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Property Maze

What does the old saying go…that if you predict that the property market will fall often enough, eventually it will happen?

American property analyst, Harry Dent, in his recent property seminar in Sydney, called the Australian property market a ‘bubble’, saying that there will be a market correction in Australian property between 30-50%. Other local economists have sided with Harry and have started to criticise the Reserve Bank of Australia who they say have used low interest rates to create an overheated housing market.
John Thomas and others don’t see this occurring. Harry S. Dent looks at specifically at changes in demographics but as I dug a little deeper, I asked the question If the property market will drop in value, how would the other parts of the economy be affected? and are they all interdependent? Could the other sectors of the economy offset and negate Harry’s predictions?

John Thomas looks at it a different way. He quoted in his last Australian Seminar in Feb 2014, “What about the effects to society by improvements in technology? Can this affect an economy positively? For example, if the motor vehicles over the next 5 years go completely to gas, what would happen to the oil industry? Where would the total spend on oil on expenditure be redistributed to in the economy. Could this be used for newer industries and to boost the economy?” And therefore the property market?

The Reserve Bank don’t see any signs of a 30-50% drop in the property market.
Mark Bouris in the Property Observer said:
But I’m siding with the Reserve Bank. Our central bank has targeted the housing market as a way of triggering economic growth, given that growth is below-trend: the three non-trade components of Gross Domestic Product – business investment, government expenditure, household consumption – are all down. So using low interest rates to boost the housing market is a good way to prompt economic activity.
Economic activity translates to Australians using low interest rates to buy and renovate houses, and it’s been working. House prices rose by 10% last year, in particular in Sydney.

But what could transform this housing stimulus approach into a bubble?

Well have a think about this though, Too much supply could be a threat, but there is no oversupply.
House prices rose 10% in one year – demand is running ahead of supply. We also have an increased number of investors, in particular from China and India, who are looking to buy property in Australia.

Will imprudent lending might create a bubble?

This is highly unlikely. Australia’s lending criteria is as tight now as in the depths of the GFC, and we’re not racing to take out loans. This is what the RBA says: ‘The upswing in housing asset values to date has not been fuelled by a rapid expansion in borrowing. Growth in housing credit is gradually picking up but remains relatively moderate…’

Since the GFC, US Lending institutions have changed legislation to ensure that another GFC doesn’t happen. The US economy are currently printing money with low inflation and interest rates (this was provided by John Thomas). This type of legislation also has trickled down into the Australian Legislation as well, so our credit providers are better

So what about an over-valued property market?

The figures on the Australian property market often refer to Sydney, which recorded property price growth of 14.5% in 2013. But look further and see that Canberra, Darwin, Adelaide and Hobart all recorded growth less than 5.0%. Affordability is good for most Australians but as always, there are pockets of expensive property.

Would a bubble form if the market was dangerously imbalanced?

Well, according to Mark Bouris, “the retail banks control residential development and their policy for developers is to finance 50 – 60% of the project while demanding high levels of presale. The banks require a supply-demand balance, and the RBA knows this.”

Let’s assume the RBA abandons its current policy and raises interest rates in 2014. The risks are obvious: you may depress inflation but you’d raise the value of the Australian dollar against the US, and you’d run the risk of dowsing the comeback in consumer confidence and trigger the housing correction that commentators are warning about. You might even push inflation too low.

It would seem as though The RBA’s plan is the best way forward right now. We will see what happens over the next six months.

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