Price Obsession, Credit Explosion and the Road Ahead
The media’s obsession with the possibility of property price increases has been the annoying page filler over the last few weeks. It seems when you need to fill a newspaper column you simply speculate about what could happen and hope it comes true. It is also a headline grabber as home owners are all interested in the value of their home and buyers are trying to pick the right point to enter the market. So with little property knowledge and needing to write something, reporters have looked into their crystal balls and created stories from nothing.
I guess you could ask why I find it so annoying? The reason is simple – it confuses home owners and buyers by sending mixed messages that make the process of buying and selling property all the more difficult. BIS Shrapnel’s recent press release that property prices “could” increase by 11% – 19% in the next 3 years is a perfect example of media headline grabbing. For those who read the actual document they would have realized that these figures also included inflation – so in real terms they are only suggesting “potential” price increases of between 5% and 9% over 3 years.
To take the point further they also have not predicted when in the next 3 years the growth may occur. In other words there may be zero or even negative growth over the next year or two and the forecast growth may not occur until the third year – taking us to 2012. The growth may not occur at all – remember they are looking into their crystal ball!
So the media headlines were just that – headlines! When looking into things further you quickly realize that prices are not going to suddenly shoot up tomorrow or next month and the property market has a lot of stabilizing still to go.
We also can’t forget the fact that the world has lived a “credit decade” and with debt exploding throughout the world. We have been perfect consumers, relied on credit cards and lived way beyond our means. As sobering as this is, it’s the truth and it’s a problem we still have to deal with. This will not happen overnight and will take years to change. The other harsh reality is that many people will be unable to repay their debts and defaults will continue to increase along with unemployment well into the future.
I’m not a fan of the First Home Buyers Grant and never have been. It has artificially increased prices for properties under $500,000 and created a price bubble that I believe will burst once the grant ceases at the end of the year. The statistics are frightening. The average first home buyer loan size has jumped by $52,000 or 23% in the last 2 years – all this at a time when the property market has been slowing and prices overall have been decreasing.
The average first home buyer now borrows $283,000 compared with $229,000 just 2 years ago. Even more frightening is the increase in the size of the average loan to first home buyers over the last decade – they have increased by more than 220%. Wages have not increased by this amount and when put into context the bubble that has been created could come crashing down around the banks, the Government and the over-committed borrowers.
Just by taking a small amount of time to consider what is happening in Australia and abroad you quickly realize that there are problems ahead. We have paid too much for real estate, forgot to save money and lived lifestyles where we buy now and pay later. When you hear the media discuss a long recovery which includes changing habits that caused our consumerist, credit crisis you then know to take them seriously. Until then treat the headlines with the contempt they deserve.