Australian (ASX) Stock Market Forum

Factors affecting property prices

30 June 2007
I would like to summarise the factors that affect housing prices.

There are pages and pages of material on this forum in the other threads on housing prices. There is a lot of emotion on this topic particularly for aspiring owner-occupiers or upgraders as it relates to an assumed right or privilege, whilst it is an asset class that directly affects your lifestyle and it is a very obvious indicator of status.

I would like to constructively summarise the factors that affect housing prices in a ruthlessly simple list. The list accepts that the property market is heterogenous and that the conditions that affect Sydney are different to those that affect Darwin, London or Detroit.

Factors that affect change in price of median housing in any one local area include changes to the following:
1. Local employment rate
2. Local income (both individual average wage, and local overall income from tourism and/or local industry)
3. Local cost of living
4. Sentiment
5. Local infrastructure (transport)
6. Local amenities (shopping & entertainment)
7. Local population (total number & demographics)
8. Release of land & construction of new dwellings
9. Interest rates
10. Lending criteria
11. Exchange rates for foreign investors
12. Regulation relating to foreign ownership and foreign buyers market capacity
13. Rent to price ratio
14. Government taxes & grants
15. Council restrictions on development
16. Environmental changes

The above will have bearing on the number of buyers vs available stock for sale and therefore the price.

Let’s look at Sydney:
• Employment remains good
• Total income has only been trending upwards quite strongly; however, median individual income growth is not tracking median house price (particularly to wage earners that service the city eg. Nurses, police, waste removal, teachers etc.)
• Cost of living (food, petrol, entertainment) is reasonable
• Sentiment for property is very strong
• Infrastructure is slowly improving in some areas (new motorways in the past 10 years; light rail; bus-only routes), but on the whole, I have the impression it is getting worse
• Sydney is only developing in terms of amenities and attractions
• Population is growing; demographics slowly changing (aging population; becoming more multi-cultural)
• The real estate people will have you believe that there is shortage of new dwellings and they may be right
• Interest rates remain well below 10%
• Lending criteria seems to remain fairly low
• Exchange rate is high, so this should deter foreign investors
• Regulations relating to foreign ownership were relaxed last year
• Rent to price ratio appears to be holding steady at around 4.5% or thereabouts
• FHO grant is still there along with stamp duty concessions for the purchase of newly constructed homes
• Sydney environment has remained quite good

So there must be tipping points where housing cannot increase any further:
• Employment and total income drops (could happen with GFC Mark II) [who knows?]
• Cost of living forces population movement (requires mass migration to places like Newcastle, Brisbane, Hobart, Adelaide and other regional centres) [may happen due to demographic changes or due to housing affordability etc]
• Strong change in sentiment (things still appear quite euphoric) [media dependent]
• Infrastructure and amenities fails to match needs (Sydney is stretched) [no immediate effects]
• Population growth stops or reverses [unlikely]
• Demographic shift. For example: aging population will see reduction in income earners and reliance on aged care facilities; white flight. [this is a slow movement]
• Excess release of land or construction of new dwellings (unsure about this – affordability is better remedied by construction of higher density dwellings rather than releasing far-off land – I believe it is better to create a new centre elsewhere than expand outwards on the sprawl and stretched infrastructure of Sydney)
• Interest rates rise beyond the capacity of a significant proportion of mortgagers (significant proportion of mortgagers have borrowed “heavily” from anecdotal evidence – however delinquency rates here are nothing compared to the US market) [Nevertheless, I have no doubt that there would be significant repercussions to the market if interest rates reached 10%]
• Lending criteria is restricted (this appears to be slowly happening)
• Foreign ownership laws tightened and exchange rates continue to rise (there have been reports that the relaxed foreign ownership laws are likely to be reviewed)
• Rent to price ratio drops considerably [rent has to follow local disposable income and so I expect this to degrade if prices continue to rise]
• Significant degradation in Sydney’s environment [unlikely in the short term]

So, interest rates appear to form a small part of the total equation and 0.25% rises won’t do much.

So long as total income to the region is strong and population is on the increase, perhaps prices will only just continue to rise (assuming further polarisation of wealth and forcing more low/medium income earners to rent, share, downsize or move).

Please comment or add to the list and I’ll update it.
I'm glad you created this thread because the last was getting very large. The 1st paragraph is well said.

I feel like people in the property investment business aren’t telling the full truth. A profession property investor or someone in that industry will give some valid reasons like increasing migration or population, but just how much are they borrowing to invest?

A cousin of mine in real estate said he liked property because you only have to put 5% down. Image if a property rises 5%. That’s 100% profit. So what happens if an investor uses the appreciation to put 5% on the next property taking out another 95% debt and so on? And there’s the problem. If too many investors are leveraged to the max and a rising market drops it could start a chain reaction of fire sales.

If the RBA raises rates, they just increase the rent and pass the rate rise on to the tenants.

Not everyone has the mind set for leverage. It’s not what you make; it’s what you keep. If you don’t know what's left if there’s a fall in any market, you might lose the lot.

Do a Google search on: “Australian housing bubble”. It’s everywhere.