Have you heard that real estate prices are going to plummet?
Have you heard that real estate prices are booming?
If you have heard of either or both scenarios you are not alone. The difficulty is sifting through the maze of nonsense to reach what resembles the truth. Who or what is at the heart of setting the price of property and is it a case of demand?
In Australia the banks enjoy a massive share of the home loan market with more than 90% of new mortgages going to banks. In fact in November 2008 non bank lenders held just 7.7% of the aggregate home loan market. This provides a huge opportunity for the Banks to control the price of property throughout Australia – after all if you are the one providing finance for a purchase you can choose whether or not you will finance higher prices. In that point is the answer – the banks control property prices.
The Four major banks in Australia have proven again and again that they follow the lead of each other. If one bank lifts interest rates so does the other and so the cycle goes on. We have all witnessed the banks being difficult in lending to business or the huge interest rates charged on credit cards. Competition whilst a great concept really doesn’t exist between the banks as they all offer similar interest rates and loan products. If you were a person arriving from overseas the only difference you might notice between all bank lenders is the colour of their logo.
Just imagine what would happen in Australia if the banks decided to not lend past a particular point. Imagine what would happen if the banks decided not to lend up to the levels put forward by valuers – remember the valuers are appointed and accredited by the banks. At the most simple of levels it becomes apparent that the Banks have enormous control over what they lend and thus what a buyer will pay for a property.
Despite the demand for property throughout Australia the banks determine how much they will lend. This of course will flow on through valuers and consequently buyers – the loop is irrefutable. With 4 banks holding such an enormous share of the home loan market we are guaranteed that prices throughout Australia will not plummet.
It is in the best interest of the banks to hold prices up and to avoid defaults and the loss of equity wherever possible. No bank wants property prices to drop by any significant level as it impacts their balance sheet – in essence they have an incentive to keep prices up and to continue to lend to current values. They can of course choose who to lend money to although the values will not change.
In the simplest of ways if you are one of only a few providers in any market place you control the price. It’s a simple analysis and you quickly realize that buyer demand is a small part of the price equation. The more banks lend the more they make in terms of interest – only if you can afford to keep making the repayments. The banks have boxed themselves into the current pricing situation and have little room to back out. Remember that only a decade ago Australian households owed just $700 billion AUD and now owe more than $3.5 trillion AUD. Who is making more profit than ever before? The Banks.