What’s going on guys Its Jordan de Jong here and today I want to talk about why property prices increase, most people would say simple economics, supply, and demand, where others would say it’s all auction hype, but there are many different ways that property prices can increase. Before we get into, let’s just make it known that property prices do decrease too, the old saying that I grew up with that properties double in value every 7 to 10 years is most definitely not true for all property, all submarkets go through their cycles at different times and there are some big impactors we’ll get into the squeeze markets, and in turn, decrease prices. Us Aussies have had 20 plus years of very strong economic growth, all the generations before us have only seen property prices increase here in Australia and I think my generation specifically just presume that property prices will continue to grow at the rate they always have because we haven’t seen it any other way and have always been told that “We are different” as a country. Although I’m not preaching a 40% drop in property prices like some of the doomsayers out there, I do like to take the time a listen to why they think we could see such drops, and along the way, I have learned some pretty useful information about what impacts housing prices, so let’s dive into them. This blog isn’t going to be about specific attributes to look out for in a property that is going to increase its value over time, this type of property is what we would classify as an A-Grade investment property. We’ll start at that very top economic level of supply and demand, essentially, as the theory goes, when there are multiple people all after the same property, there is an increase in demand and only a supply of one property, this leads to a competitive environment where one party is trying to outbid another. I’ve recently read David, Lindsay’s book. Australia: Boom to Bust: The Great Australian Credit and Property Bubble and I couldn’t explain an auction scenario better myself, so here is an extract from the book: In the auctions I’ve attended, I’ve rarely seen a registered bidder rush to be the first to bid. The silence is momentarily uncomfortable, then the auctioneer will make a small joke to relax the crowd, and then someone finally makes the first bid. After that, it’s off to the races with the first-time homebuyers: “$600,000” yells the first bidder. The auctioneer notes that the bid is really on the low side, “But let’s start with $600,000 and see where it takes us.” Three other young bidders jump in: “$610,000,” “$620,000,” “$640,000,” “$650,000,” “$660,000,” “$680,000,” “$690,000.” In a matter of fifteen seconds, the bidders have pushed the price up by $90k. In come the property-investor bidders: “$720,000.” All heads turn to the person who just bid $30,000 higher. And it’s Adios to the first-time buyers. The bidding continues with bidders ranging between the ages of forty and fifty-five. “$730,000,” “$740,000,” “$750,000,” “$760,000,” “$770,000.” The auctioneer is having a field day: “GOOD BIDDING!” he says to the previous bidder. “$780,000,” then “$800,000,” “$810,000,” “$825,000,” “$830,000,” “$840,000,” Now we’re down to just two bidders. “$850,000,” “$855,000,” “$860,000,” “$870,000,” “$875,000,” “$880,000,” “$882,000,” “$885,000.” The people are shaking their heads in disbelief; The two bidders start to slow in their bid making: “$887,000,” “$889,000.” The more confident-looking bidder raises his hand: “$891,000.” There is a very long pause; the auctioneer adds pressure: “Can I get $895 from you, sir? Ladies and gentlemen, are we all done? Going once, going twice.” The hand goes up: “$895,000,” “$900,000,” It’s like people have seen a ghost: “$901,000,” “$902,000,” “$903,000,” “$904,000,” “$906,000,” “$907,000.” The tension is out of this world and neither bidder wants to look like the cheapskate. But they have their financial limits—which they probably past $80,000 ago. “$908,000,” “$909,000,” “$910,000.” It hurts just to watch. “This is just insane,” the woman standing behind me mutters. “$911,000,” “$912,000,” “Can I get a bid from you, sir” the auctioneer demands of one of the bidders. He then goes on: “ Ok, ladies and gentlemen, for the third time, are we all done? Going once, going twice, going . . .” And the hand goes up! “$913,000,” “$915,000.” $2,000 more has been bid, this has got to send the other bidder into submission. But not so fast, he goes for it: ‘“$916,000,” “$916,500,” “$917,500,” ‘“$918,000,” “$919,000,” “$920,000,” “$921,000,” “$921,500,” “Going once, going twice, sir, can you make another bid?” Unless you have seen an auction get to this point, you can’t imagine the pressure of just being an observer. What the experience must feel like for these two bidders is unfathomable. They’ve put all their heart and emotion and debt into this. And then: “going, going . . . ” “$922,000,” “$922,500,” “$923,000.” One of the bidders can’t stand still—he looks like he’s going to have a heart attack; but just as the auctioneer is about to yell, “Sold!” “$923,500!” And immediately the confident bidder backs up with a whopping “$924,000!” Finally—finally!