Industry experts may all agree that Australia is definitely suffering from skyrocketing home prices, however, when asked what could be behind these catapulting home prices across the country, they offer very different opinions.
In a commentary on Digital Finance Analytics, industry watcher Martin North said the classic economic theory would likely blame factors like supply and demand, population, planning controls, and migration. In fact, some experts believe that the solution to the affordability crisis is adjusting zoning restrictions and building more houses.
However, there is one factor that directly impacts home prices and affordability more than supply and demand do – the availability of credit.
While this may make classic economists raise their eyebrows, North suggested the impact of credit on housing prices is more significant than supply, demand, population, and planning policies combined.
To explain this model, North mapped home prices relative to several factors including income growth, population growth, migration rate, building approvals, cash rate, and lending, explaining that more significant correlations were seen in the relation of house prices to interest rates and overall lending. He also claimed that there is an inverse linkage between interest rate and home prices – one falls while the other rises.
"The correlation between home prices and credit availability are clear to see. As credit rose from 2012 onward, home prices did too," North said.
"It also suggests that if credit availability is tightened, we should expect prices to fall – take note, given the current tighter underwriting standards now in force. This is why I predict ongoing falls in property prices."
If all the factors are laid out and their respective impacts are expressed in ratios, North showed that the overall growth in personal credit would account for 27% of the pie, while investment lending has 18%, tax policy for investment captures 17%, and the interest rates take 14%. Other factors such as supply, demand, population growth, planning restrictions, and migration make up just 22% of the total impact.
"Or in other words, without addressing the credit elephant in the room, tax policy and interest rates, the chances of taming prices is low," North said.
He furthered, "The alternative is to continue to let credit grow well above wages and lift the already heavy debt burden even higher. Current settings are doing just that, as more households have come to believe the only way is to borrow even more. But, that is, ultimately unsustainable, and why there will be an economic correction in Australia, and quite soon."
Collections: Mortgage News