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The Forum > Article Comments > Popping a housing bubble fantasy > Comments

Popping a housing bubble fantasy : Comments

By Christopher Joye, published 7/7/2011

Australian house prices have arrived at the 'new normal'.

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News for you. Current prices are not the new normal, they are what existing buyers are willing to purchase them for. As we continue to see economic chaos in Europe, the US and as China blows it's bubble, people will find it increasingly hard to service existing debt, and also to take on new high levels of debt just to put a roof over their heads. Global energy supplies are peaking (particularly oil). Without cheap energy you cannot have growth, period. Housing prices in Australia, like the rest of the world will continue to decline as the Industrial age comes to an end. Who cares about differing points of view in relation to interest rates, time frames etc. We are seeing a new paradigm shift, post petroleum age, welcome to a new age and a new economy. Get used to it.
Posted by Geoff of Perth, Thursday, 7 July 2011 1:34:33 PM
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I suspect you may not have actually read the article before taking up your metaphorical pen, Geoff of Perth. If you had, you would have begun the discussion by first finding fault with - or even wiggle-room in - one or the other of Mr Joye's arguments.

Of course the cost of houses is "what existing buyers are willing to purchase them for". That is a truism. It is one that is often forgotten, incidentally, when folk go waffling on about the "unaffordability" of houses. When houses actually become unaffordable, prices fall. According to The Economist, this hasn't yet happened.

But your riff on what people might be likely to do in the event of "economic chaos in Europe, the US and as China blows it's bubble" is only one possible scenario. The way I see it, rather than find themselves out of the housing market when times become uncertain, I suspect that more than a few will choose to go without another 3D TV, or skip a generation of iPad, or defer the purchase of a new car, rather than give up their home and take their chances in the rental market.

The first signs of serious hardship amongst the populace is far more likely to be when Harvey Norman goes to the wall, rather than a serious dip in property prices.
Posted by Pericles, Thursday, 7 July 2011 2:05:48 PM
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The Economist, this hasn't yet happened.
Pericles,
This economist is talking nonsense. Housing has been unaffordable for a long time in Australia. The economist just can't tell that there is a difference between working class families who simply can't afford a home & those who drive up prices by speculation purchases. It's the latter who are the cause of the discriminatory buying of property thus effectively denying many others the opportunity of getting a home.
I just hope there are some economists who can see reality.
Posted by individual, Friday, 8 July 2011 6:42:09 AM
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Your response puzzles me a little, individual.

>>This economist is talking nonsense. Housing has been unaffordable for a long time in Australia.<<

I was referring to "The Economist", which is a weekly publication, 50% owned by the UK's Financial Times. According to the article, they maintain that the property market is overvalued.

This has nothing to do with the concept of "affordability", which is not mentioned in the article. I introduced the idea to support the article's contention that The Economist's assessment is flawed.

Housing only becomes "unaffordable" when it is too expensive for people to buy. The fact that people are still buying houses, by definition, indicates their affordability. If they become unaffordable, no-one will buy, and prices will fall until they are able to be sold.

You have introduced the concept of a segment of the population, "working class families who simply can't afford a home". While there may be a significant number of people who fall into this category, it is a problem of income distribution, and not housing affordability.

You also identify another group, "those who drive up prices by speculation purchases." In order to fund their purchase, these people expect to make the properties available to rent. If they are unable to do this at an affordable (to the tenant) level, a level that relates to the price they paid, rents will come down, and bring with them a lowering of the property price.

I hope that makes it a little clearer.
Posted by Pericles, Friday, 8 July 2011 9:23:06 AM
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The state in the biggest danger of collapse is WA; There is no manufacture, the state is far to reliant on mining. Any downturn in China and WA will submerge in it,s own excrement.
Posted by a597, Friday, 8 July 2011 4:56:34 PM
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Many economists’ reputations have been destroyed on the shoals of house price projections.

House price increases reflect two sorts of forces.

First there is the intrinsic scarcity of some locations. These are scenic areas or close to the fashion shopping etc. With consumers’ rising income levels, competition for them lifts the prices they can command.

Secondly, there is new housing on the urban periphery on land that is plentiful, and therefore less vulnerable to changes in interest rates and so on.

Demographia adjusts house prices for household income levels. On this basis, Australian house prices have increased relative to incomes by between 60 and 100 per cent over recent years. Mr Joye argues that house prices have not kept pace with disposable household income growth.

If houses were an absolutely inelastic good one would expect the price to rise in line with income levels depending on their responsiveness to income changes. However houses are not in fixed supply and like IPODS they need not keep pace with inflation. With open access to the house construction market, new house prices should be dictated by building costs. And existing houses should reflect those costs.

There are three elements in the costs of housing

• preparing a block, which depending on terrain and size is between $40,000 and $80,000. This involves putting in local roads, leveling putting in water, gas, electricity and so on.

• Finished houses with three bedrooms, two bathrooms and a double garage are available from many builders across Australia at $130,000.

• Land itself in its dominant use, farming, is worth around $1,000 per housing block. A regulatory induced shortage of land raises this to between $100,000 and $190,000 on the fringes of major Australian cities.

If the regulatory arrangements change and land becomes priced at its worth, we would see prices fall by $100-190k.

Falls may occur without such changes in regulatory arrangements if incomes fall. If the regulatory vice is maintained on new land availability and incomes rise, notwithstanding the fundamental overpriced nature of Australian housing, prices could rise further.
Posted by alan, Friday, 8 July 2011 5:40:17 PM
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