Boom or Bust ?

Boom or Bust?

by Nick Shinner  posted on Yahoo – Apr 14 04:01pm

It’s the debate that is raging at dinner parties all over Australia – will the property burst soon or continue to soar? Nick Shinner shares his view.

There is a property investment debate raging at present and it’s a pretty important one – are we coming towards the end of Australia’s biggest ever property boom, set to burst at any moment; or is the future rosy and strong demand will continue to push prices higher?

If you’re thinking of investing, or buying a home, it would be good to know who’s right!

So what’s the argument for prices continuing to rise?

I have to say, it’s a pretty simple rationale being put forward; demand for housing is increasing and the supply of new housing isn’t keeping up to meet that demand. As any budding schoolboy economist will tell you, the inevitable consequence is that prices rise, and continue to rise until people are unwilling (or unable) to buy at that price.

Australia is currently enjoying the highest level of population growth it has seen in over forty years. We have the highest birth-rates, highest immigration and lowest deathrates.

By far the greatest increase is coming from immigration though, and that’s important. If you have a new baby, as my wife recently has, generally you just make room for them in your current home. But if you’ve arrived ‘off the boat’, then you generally need a whole house to accommodate you. Plus, the strict immigration rules here mean that many people arriving on our shores have the money to afford higher priced housing (certainly more than the new baby!).

On the other side of this balance between supply and demand, the building industry has not managed to keep up with the higher demand. There is a growing shortage of properties across Australia, with the greatest shortage being in Sydney. Too many people chasing too few properties, prices go up. Add in the fact that the cost of building new properties is generally on the rise again and fuel is added to the fire.

We can’t live without a place to stay

All this is underpinned by one final important factor; one that sets property apart from most other items we ‘consume’ – we can’t live without it. We can stop buying shares, we can buy less new clothes, we can even adjust our habits and spend less on food, but we always need somewhere to live.

The bubble bursts….

Those predicting a bursting of this bubble mainly point towards the thorny issue of housing affordability. This is also a simple and compelling argument; prices (or mortgage payments) will get to the level where a large number of people will simply be unable to afford to buy property.

So those of you in your twenties will stay with your parents longer or rent rather than buy. Less demand, less buyers after each property and prices fall. In reality though the price of property is largely irrelevant, even if it makes for good media headlines. Affordability is more about the size of the mortgage payments and how they compare to your income. And both of those are underpinned by possibly the most important factor of all, easy credit.

How easy is credit?

As long as the banks will find ways of giving more people the money to buy property, even if they can’t really afford to, the fire will continue to burn brighter and brighter.

So, there are three key factors affecting affordability:

– interest rates controlling the size of mortgage payments,
– unemployment affecting the ability to pay the mortgage and;
– access to credit so people can buy a property in the first place.

These factors can affect the market in different ways, and this I believe is the key to trying to predict a ‘bust’. Either they reduce demand by preventing new people from entering the market, usually because of lack of credit or high interest rates making payments out of reach. Or they force people out of the market, usually when increased unemployment forces people to sell. Importantly with this one, people may have to reduce the price of their property to ensure a quick sale (or the bank does it for them), and it automatically increases supply of available property.

So, here’s my (over-simplified) prediction of who’s going to win this debate.

If unemployment rises dramatically or credit is drastically reduced, there will be a property crash. If interest rates rise above normal levels then there will be a less rapid rise in prices. If everything remains largely as it is, then we are on track for the continuance of the general rule of thumb, being that prices double every 7 – 10 years.  Within that though, certain areas will perform much better than others and certain parts of the market will perform differently (more on that another time).

To know what will happen, if you believe my predictions, you would still need to have a crystal ball or know something about the future of the economy the rest of us don’t know! If you’re feeling disappointed at this point then it is because life just isn’t that simple.

Are you serious about boosting your wealth?

But here’s the thing, if you are serious about increasing your wealth you don’t have a great amount of choice but to invest in property (even if it is just to buy somewhere to live in as well). Unless you are a very high earner then Super certainly won’t save you (the average Aussie apparently has around $30,000, enough to last less than one year of retirement). Shares can be great and are an essential part of your investment portfolio, but if you are afraid of property falling then shares are going to petrify you.

Some of the readers are adamant that property is over-valued and has to go bust. They may of course be right, but there are two things I have found out of personal experience.

Don’t do nothing

The first is that some of these people are very good at pointing out why you shouldn’t do something and end up doing nothing. That suits some people (actually probably most people), but not me. Or they are just anti-property and all about something much better, most likely shares. In that case they have either been silenced by recent times or they are very clever investors; either way it is not really a solution for the majority (or me!).

The second lesson I have learnt is that the only times I have been talked out buying property I have missed out on making good money, the last time being right before property nearly tripled in value in Perth.

So where do you go from here?

As I said, if you are serious about increasing your wealth you need to be in property. If you research where to invest, focus on the fundamentals of supply and demand and ensure that you are going to get a good rental return, then even if prices do drop you should still do well over the long-term.

Go for it but don’t go crazy.

If everything goes the wrong way (interest rates up, prices and rents down) then you need to know you can sustain your investment. The only people I know of that have lost money in property, have done so because they were unprepared for changing circumstances and forced to sell.

And if you’re not serious about increasing your wealth, just accept that and make the most of your circumstances, without torturing yourself with the ‘should I or shouldn’t I’ debate.

What are your predictions? Do you think we’re in for a property boom or bust? (Share your views below).

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