There is so much talk in the media about rising property prices in Australia. I constantly hear people suggesting that prices are a factor of supply and that the short supply of housing in Australia is the driving force behind price growth. I don’t share that view for a number of reasons.
First of all I believe that property prices are really a factor of how much banks are willing to lend – the availability of finance. The credit explosion of the last decade has coincided with an enormous increase in property prices. The answer to this is simple – the banks were willing to lend the money and people were willing to borrow ever-increasing amounts of money to purchase homes.
The Global Financial Crisis exposed this truth throughout the World. Prices dropped around Australia as the banks tightened lending criteria and refused to take on as much risk. Had supply changed overnight? Of course not, and the banks showed just how much influence they have on property prices – they stop lending or lend less and prices decrease.
This has been mirrored around the globe with property prices plunging around 50% in countries like Ireland – why? The banks were no longer prepared to lend money and take risks in the same way as they previously had.
The second point I would like to look at is the notion of “undersupply”. We hear so often that Australia has an undersupply of housing but how true is this? The structure of households is changing, especially in the capital cities with friends and family sharing accommodation to lower costs. The costs are unlikely to decrease by any real amount and so the trend of co-habitation for affordability will continue.
Australia has also seen unprecedented levels of immigration with people coming from all around the globe. Both India and China are in the top 4 countries contributing to Australia’s population growth and the culture of shared accommodation to increase affordability is well entrenched.
Last of all it is worth noting that rental vacancy rates in almost every capital city have increased over the last 12 months. If we were truly suffering an undersupply of housing this trend would be most unlikely.
So are prices really increasing because of an undersupply? I think not. Prices are increasing because banks are willing to lend the money and people are willing to borrow the massive sums offered. Household debt has increased by a factor of more than 5 times in the last decade. This is not because wages have increased by that amount but rather the lenders have allowed ever increasing amounts of money to be borrowed.