Now we know all about property market
cycles and at what stage in the cycle we’re currently in, let's talk about
property price rises, and how and why they grow.
There are
The short-term factors - which are what
most of the media is concerned about and…
The long-term influences - which is
what strategic investors pay attention to.
Some Short Term reasons values increase
Interest rates
Obviously, low-interest rates make it
easier for buyers to borrow more, as money is cheaper.
But interestingly, the converse isn’t
true.
In the past, property values continued
rising for some time, despite the RBA raising interest rates
Supply and demand
Generally, if demand for accommodation
outweighs supply, property prices will rise.
But if supply outstrips demand, such as
when we go on too many apartment tours, prices tend to decline.
Availability and cost of land
The lengthy time taken to release new
land supplies and the vast amount of taxes and charges developers must pay to
subdivide new estates have positively contributed to housing price inflation in
Australia.
Access to credit
Now I’m not talking about interest
rates here, but a borrower's actual access to credit.
Rising interest rates tend to prompt
lenders to tighten their lending standards so borrowers can’t borrow as much.
When our Banking Regulator
APRAwas concerned about the rapid growth in lending to property
investors which led to steep increases in property prices in 2014, it
instructed the banks and other lenders to be more cautious and set stricter
criteria for determining whether borrowers could repay their loans if interest
rates were to change.
This warning had the desired effect and
the share of new loans to investors fell from over 40% during 2014 -15 to less
than 30% the next year.
On the flip side, during the pandemic boom,
banks eased lending standards in a move designed to free up credit and revive
the economy - and it worked, hence the price surge.
The general economic climate
Here we’re talking about things like
inflation and employment levels.
It seems obvious that periods of low
inflation and high employment would see an uptick in borrowing as consumers
look to spend the extra cash in their back pockets.
And as we know, when buyers fight over
property purchases, values are only going to go upwards.
Consumer confidence
Increasing consumer confidence
increases consumer spending.
The aggregate demand curve shifts to
the right, indicating an increase in demand for goods over services.
In other words, a robust economic
climate and rising property prices cause a "wealth effect " which leads
to higher consumer confidence where buyers think it's the opportune time to
spend their spare cash on a property.
Government incentives for first-home
buyers
When the government wants to inject
more demand into the market it looks to incentives for first-home buyers.
Just look how well this worked during
the Covid pandemic as first home owner grants and incentives boosted jobs in
the construction industry as well as in many associated retail industries.
Our new Labor government currently has
a few schemes in place for first-home buyers: the Help to Buy program (where
the government owns a portion of your property and you pay it off down the
track), the Home Guarantee Scheme where you can buy with a 5% deposit or
regional first home buyer support.
And what do these incentives do?
It broadens the pool of property
buyers, flipping the supply/demand balance and putting pressure on property
values.
Investor appetite
Over the long term, property investors
make up about 30% of the housing market.
When the market conditions are
favourable this leads to high investor demand and we all know what that leads
to.
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Jason Gwerder
Wednesday, 27 July 2022
