Average household incomes in this resource boom town may be higher than the national average but such prices still seem ludicrous.

Even the “priced-to-sell” house next door would still consume three-quaters of our entire income at pre-GFC rates.

We thank our lucky stars that we built our house just before the real estate boom kicked off and are paying less than 20% of our monthly income in mortgage costs.

Nationwide though, prices seem to show no sign of heading any way other than up (and Steve Keen will be taking that mountain walk).

It really just goes to the poor quality of the data available in Australia where the primary sources (RP Data, Australian Property Monitors) are just thinly veiled industry marketing tools, while even the ABS has significant flaws in its data collection (doesn’t count units, doesn’t assess capital works).

What I do hope we’ve done though is index our existing savings with the property market – if property values do keep increasing in line with the historic trend they will grow faster than any other investment we could have made, in part due to the CGT we would be liable for on the returns (we are top bracket tax payers). Certainly if we had kept our savings in cash and prices keep rising the dream home would always remain a dream as our savings would never keep pace.

By investing in a residential property that we live in, rather than shares or term deposits, we have been able to invest a large sum of borrowed money at essentially no additional cost to ourselves. This is because the interest on our loan is roughly equivalent to the rent we would otherwise be paying (substantially less at the moment), and we need to live somewhere! We simply would not be able to service an equivilant loan on an alternative investment, regardless of whether it would provide a better eventual return.

If property prices do crash it means we’ve made a poor decision to buy now. But in consideration of our long term plans it will actually be better for us if they do… so long as we still have enough money between the equity in our current home (less costs) and our cash savings for a deposit on the “dream home” when the time comes. Obviously it will make us look foolish if that happens, but at the end of the day any investment except cash carries an element of risk. You can’t get everything right in life, only try to make rational decisions based on the information to hand – I won’t be beating myself up forever. And besides, my gut still tells me we did the right thing!

Regarding the comments about the housing surplus/shortage, I am in no way qualified or even informed enough to comment on the market as a whole but I would like to share some specific recent experience.

We have two sets of friends (couples) who have been attempting to rent a property in Sydney recently. Both have good incomes and references from previous tenancies. They’re looking for nothing special, a 2 bed townhouse in one case and 3 beds with a bit of yard in the other, both looking on the North Shore.

Every open house they visit is packed with other couples searching for the same thing.

One has now found a place – by offering 10% (!) more than the asking price after searching for 3 months. The others have been looking for nearly 6 months now and have submitted an application for almost every house they have viewed, even offering 6 months rent in advance and been turned down on every occasion, usually because someone has bid over the advertised rent taking the property out of their price range.

If the market is awash with vacant property why can’t our friends find somewhere to live that they can afford to rent?

When we moved out of our rented townhouse house last year the landlord had let it within an hour of the first viewing…

As for the impact of rate hikes on prices, the property market is rather different from markets like the share market and can be “sticky”. If the “true” market price of a house falls, many people simply will not sell and they can continue to convince themselves their property has not fallen in value. The same cannot be said of, say, BHP shares. If the selling of others pushes the BHP share price down, there is no denying the fall in value of my shares (if I had any that is!). So a reasonably plausible scenario is that the market turnover slows and prices simply stagnate for an extended period of time (while this may be a correction of excessive prices, it is not dramatic enough to be described as a bubble bursting). The main thing that can really trigger a collapse, as I argued in the post, is forced sales and while rising interest rates will push delinquencies and foreclosure rates up, we are still a long way from levels seen elsewhere.

Lefty I read that post and many of the comments. I have to say that little I have read on either over or under-supply seems that rigorous or convincing. The most promising line would seem to be the ABS figures quoted in one comment, although the commenter looked at changes since 1981,which is a long period. This may support the idea that there is not an oversupply today, but the rates of construction and population growth more recently may give a better indication of trends in coming years. Perhaps I’ll have a play with the data myself when I get a chance.

I was wondering if you could comment on this article. Check the comments and the links in them as well.

http://www.dailyreckoning.com.au/property-spruikers-claim-australia-suffers-from-a-chronic-housing-shortage/2009/08/24/
I remain unconvinced that there is any actual physical shortage of housing in Australia.

stubbornmule: The big two effects I’m curious about are the raising interest rates and winding down of the FHOB. Both will take months to play out, but the latest ABS reports have already stated a slow down in home loan growth. Rising mortgage rates in particular will be interesting, as I have often heard commentators (with vested interests) claim that low interest rates were fueling price growth (due to increased ability to service debt) and helped affordability; however, rising interest rates simply lower demand, but do not have a downward affect on prices. Sounds like a case of eating your cake and having it too.

I have long thought that the easy availability and cheapness of credit has helped push house prices to high levels, and rising interest rates increase the cost of money and thus should have a downward effect (especially on the maximum amount offered by banks). The next 6 – 12 months will be interesting.

As for supply, the article “Nailed to the Wall” in today’s Sydney Morning Herald suggests that there is still a long way for Sydney to go to get to an adequate supply of housing, let alone the excess supply that helped lead to the collapse of the US property market. In part the article says of Sydney:

‘‘Currently NSW is supplying just one dwelling for every 4.7 person increase in population. That is by far the lowest level on record, and when you consider the average household size is circa 2.6 people it just doesn’t add up. The Sydney market flattened out from a capital growth point of view around 2003, when more than one dwelling was approved per person. Now it is less than one fifth of that.’’