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The Real Reason House Prices Rise

29 May 2015 - 4C Realty

Everybody is freaking out about the bubble in Australian housing.

Which is really to say the bubble in Sydney property.

Which is really to say the solid performance after several slow years in Sydney. Maybe in Melbourne.

But the point is, Australia’s got a bubble OK?

Anyway, Stott brings a bit of sense to the debate:

“Is Australia in a housing bubble?"


We don’t believe this is the case. Australia has not built the homes needed for our growing population in recent decades. The fact that we’re still facing an undersupply of homes means it is unlikely we’re in a housing bubble…

Rising house prices are being driven by growing demand from years of positive net migration. While the country has been too slow to cater for its own population growth, we have also failed to accommodate those who have settled here from other parts of the world…

Against this backdrop, home ownership will become even more unattainable for the next generation. It is likely Australia will follow the European path and become a nation of renters…

As we struggle to provide housing supply it’s hard to agree we’re in a bubble. A fall away in the macroeconomic conditions, reduced migration or regulatory intervention could slow current price growth and present issues over the medium to longer term.”

The key reason I’m not fazed by rising prices, or the prospect that prices could rise a lot further yet, is that we’re still not building enough homes.

There was a pick up in fertility around the turn on the millennium, and also a big pick up in net immigration around the GFC.Population growth surprised on the upside. There were just more of us than we were expecting.

Graph on the right side shows high population growth in Australia from 1992-2012, compared with China and USA. There is a surge in population growth after GFC in 2008, even exceeding 2%. (source: Google - Public Data)

More people means more housing demand.

But at the same time as demand was increasing, supply was falling behind. And that was mostly due to the mining boom, as anyone with a ticket headed out to the mines to make their fortune.

It was just a hard time to get houses built.

That’s improved recently, but still, it doesn’t look like there’s enough housing coming on to the market. And that now mostly seems to be to do with the ball and chain planning authorities have put around land release and development.

And so, the long running shortage of housing continues.

A ‘bubble’ refers to a market without any support – where prices are just rising for no good reason.

But the ongoing shortage is exactly the reason why prices are going up.

That means there is no bubble. And until the housing shortage unwinds, prices will keep going up.

Always worth keeping in mind.

 

The above is an extract from CashFlow Capital - Economy;edited by 4C Realty

 

4C Realty

Caroline He