to the rest of the world. Housing has obviously been an incredible vehicle to create and store wealth for the large majority of Australians.
Breaking it down into periods, this is how I?ve seen some of the drivers play out.
30 year history: Financial Deregulation, Macroeconomic shifts, Strong growth
There has been a very large increase in the price to income ratio since 1980s (1.5 to 4.5-5?). This part I think was driven by structural changes to the economy and housing market.
1. Financial deregulation, allowing for greater leveraging and access to funding. As an economy, this allowed Australia to go from a ?low debt? economy to an ?average? debt economy. With much of this leverage invested into property, prices accelerated at an exponential rate for a 5 year+ period.
2. Macroeconomic shifts. Since 1993, we?ve shifted as an economy from ?a high inflation? to ?low inflation economy?. This was largely due to the ?anchoring? of inflation expectations by the RBA (inflation targeting).
In terms of its impact on property prices, when we?re a high inflation economy, we need a higher nominal interest rate (so the real interest rate is positive). This led to lower borrowing capacities and lower levels of mortgage debt. In the low inflation environment, we need lower nominal interest rate to have the same real economy effects, leading to higher borrowing power and mortgage values.
10 - 15 year history: Supply bottlenecks driving price growth
Once we had the ?shift? in house prices in the 1990s, we?ve still seen a run up in prices over the last 15 years. What drove values during this period?
I think it was less about financial market changes (previous 15 years).
A big part of the story here, particularly in Sydney, is the supply side. We?ve essentially been building the same number of houses (supply) for 15 years, while there has been ~30 per cent increase in population over the same time period.
Naturally, that puts continued upward pressure on house prices and drives up values.
Last 24 months: Cycle, cycle, cycle
The recent growth in house prices is probably less structural and more part of the debt cycle.
Low rates have fuelled an increase in property values across Australia?s two largest cities. There?s been a noticeable ramp up in investor credit growth (10 per cent p.a.).
Next 30 years - who knows?
Fingers crossed it?s as good as the preceding 30!
