Some in this year (09) speculate that house prices will drop. They say this but I am yet to discover what would make them say this. So what could cause house prices to drop. In the event of a natural disaster so a city evacuates less demand and so prices drop. What is the likelihood of that? A oversupply of homes to many have been built and so demand drops again what is the likilihood of that. Could any one else share why house prices would drop. Also historically has this ever happened and what were the causes to it. I am not afraid b/c I am here for the long haul but it would be interesting to know. Thanks in advance.
What can really cause home prices to drop.
- Thread starter mmmggg
- Start date
Supply vs Demand
It happened in Cairns...Pilot strike, SARS, Ansett demise, lack of tourists. Values halved, went on for a long time.
Think about unemployment, people moving out of areas to obtain work, lack of demand for rental. There can be many reasons why property prices drop but as already stated its economics 101 Supply vs Demand
Chris
Think about unemployment, people moving out of areas to obtain work, lack of demand for rental. There can be many reasons why property prices drop but as already stated its economics 101 Supply vs Demand
Chris
As property market is relatively illiquid, it is:
1. unlikey for all prices to crash across the board (like the share market)
2. likely to have particular segments, areas or even specific properties to suffer large price variations
example.
You borrowed $1m to buy your dream home.
You get laid off from your high paying job.
You can not afford mortgage repayments.
You need to sell quickly.
You sell to the first serious buyer at $800k.
You buy a smaller place at $500k to move into.
Now it is quite plausible the person who sold the $500k place to you made a profit - thereby pushing prices up in that area/segment, while your forced sale pushed prices down in that area/segment
Cheers,
The Y-man
Maybe look at it another way.
What causes house prices to RISE?
There have been lots of drivers of rising prices in the last five years. Add market herd mentality and it is easy to imagine that prices overshoot - they rise too much. When prices have risen too much and then circumstances change, as we've seen the last six months, then some buyers are overstressed and have to sell at a time when there is little demand. Prices decline.
This is part of normal market cycles. Prices overshoot and then decline, or at least stay flat which is declining in real terms.
There are endless examples of this: notably it is happening right now in Perth, it happened in Sydney a few years ago, I recall it happened Australia wide in ~1990 or soon after.
regards
What causes house prices to RISE?
There have been lots of drivers of rising prices in the last five years. Add market herd mentality and it is easy to imagine that prices overshoot - they rise too much. When prices have risen too much and then circumstances change, as we've seen the last six months, then some buyers are overstressed and have to sell at a time when there is little demand. Prices decline.
This is part of normal market cycles. Prices overshoot and then decline, or at least stay flat which is declining in real terms.
There are endless examples of this: notably it is happening right now in Perth, it happened in Sydney a few years ago, I recall it happened Australia wide in ~1990 or soon after.
regards
mining dependent towns may drop during this resource downturn ... but considering many mines are still signficantly understaffed then perhaps not.
towns with one major industry that could close - ie - i personally wouldn't be buying in broken hill or port pirie atm due to perylia (sp?) looking at pulling out of australia.
supply and demand ... as long as you buy somewhere where there will be a consistant and foreseeable demand (ie, multi industry cities or well serviced, desirable retirement locations) then you should be pretty right.
not much point in owning a property that theoritically doubled in value over the last year with 17% yeild if you can't get any tenants or purchasers.
towns with one major industry that could close - ie - i personally wouldn't be buying in broken hill or port pirie atm due to perylia (sp?) looking at pulling out of australia.
supply and demand ... as long as you buy somewhere where there will be a consistant and foreseeable demand (ie, multi industry cities or well serviced, desirable retirement locations) then you should be pretty right.
not much point in owning a property that theoritically doubled in value over the last year with 17% yeild if you can't get any tenants or purchasers.
One way demand is affected when the economy is weak because people dont have confidence about job security or wages go down (or are not expected to rise).
So for even those who are selling in not-distressed circumstances, there are less people coming to look at their house. Ie. less demand because people dont feel in a comfortable position to take on a mortgage.
I was going to add that credit had tightened as well which affects demand. One contributor to the 2007 growth was easy loans i.e. buyers could bid higher but now credit has tightened
.... but now that I think about it the recent drop in interest rates has increased affordability anyway. Hopefully that will be enough to put a floor under prices.
So for even those who are selling in not-distressed circumstances, there are less people coming to look at their house. Ie. less demand because people dont feel in a comfortable position to take on a mortgage.
I was going to add that credit had tightened as well which affects demand. One contributor to the 2007 growth was easy loans i.e. buyers could bid higher but now credit has tightened
.... but now that I think about it the recent drop in interest rates has increased affordability anyway. Hopefully that will be enough to put a floor under prices.
House prices drop when desperate sellers arrive on the market, and when there are few buyers for them.
