STOP! Housing Market Going Nuts? And how we could see a decrease in house prices…
I wanted to quickly take out some time from our beginners investing series to quickly talk about the housing market and just how bonkers it has been. The scary part, it doesn’t look like housing is going to be going down in price anytime soon!
Not until the government and the central banks take action anyhow, which I will go through what the government will need to do and what action the central bank will take in the next 24-36 months to correct the housing market.
Let me give you a quick understanding of where we are at right now in the housing market…
The Australian median house price has risen by 20.3% in 2021 alone and expected to rise by 25% (1)
People are exacerbating the price increase due to FOMO (Fear of Missing Out) by trying to buy before house prices are out of reach completely.
Buyer demand and sales rates has been super high, due to the FOMO and low supply for houses in the market, which has increased prices considerably. Creating a cut-throat competition right now in the housing market, where buyers are offering anywhere from $30k-$600k above asking price. (depending on suburb of course)
I have been watching in astonishment as weekly numbers come in of sales in Victoria alone, where at the height of lockdown, we were getting anywhere between 83-92% auction clearance rates and private sales of 1,000-1,400 per week. Which, in hindsight from watching these numbers week in-week out over the last few years since buying my first home, has risen substantially. (I remember seeing 600-800 sales on average per week in 2019)
Now we are out of lockdown, sales have increased again to average around 1400-1600 sales per week. (3) Which has left me dumbfounded and I truly believe that people are acting on high amounts of fear and emotion right now.
Of course, this is a great time if you are looking to sell your family home and downgrade because you want to look at retiring, but for anyone looking to buy their first home, it is a little bit deflating to think that your deposit you had been saving the last few years is now not enough for what you want.
How did we actually get here though?
Government policy and the increased incentive to look after home owners to get votes
The Australian real-estate market is valued at a whopping $9 Trillion (up from $7 trillion two years ago), which means the government does not want to see a huge down-turn in prices, as Australians have hedged all their bets and a lot of their wealth into the real-estate market.
The pandemic happened and the central banks (The RBA), fearing a massive downturn, has decreased the cash rate and thus has decreased interest rates to all time lows. Making it easier for companies, businesses and individuals to acquire a loan.
The millennials are growing up and want to move into their very own home, increasing demand!
The expectation and dream of owning your home in Australia is concrete. Most people will not reduce expectation of what they want or where they want to live either, increasing demand in particular suburbs.
The First Home-Buyer and Home-builder policy, which was used to create incentive for first home-buyers and to help with regards to affordability. Unfortunately, the ramifications of this was an increase in buyer demand across the market.
Now that we know how we got here, what is going to happen in the future? Will house prices continue to rise like they have the last 30 years?
I have read a lot of opinions, for that is all they are, no matter whether they come from a real-estate agent or an economist, no one truly knows what will happen. The last twelve months of unprecedented increases in price is case in point for proving everyone wrong.
I cannot tell you whether there will be an increase or decrease over the next year, three years, five or ten. All I can tell you is there are certain things that will need to happen for house prices to cool off.
The Reserve Bank of Australia will need to increase the cash rate, which will in turn increase interest rates on loans. Applying pressure on the amount of loans that will get approved. Problem the RBA has right now in doing this, is that there have been a lot of Australians who have borrowed too much. A sharp increase in rates may reduce the amount of expendable income Australians have for buying things/services, which would impact the overall economy.
The government will need to look at improving supply of houses and create policies to create construction.
The government may need to look at the tax concessions on investment properties, although the last time a government did this, they lost the election.
People may need to reduce their expectations and may need to look at buying elsewhere and not in hot locations. Or potentially look to wait out the strong housing market until they can save up a 20% deposit. Even though prices have been going up consistently, what goes up, must come down, even by a little bit.
I have no idea whether one of these above scenarios will decrease housing prices, or whether all of them need to happen before there is a correction in the real-estate market.
However, I do know that house prices will most likely keep increasing over the next twelve months. The likelihood that they will boom like they have in the last twelve months is low, but we will still see an increase in prices. Albeit, a very small increase, most opinions are between 3-8% over the next twelve months.
With sales at massive highs and supply not meeting the demand, I doubt there will be a correction anytime soon.
Until next time,
Take Back Control
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