Why falling property prices are bad news

It sounds too good to be true. Sydney property prices drop by 20% to a price low enough for you to swoop in and easily buy the house of your dreams.

The reality is that if prices are dropping, it is likely they are doing so because you either can’t buy or you don’t want to.

This may be because you can’t get finance, or you lose your job. You may keep your job but the outlook for growth in your income looks bad. You may lose bonuses you rely on to pay off your mortgage. Or it may be a longer term structural issue where Australia is simply not growing enough to support price increases.

It could mean that you have lost confidence in Australian residential property.

If prices are dropping, it’s likely you either can’t buy or you don’t want to.

There is no doubt that housing affordability is a big problem in Australia. There are a number of solutions put forward to address the issue.

The protectionists out there argue that restricting migration would lead to less demand for housing and prices trending downwards. This sounds fine until you take into account the economic benefit that migration provides.

In Japan – an economy that has virtually blocked migration – the population has declined by one million people in the past five years. This drop in population means more than 350,000 houses are no longer needed.

House prices will drop in areas losing the most people because there is no one to live in them. But another impact will be that there are also fewer people to pay taxes, taxes that benefit everyone – from schools to hospitals to ageing populations.

In this case, house prices may drop, but the long term economic impact would far outweigh this benefit

Negative gearing continues to be a major policy issue following the recent federal election.

There is no doubt that investing in property is popular in Australia and negative gearing is a popular tax incentive for these investors. Getting rid of it however ignores that affordability is not just about buying a home but also renting.

Australia has a very competitive rental market – private investors might like tax breaks but they also like tenants and are prepared to cut rental levels to ensure their investment is leased. There are very few who can afford to leave them vacant for long periods.

Rents are now dropping in Australia and it is a pretty good time to be a renter. This however is making investing in housing look less attractive.

It is likely that this will be an impetus for many investors to view the market less favourably.

The policies that work best to ensure house prices remain affordable are those that increase the supply of housing, providing enough housing for people to both rent and to buy. There is no market more obvious for this than Sydney.

Over the past decade, Sydney housing approvals have been just two thirds of Melbourne.

This lack of housing has now made Sydney the most unaffordable city in Australia.

Continued improvement in delivering housing will benefit the NSW economy but will also moderate price growth.

Prices drop because conditions are bad and the worse conditions are, the more prices drop.

Right now we are seeing house prices dropping in Brisbane, Darwin, Adelaide and Perth. They are dropping because a poor economic outlook is leading to fewer people wanting to buy houses.

Interestingly, only Brisbane is seeing an increase in first home buyers. Despite rapidly growing affordability in the other cities, these price conscious buyers also don’t see now as a particularly good time to buy.

[Source: Realestate]