House Prices in 2010

Andrew Pegler – 15 January 2010

To paraphrase Elton John in Son of Your Father circa 1970 bricks and mortar take blood and water. Indeed Elty is right. Buying a house takes a lot of work and while those galloping prices will slow a tad the trajectory for 2010 will, like Superman, continue to be up, up and away.

Our collective obsession with house ownership has sent prices through the roof and turned the great Australian dream of owning a home for many into just that. Over 2009 Melbourne house prices soared 17%, Darwin 15% and Hobart 14%, while Sydney’s median price ended the year on $655,000. This is despite successive interest rate rises in October and November and the winding back of first home buyer grants. Jeeze Louise!

The primary driver of all this madness is the lethal combination of an under-supply of housing and the fastest population growth in Australia in 40 years. In 2009 Australia grew by 440,000 people, but we only built 131,000 new houses. Basically, there aren’t enough houses to go around. In addition, the relaxation of foreign investment rules has seen more overseas bidders at auctions, thus stoking prices.

Following an entirely unexpected and exceptional 2009 for house prices, 2010 holds two scenarios, neither of which is good news for first home buyers. The first is that house prices will slow down to a more modest 5-10% as interest rates continue to move back to normal, inflation starts to creep back in and the emergency stimulus component of the first home buyers grant goes the way of the Dodo. In other words prices will rise but not by as much as last year.

The other scenario is bad news for everyone. A bursting of the housing bubble, the old boom-bust scenario. For most of us, buying a house is life’s biggest financial decision. It ought to be based on what you can afford taking into account rising interest rates, the possibility of you losing your job, and, of course, ongoing valuations. But Aussies have been gambling on houses for over 10 years now and if an event comes along that drove unemployment up or existing wages down then it could be cameras, lights, meltdown.

In other news… some commentators are tipping commercial property in the US is in such a bad way that it may send us all back into the abyss this year. With $1.4 trillion of commercial real estate debt set to mature over the next few years and over half of it worth less than the mortgage, it’s not hard to see why it’s being called a ticking time bomb.

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind – log in and post your comments below.

Andrew Pegler – 15 January 2010