House prices everywhere are linked to 3 main things (all supply and demand related in each case)

  

A. Availability of housing in each area.
Look at the huge rents being paid in central Queensland mining towns due to lack of supply.

B. Availability of credit relative to the house price
In many rural areas banks will only lend 50% of the house value thereby keeping prices down.

C. The average wage and therefore the ability of people to pay mortgage payments.
The lower the wages in an area, generally the lower the house prices.

 

So why will house prices will actually plateau in dollar terms over the next 5 years? Simply because points b & c will rule during this period. Credit will stay tight and wages will remain relatively stable (outside of the mining areas) for a long period. This structural change happening in the economy here and worldwide are also creating a lot of uncertainty for everyone so most people will not be looking to upgrade or move unless absolutely necessary. This will keep sales volumes low for a long period.

Generally, small business is doing it tough, so keeping your job is more important than asking for a pay rise every year. Wages may be not be going up, but with our Industrial relations regime and low unemployment they will not be going down either anytime soon.

Banks are managing their loan portfolios very well so that a major drop in house price’s doesn’t occur and force people to sell. Our overall banking system is working to maintain and stabilize prices. Do we want prices to boom? Actually no! If prices stay stable in dollar terms over the next 5 years (or more) the owners today won’t lose money and over time as wages start to increase again homes will become more affordable.

 

Greg Watson