If you are like me you have probably looked at the property market over the last decade or more and thought ‘surely the bubble has to burst’. But then it never does. History has shown prices keep going up and any decrease in house values are temporary. The question is, why?
It is not that we necessarily value the property higher, but our money is worth less. Low interest rates and government incentives make it easier than ever to access money which pushes up prices and puts buyers in more debt and at a disadvantage. There are more factors but let’s focus on those two.
Your parents may have complained that in the 80’s they paid a 17% interest rate on their mortgage. These days interest rates are less than 3% so that is an advantage right? Here is the thing, low interest rates are the number one factor for pushing up prices. In other words if interest rates were higher it would be no more difficult to buy. Investors would not want to pay 17% so arguably it would be easier.
Also loan periods are now 30 years standard up from 25 years not that long ago and 10-15 years back in the 80’s. The longer we are allowed to pay off a loan, the more we can borrow which again is detrimental to those looking to break into the market. Finally, those buying in at 3% are more likely to see rises in the life of their loan, what if rates go to 4%? 5%? Or higher? At what point will this cause mortgage stress?
The other major factor for prices increasing so much in the past two decades are first home owner grants and incentives. More ‘free’ deposits available equals more buyers competing for the same homes which pushes prices up (usually well above the benefit provided). So the winner here is not the buyer but the developer and the economy. Whilst a $25,000 first home builders benefit may sound fantastic all this is doing is giving more people access to money (increasing demand) and therefor pushing up prices by $25,000 or more.
So will the bubble ever burst?, Who knows, if rates go up and there are forced sales by those who repayments increase beyond what they can afford the supply and demand scale may finally burst. But history has shown that decision makers continue to come up with ways to keep the economy moving. For those in the market happy days, but for everyone else so the determent of our kids future ability to ever own a home.
It is not that we necessarily value the property higher, but our money is worth less. Low interest rates and government incentives make it easier than ever to access money which pushes up prices and puts buyers in more debt and at a disadvantage. There are more factors but let’s focus on those two.
Your parents may have complained that in the 80’s they paid a 17% interest rate on their mortgage. These days interest rates are less than 3% so that is an advantage right? Here is the thing, low interest rates are the number one factor for pushing up prices. In other words if interest rates were higher it would be no more difficult to buy. Investors would not want to pay 17% so arguably it would be easier.
Also loan periods are now 30 years standard up from 25 years not that long ago and 10-15 years back in the 80’s. The longer we are allowed to pay off a loan, the more we can borrow which again is detrimental to those looking to break into the market. Finally, those buying in at 3% are more likely to see rises in the life of their loan, what if rates go to 4%? 5%? Or higher? At what point will this cause mortgage stress?
The other major factor for prices increasing so much in the past two decades are first home owner grants and incentives. More ‘free’ deposits available equals more buyers competing for the same homes which pushes prices up (usually well above the benefit provided). So the winner here is not the buyer but the developer and the economy. Whilst a $25,000 first home builders benefit may sound fantastic all this is doing is giving more people access to money (increasing demand) and therefor pushing up prices by $25,000 or more.
So will the bubble ever burst?, Who knows, if rates go up and there are forced sales by those who repayments increase beyond what they can afford the supply and demand scale may finally burst. But history has shown that decision makers continue to come up with ways to keep the economy moving. For those in the market happy days, but for everyone else so the determent of our kids future ability to ever own a home.