The following article appeared on the Yahoo 7 Finance website at this link:
What is this house price “crash” that seems to be getting so much media attention in recent weeks?
Before we start, note that house prices are still rising – there is no hint of prices even stabilising, let alone falling.
The shouts of “crash” are not much more than wild headline grabbing exaggerations of the usual cycle in housing coming in to play.
History shows that after periods of strong house price gains, there comes a period of flat house prices or even small price falls.
This is what we might be starting to see unfold.
The reasons for the house price boom ending have been evident for some time. The main one is good old fashioned supply and demand. Dwelling construction is booming and is at a record high which is adding to the supply of houses. At the same time, immigration is slowing which is seeing population growth drop to near a 10 year low.
This means there is more supply and less demand and this combination was always going to take the heat out of house prices.
It was only a question of “when”.
Add to this mix a couple of other negative influences on house prices such as the way banks are regulated with tighter lending for investors and an increase in the banks capital holdings.
These changes mean that it is more difficult to get a loan today that it was a year or two ago. It has also spilt over to mortgage interest rates with Westpac lifting its rates by 0.2 per cent, independent of any move in official interest rates.
When a booming market is in the early stages of cooling down, there is always the question of how severe that downturn will be.
It is as easy as it is mischievous to get carried away and predict sharp 20 or 30 per cent price falls as many ‘analysts’ have done in years gone by – much to their humiliation.
More realistically and perhaps more boringly for the headline writers is a more sober view.
If history is any guide, get set for a couple of years where house prices go sideways or perhaps drop 5 or 10 per cent from their peak.
Falls greater than this would require a cocktail of events that are extremely unlikely, in large part because of the sound regulatory framework for mortgages and the fact the RBA would act with easier monetary policy if a severe house price crash were to evolve.
For people who buy a house to live in, a period of flat or slightly falling prices is no big deal.
Here’s why. If we work off an assumption that from today, prices were to drop 10 per cent over the next two years, it would mean that someone who bought a house at the start of 2010 would still be up 15 per cent on the trade in 2017.
Someone buying in 2005 would be up about 63 per cent – and recall this is if prices drop 10 per cent from today!
Even those who bought a house a year ago would be about breakeven on the purchase price which of course is nothing to be scared of.
A cooling in house price growth seems certain. Zero growth is likely. We might even see some small price falls. But a crash?
That is scaremongering with little substance in fact, unless of course those calling for a price crash define it as a 10 per cent fall in which case, as the illustrations above show, is making the proverbial mountain out of a m