Friday, November 19, 2010

Has Melbourne's property bubble burst?

After a long sustained period of dramatically rising house prices in Melbourne, and across Victoria, the market seems to have flattened out at last.  Many house prices in metropolitan Melbourne have doubled over the last 10 years.

I think the major factors contributing to this are:
  1. Tax free status of the place of residence. Home owners pay no capital gains tax when they sell their house.  This is one of the last easy ways to avoid tax.
  2. Negative gearing for investors. Investor can write off interest on loans for investment properties as a tax deduction.  This is also easy tax avoidance.
  3. First Home Buyers Scheme grants puts money in the pockets of first home buyers which allows them to pay more for a house
  4. Ongoing volatility in the share market creates doubts about shares being a good investment
The first three factors are all dependent on and associated closely with continually rising house prices. Nobody wants to take out a big loan, buy a house, then see its value decline.  As soon as there is a perception that house prices are flat (or even worse falling), we risk entering a negative feedback loop of the kind seen recently in the United Kingdom and the United States.

We could end up with a rush to sell houses to avoid losing capital value, which in turn floods the market and would drive the price down.  In addition, if unemployment rises and/or interest rates keep increasing, some people can no longer make their home loan repayments so they would be forced to sell their house.

Money borrowed to buy houses at inflated prices only benefits the banks and other lenders who reap a windfall in interest payments over a long time period. This money would be better spent on improving the energy efficiency of our housing stop so the we use less energy and save money on bills.

Factors one, two and three are "sacred cows" where no politician will go.  Unfortunately, I fear these factors  have combined to create a huge bubble in house prices which is based on peoples perceptions about wealth without having any real basis.

The other big problem is affordability and provision of housing for people and families on low incomes.  Many are simply priced out of the market.  They cannot afford to buy a house, or pay inflated rents that landlords charge to offset their large loans.  This is not good for the long term cohesion of our society.

By coincidence, the Australian has also published a prominent article on this topic.

Update 24/1/11
Apparently Melbourne's house price bubble is no longer growing.  I wonder if it will burst?

In the last two decades, we have gone from affordable housing for most to the world's most expensive housing for the wealthy elite, under the gaze of our politicians.

See also

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