One said to the other that he was surprised to see his land had gone down in value over the year.  The other agreed, saying that he had read in the papers forecasts of houses being worth millions of dollars in 20 years, or some such stuff.

I do actually recall the forecasting that was mentioned – its a bit misleading, but many people do believe whats written in the newspaper.

Consider the following (it is past of a newsletter I send to my clients every month and was written about a month ago).

The House Price Saga.

 This seems to be the number topic again, so I will chip in for my 2 cents worth – again.

 This year we are again in a time when first home owners will not again be able to afford a new home – last year they could, but not this year.

 An article appeared in the Sunday Mail on February 21 in the Smart Money Section regarding home prices.

 I have done a table below that summarizes some of the salient points of the article:

What does this mean – well in 1960, the average house was 3.38 times the average income, now it is 8.34 times. 

 Or if you like to look at it this way, house prices have increased since 1960 at 8.83% per annum and wages have increased at 6.88% per annum since 1960 – this is not a cause for alarm, however since 2000, house prices have increased by 15.84% – more than twice the 50 year average, while wages have increased by 4.11% – less than half the 50 year average.

 Interestingly interest rates were at their lowest over that time in 1960 – at 5%.  We are at the second lowest level now at 6.64% (although not for much longer) and repayments are at 29% of income – the only time they were higher was during the recession we had to have when house prices were at 3.56 times annual earnings.

 Does this matter to you – well given that nearly all Australians have their wealth concentrated in their houses, yes it does matter.

 Affordability is not an issue so long as rates stay low – rates stay low when the economy is not performing.

 What are our headlines saying at the moment? That we have dodged the recession bullet, interest rates will rise and prosperity is on the way.

 Also the other question is can house prices keep increasing at the rates they have in the past 10 years, or will they revert to normal – or dare I say it, less than the long run return.

 Its possible that returns will be lower in the longer term as we do have a rapidly ageing population – in short more old people than young people – young people buy more houses than older people.  With less young people (unless we have rapid increases in migration) demand for housing will probably subside, as a result prices will decrease also.

What will support the growth in housing returns – shortage of supply – although I can’t see that happening.  A rapid increase in wages – not if the Reserve Bank have their way.  Or finally an asset bubble where prices are artificially increased through measures such as the first home owners grant.

 I am not sure, perhaps you have a view, I am willing to listen to any thoughts you may have.

 But what I will say is that coupled with the inadequate level of savings that many Australians have (and that is all savings) and the increasing taxes or decreasing level of services our governments will be able to provide as a result of the money spent on preventing our recession that forgot to turn up, there are going to be a lot of Australians that hit retirement – the longest holiday of your life with very little money – hope they all have a contingency plan.

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Steven’s article presents an interesting perspective on the doom and gloom surrounding the impending crash of US house prices and the subsequent mortgage foreclosures and argues as to why they should be allowed to happen. On the positive this article does provide those of you with children destined to never own their own home – or so you thought, hope for the future.

While the article goes into more detail than I will cover here, a valid point is made that while it is not nice to see a person lose their home – particularly where you know that person, it is important to remember that the physical asset – the home is never lost, but is effectively resold on to a new owner (or investor) at a lower price. This new owner may have been a person who previously was excluded from the property market, but now is able to enter the market and fulfill their own personal dreams.

He also argues in a rather Shakespearean way along the lines of better to have loved and lost, than to never have loved by saying that if you are one of the people who has been able to live in a nice home for a few years and then lost it to foreclosure, you are not worse off than someone who never got to live in a nice home in the first place.

Not sure if I agree with that, but I suggest reading the article for an interesting perspective on what has been a largely doom and gloom view of what is going to happen to the US housing market, and if it happens there, maybe it could happen here –after all today’s financial press were covering stories about auction clearance rates being greatly lower over the past weekend compared to the same weekend last year.

His final point in suggesting that foreclosure is not a completely bad thing for the economy as a whole is that if there is government intervention to prevent banks from foreclosing on bad loans, then banks will undoubtedly be more reluctant to make loans in the future. What this will mean is that all those young couples out there with good savings records and prospects will find it harder to get a loan next year and that houses won’t sell and the prices will fall further, hurting the economy even more.

A bit of short term pain for longer term gain perhaps….

Does this offer hope to those who thought they could never enter the market?

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