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House prices

Marty McDonald - Wednesday, June 09, 2010

My latest thoughts on house prices below prompted by this article in the Sydney Morning Herald yesterday by journalist David Potts.



Floored by housing

DAVID POTTS

SMH

June 21, 2010 - 11:27AM

“Through-the-roof prices are not the sign of an asset bubble, despite opinions to the contrary.

House prices have gone into hibernation, which is fair enough since it's getting cold out there. Really, they must be exhausted after running up 20 per cent gains in some areas in a year when most of the world was going backwards. In fact, rather than just hibernating for a while with no growth, maybe they're about to fall out of bed altogether.

And there's always somebody passing through who can't believe our property market is so strong, concluding therefore it shouldn't be. Most recent was the US fund manager GMO's Jeremy Grantham, who sniffs out asset bubbles the way others chase tornadoes.


He says our house prices are at least 40 per cent overvalued because they are almost 7.5 times family income, which is twice the supposed norm.


The last guy who said that finished up climbing Mt Kosciuszko after losing his bet but Grantham has a point.


On his calculations, we wouldn't cope with many more interest rate rises.


But the figure used by the respected RP Data-Rismark is 4.3 times income”

Full article here.

http://smh.domain.com.au/real-estate-news/floored-by-housing-20100621-yr0m.html

 

My thoughts:

I have been generally divided on this issue in the past and admit to being bearish at times, I was pretty sure during the GFC that prices would crash, however lately I have had a rethink and think prices are although maybe a touch higher than they should be are definitely not going to crash by 40% any time soon. As we know during the GFC the much hyped crash never eventuated and as has been well publicised since prices actually went up over the next year or so.  We hear all the time in the press about the reasons for that being the housing shortage, low interest rates and the FHOGrant and while I think all those factors did have a big impact on firstly keeping house prices stable and then causing them to increase, the thing that is overlooked is that unemployment hardly moved during that period. The reason prices only went down marginally in the GFC was that there was no major increase in unemployment. This stopped a potential negative feedback loop that is created in a falling market ala the UK and USA markets where unemployment is around 10%. If you have no job most people can’t pay their mortgage for long**

So what now for property prices? I think we should all take a deep breath and forget the noise about 40% price crashes. Keep an eye on the unemployment figures, if they stay low ie less than 7.5% (currently 5.5% ish) house prices will not crash regardless of what else happens. My guess is that home loan approvals (down over 30% over the last 6 months) will bottom soon and with interest rates stable we will have a period of stable house prices. In the long term eventually we might get a crash but it could years and years away and prices could well by far higher than they are today when it happens so what do you do until then...put your life on hold?

Regards,

Marty McDonald


** How long could you last without your regular income? If the answer is not long maybe you should consider getting advice about income protection insurance. If anyone is interested I can recommend Peter Alvarez of Navigate Wealth in Sydney who is an independent financial planner. Peter’s contact number is 1300 505 565. I receive no direct financial benefits if you use Peter’s services...just a thought for my clients, friends and family.

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on and LinkedIn.

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