To be fair shadow, prices weren't appreciating in the months leading up to the GFC. ( circa 2007)- they'd been pretty flat across most markets in Australia for a good year or so (or three years in Sydney's case). Of course one can always make a case for the odd exception here or there, but overwhelmingly the market was stagnant. Cities everywhere had peaked or were peaking.
I think what we can learn from that is that between 2004-7 in every major centre of Australia, the "oomph" (ie borrowing capacity) to drive further price growth hits its limits. Keep in mind, this plateau occured when banks were still ending 95, 97 and 100LVR, mortgage insurers were less restrictive, lo doc and no doc still existed, and developers could get money to build stock. But there was one difference- rates were higher.
Property is a deeply emotional subject for most Australians. We are almost all hard wired to gear into property, and because of that, we view the acute supply shortage caused by a lack of developer funding and years of inept Govt planning and infrastructure investments, as signs that a boom is coming. It all points to that, I agree, The supply v demand argument is a very powerful one and ordinarily property would experience significant growth because of these factors. But I offer one counter argument;
It cant happen if people cant get the money to fund it. I think we all agree that to buy something, one needs money. Doesnt matter how much equity you have. Thats only part of the solution. You still need the balance of the solution via a loan. I think Australian lenders are pretty much making it clear that they are facing increasing funding costs. They arent going to open up the 95% or 100% LVR loans again in a hurry, and Lo Doc and No Doc are dead or dying. Rates are creeping back up, whether its the RBA or the lenders driving it.
All Im suggesting is that this is the other side of the coin, and it will be a powerful counterbalance to the supply shortage mentioned above. Banks arent going to hand out money as readily as they used to. First Home Buyers will dry up. This "boost" has brought the next 2 years worth of first home buyers forward into a market where there's been almost no new stock added for a few years and its created a mini boom, but as it winds down in early 2010 First Home Buyers will mostly be gone. They banks had significant political reasons to lend to First Home Buyers- they wont have the same incentives to fund investors. Look at how they are treating commercial and small business customers. Look at how they have cut off developers seeking finance to build units or townhouses.
Anyway, I suspect we might see continued stagnant property prices for a few years yet. Not because the environment isnt right for capital growth, but because the banks wont lend as much to investors as they used to. Of course, like anything there will be exceptions, but I think we all have to accept that theres a point where it becomes mathematically impossible for prices to keep growing at 8-10% a year- For example- If median house prices doubled in Sydney by 2020. (11 years from now) like they have historically, the median price (currently just over 600K) would become $1.2 Million. At current interest rates one would need a household income of 220-250K + to service it. According to the ABS, median incomes are around 60K now (120K household), so we would need to see a 100% increase in income over 10 years to support that kind of debt servicing, and thats if rates stayed at current levels. If rates climbed above current levels, he equation gets even tougher. That sort of income increase would be really inflationary. Interest Rates would surge, and then you'd need an income of 300K plus to service the debt. The spiral would just get worse and worse.
On the upside- that should also mean excellent rental yields, because no one will be able to afford to buy their first home if prices hit those levels. I dont have any confidence whatsoever in any state or federal Govts ability to provide an environment for lots of new stock to be built to catch up with the supply v demand imbalance, but I dont think this will mean huge capital gaisn for property- I think it will mean huge rental yields for property investors. That will have tax implications obviously, so I think more of us should be exploring self managed super funds and investing via that mechanism. Tax on cash flow positive property is only 15% in a SMSF, and tax free after pension age.
Just my 2 cents.