I had an article linked this morning which solidifies my belief that continued doubling of house prices will not be possible in the near term.
I believe this quote sums up the argument I have been making in this thread, but in a much more succinct manner:
"While there are many factors that have increased the demand for housing - such as tax concessions, subsidies paid to first-time buyers, and Baby Boomer Demographics – in the end, the extra demand for housing can only feed into higher prices if credit is readily available, enabling buyers to borrow large sums and pay high prices. Put simply, the supply of credit is the crucial ingredient to sustaining high house prices."
The article goes onto describe changes in the mortgage/credit industry over the last 30-40 years.
Link to the article, earlier article which adds to context
here.
I think what most people are forgetting is that in earlier years the banks calculated servicability on ONE income. The male of the household was the income earner while the female stayed at home and looked after the house and kids.
These days serviceability is calculated on BOTH incomes now that we have equality of the sexes. If you go back to those charts above (sorry, I didn't copy them) you will find that in 2010, the ratio compared to wages is 7.8% if you only use ONE wage. Yet if you use two wages for the same property the stats look a whole lot different, making property affordable again.
and i'll put another one out there ... show me a chart that show "household income to mortgage ratio" and i'll be impressed. most highly mortgaged households nowadays have two income - even if one is part time.
to show a chart of mortgage against single income is not reflective of the times.
I think I briefly touched on your posts earlier in the thread, but have since come across a couple of graphs which clearly indicate that household income has not been a huge contributor to change in prices:
On a multiple scale household income is clearly lower than in comparison to a single wage; however housing as a multiple of both household and single income has remained relatively constant (both rise/fall in tandem). If a change in household income has had the effect that you are both suggesting then we should have seen a disconnect between the way housing acts as a multiple for both (for example we should have seen housing rise as a multiple of single income, but stagnate or fall as a multiple of household income, if either of you can show me on the chart where this happened please be my guest).
Further to this female participation in the labour market has increased, but at the same time we have seen a decrease in male participation:
I agree that 'easy credit' has been a (small IMO) factor in this recent boom - however, it wasn't a factor in the previous dozen or so booms. Those booms were caused by the long term effect of rising population, limited desirable supply & disposable wages rising by more than inflation - all of which will contribute to the next few booms.
To many people who have only experienced a single cycle, the growth appears to be a bubble or obscene...... when in fact it happens every cycle, with or without easy credit.
keithj, have not had a reply regarding proof of prices doubling every 10 years for the period 1890 to 1970 as you suggested they did... The first article I linked in this post described events/factors (mainly credit and taxation linked) which have contributed to the rise in prices from this date, so would be interested to see how you (or anyone else that thinks the same) have come to the conclusion that:
- Prices have doubled every 10 years prior to 1970
- They were doubling due to fundamental reasons as opposed to the predominant effects of inflation or credit growth
If population increasing was to have such a large effect on house prices then surely that must be an indication of supply not meeting the demand from new additions, however all data that I have looked into has shown an oversupply over the longer term (clearly the last few years differ, but suspect this is only a short term occurrence):
The past 100 years have seen a massive increase in the Australian housing stock. In the period from 1911 to 1996 there was a fourfold increase in the Australian population - from 4.5 million to 17.9 million. The housing stock did not just keep up with this rapid rate of population increase; it increased at almost double the rate. From just under a million dwellings in 1911, the Australian housing stock had grown to over 7 million dwellings by 1996.
Link to ABS
Granted this has come with a reduction in the number of people per household, but still I cannot see any evidence of population having contributed to significant increases in house prices over inflation/wage increases on a longer time frame.
The first is that house prices are at historically high levels on virtually any metric. When people say that they cannot foresee them falling then I get nervous because punters are ignoring downside risks, and possibly even showing a bubble mentality.
(Incidentally the arguments that there's a housing shortage, high immigration and so on were all used in the US, Ireland and the UK.)
The second is that even with a pessimistic set of assumptions, including a Keen style market collapse, inflation makes virtually any property investment a one way bet over a 15 to 20 year timeframe, in that it will ultimately break even. But you need to be able to hold it for that time.
Fantastic post Graemsay, couldn’t have said it better!
To continue to increase in price above the rate of inflation the market needs to continually convince the next generation of buyers that there are further gains to be had. In my opinion if you are investing at today’s prices then you are either:
- Doing so in way that creates instant equity or profit from rent (Nathan on this forum has shown time and time that there are still some opportunities out there, although seemingly far and few between and in areas that I would consider high risk, e.g. regional, damaged buildings/major renovations)
- Think that housing will continue to increase at a faster rate than wages/inflation (if you think this then I would love to hear your reasoning or expected driving factors)
- Are simply oblivious to the fact that housing is overvalued in almost every metric available for us to measure it (ignorant to the risks)
I know that the doom and gloom parade have been through this site before, the fact is that some of their arguments even going back to 2007/2008 ring true, however the housing correction was put off by the government injecting stimulus and record low interest rates (and in the process made the situation even worse by encouraging buyers into the market who knew no better and who otherwise would not have been able to afford to enter the market for sometime). All I can do is ask anyone thinking of investing in the property market at today’s prices, make sure you: understand the risks, have a buffer to ride out what could be a very extended downturn (in comparison to anything seen in the last couple of decades) and look over historical figures/data with an OPEN mind before making your purchase.