The factors contributing to this are many, but ultimately the seller is in a cashflow squeeze for whatever reason, and needs the cash now.
Agents like to call them a "motivated seller".
The factors contributing to this are many, but ultimately the seller is in a cashflow squeeze for whatever reason, and needs the cash now.
Agents like to call them a "motivated seller".
The only factor that would cause significant drops would be unemployment.
Other things like increasing population, lack of supply, lower interest rates and improving rental yields keep things looking good.
Now that interest rates are lower, there is less chance of distressed sales. And for the large number of homes purchased pre-boom, the owners can afford to not sell and will just stay put. This will keep the amount of stock available low, and support prices.
Other things like increasing population, lack of supply, lower interest rates and improving rental yields keep things looking good.
Now that interest rates are lower, there is less chance of distressed sales. And for the large number of homes purchased pre-boom, the owners can afford to not sell and will just stay put. This will keep the amount of stock available low, and support prices.
A very good observation.
In free (or mostly free) markets, the price is set at the margins of the market.
At any given point in time, most people are not buyers or sellers (save for traders). They are either holders (people who own assets and are not selling them), or they are lookers (people who are may one day want to buy more assets but aren't actively putting offers in [whether they already own some or not]).
If you're a holder or a looker you have ZERO impact on the market price.
It is the interplay of only those on the margins of the market (people actively trying to sell / people actively trying to buy) that sets the market price. That is demand and supply in action.
What happens next is a little bit chicken and egg, in that it could be desperate sellers who lower prices, or cautious buyers who offer lower prices. In truth it is a bit of both.
And it is the opposite during times of growth.
And while this is all patently obvious, it does highlight one thing.
Prices aren't set by the majority. They're set by that small percentage of economic agents who are active in the markets at any given point in time.
I've heard reports that 1 in every 9 properties in Queenstown (NZ) is listed for sale atm. That's a huge number, but it still is a small minority of property owners.
Then again we had unemployment at almost double the current rate just before the last boom.
There is a large pool of buyers waiting to jump in at the first signs of market reversal, the smarter ones have already signing up on the dotted line or are doing it right now before rates drop any further. The not so smart ones will probably miss out once again and are left Singing in the rain old favorites like Unaffordable Dream and While I'm Waiting for a Crash .
Unlike renters who are getting itchy to buy, specially if they have a bit of deposit in the bank earning very little interest and a nagging wife who wants her own nest.
As prices rise, demand decreases. Or maybe that should be as affordibility decreases, demand decreases.
Resi property in Australia is still at record high levels (relative to income) and yields still very low.
This will determine lack of future demand and if prices dont fall they will just stagnate for years (which is a fall relative to inflation) just as they did in the 90s.
The only thing that will alleveiate this situation is continued government/RBA intervention as has been seen recently with a short flurry of buying activity in lower priced properties in average areas.
This will end as soon as the assistance stops and to buy on this basis is downright dangerous to ones wealth.
Anyway, they cant continue to prop up the economy/propertry market endlessly. They have just about blown the surplus already and will probably be in deficit soon.
Resi property in Australia is still at record high levels (relative to income) and yields still very low.
This will determine lack of future demand and if prices dont fall they will just stagnate for years (which is a fall relative to inflation) just as they did in the 90s.
The only thing that will alleveiate this situation is continued government/RBA intervention as has been seen recently with a short flurry of buying activity in lower priced properties in average areas.
This will end as soon as the assistance stops and to buy on this basis is downright dangerous to ones wealth.
Anyway, they cant continue to prop up the economy/propertry market endlessly. They have just about blown the surplus already and will probably be in deficit soon.
What about a choking off on money supply, or a change in sentiment?
I think the house price bottom will be just before the peak of unemployment, but I don't think December's unemployment figures are anything compared to what's coming yet.
Until last week, I haven't had any friends tell me their workforce was cutting back - in fact two said that senior management had assured the company would look at every other possible cost savings before retrenching staff.
Since work went back 5th/12th of Jan, 3 friends have told me their companies will be announcing redundancies soon, which won't show up until Feb/March.
Scary.
Yeah, both those play a major role imo.
Sentiment in particular (perhaps more than many people realise or care to admit).
Unless someone is watching that specific market(s) all they are going to see is 20% down in one (200K) and, let's be generous, and say 20% up in the other (80K).
That would send strong messages. They may be mixed enough for some people to think all is great.
I think when the losers are losing more than the winners are making it might be a time to be cautious.
hehehe I miss in basketball way more than that. I guess I am teh roxxor?
Man I hate quotes out of context.
Any chance you could add in his percentages of succeeding?
26 times he has gone for the game winning shot and missed... how many times did he make it?
arrrrgggghhhhhhhhhhhhh
Trust me, screw up 26 times when your entire life is on the line and you won't be making quotable quotes...