—the other bidder says, “You can have it, mate.” He’s out. “Going once, going twice . . . and sold!!” Sorry, that was a bit of a long one, but it’s a perfect example of an auction in a seller’s market, where the bidding started at $600,000 and ended at $924,000, that’s a $324,000 difference and many people got burnt along the way, there were plenty good points in this segment but the one that sticks out is emotion, also if your loving this content don’t forget to smash that like button. Unfortunately, in these heated scenarios we often let our emotions get the best of us, we get FOMO, we feel like if we don’t get in now the market will keep rising by $10,000 a week and we’ll never be able to get in, we don’t want to look like the cheapskate and walk away from the auction with our tails between our legs. So emotion, in theory, is one of the drivers for an increase in property prices, once this happens to one house on a street, all other comparable houses on the same street now are suddenly being valued at this same level, and even if they don’t achieve the same results, it's often not too far away. However, this driver can only be pushed up through the access to credit, if we didn’t have the ability to pull out a large mortgage to pay this amount for these properties, then who’s paying $924,000 in cash for a property, a very limited amount of people, which would shrink demand down significantly. So, although our emotions are flooring the accelerator, we are being fuelled by lenders allowing us to borrow large amounts of debt, our debt to income ratios have risen significantly in Australia since the 1990s and we seem to be able to always borrow more and more money, so how is this possible? I apologize in advance, it gets a little economical from here on out. Initially, people argue inflation, which is essentially the price of goods and services increasing over time, however, property prices in Australia have grown by 6.9% on average over the last 30 years and inflation generally sits around 2-3%, so although this may have some impact, it doesn’t tell the whole story. Others factor in wage growth, so as our incomes increase, so does the amount of debt we can “Service” meaning we can afford to pay more in mortgage repayments and therefore increase the amount we can borrow. However, I would argue that as wage growth has grown pretty relative to inflation, our cost of living has also increased at the same rate, so although we can afford to borrow more on paper, we sometimes forget to note down the right side under liabilities that our expenses have also increased. One element close to wage growth that I think has had an impact in the increasing amount of debt we can borrow is, historically there has only been one person in the household bring in income, where today it is quite normal for households to be bringing in double incomes, meaning both partners are working full time. This does technically increase household income pretty dramatically while keeping the expenses relatively the same unless of course there are children involved and the childcare expenses start to creep in, and from what I’ve heard can be quite expensive. So over the last 3 decades as it’s become more normal to have both members of the household bringing in income, this has allowed couples to combine their incomes and together have much larger serviceability to pay off mortgages which they use to purchase nicer properties or family homes and ultimately increase values. I think there has been a clear winner throughout this blog and its lenders, they are essentially the ones who are calculating how much debt we can afford to pay and allow us access to these enormous mortgages at a mass scale throughout Australia, without this access, we couldn’t continue to increase property prices at the current rate. As consumers, generally not entwined in economics, lenders are the final stop as they are who we deal with and all we see, but behind the curtain, we have some big players pulling the strings of these lenders including the RBA, APRA and government policy. The RBA can pull the cash rate lever up and down as they see fit, however, this has trended down since the 1990s and today is at the historical low of 0.25 basis points, essentially this means it costs less in interest to service a mortgage, which in turn decrease out expenses, increasing our surplus cash flow and allowing us to be able to borrow more. APRA also has a hand in being able to impact markets, in fact so much so that they theoretically caused the recent market downtown between 2017 and 2019, by putting tighter restrictions on lenders, and cracking down on responsible lending. The government on the other hand has numerous levers to they can pull, first homeowner grants, capital gain tax discounts, negative gearing policies, these are only something things we have seen of late. During the coronavirus they have injected huge stimulus into the economy through wage subsites such as job seeker and job keeper, this prevents mass unemployment and allows people to keep paying their mortgages. On top of this many other levers can be pulled to sustain property values, including abolishing capital gains tax, stamp duty, land taxes they are just some of the big ones but there is so much more. So essentially there are multiple entities with their hands in the pie and although from boots on the ground perspective it looks like just a competitive environment that pushes up prices, realistically it's credit policy that fuels these environments. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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