Monday, June 8, 2009

The trend in house prices

I read an interesting article published in The Age today, written by Robert Shiller, professor of economics and finance at Yale. Here is what I have gathered.

According to Shiller's observation, real estate market moves very slowly. That is because sales of existing houses are mainly by people who are planning to buy another. In other words, they are already "in the market". If they wait to buy low, they also sell their houses for less, and vice-versa. For such people, there is no reason to hurry.

The real shift in real estate market trends are effected by those entering the market for the first time (e.g. a young couple buying their first home), or those exiting (e.g. an old couple selling out to move into a retirement home)*. The decision to move into the market or to move out of the market usually reflects the growing pressures of economic necessity. For the former, it may be that the cost of rentals outweighs the cost of home ownership. For the latter, it may be due to foreclosures, or a changing opinion about the future. Typically, the decision-making sentiments can last long after the actual economic factors have changed. A new couple may decide to stay longer with their parents to delay buying into the market, based on their perception of what the future holds. An elderly person can decide to cash in early in a declining market, or to delay in a rising one.

Shiller says that the fall and subsequent rise in house prices do not exactly follow the timings of an economic recovery. He says "Any trend may suddenly be reversed if there is an "economic regime change" - a shift big enough to change their thinking. But market changes that big do not occur every day. And when they do, there is a coordination problem: people all won't change their views about home ownership at once." Shiller believes that even if there is a quick end to the recession, house prices may be subdued for years. "After the last price boom, which ended about the time of the 1990-1991 recession, house prices (re:US) did not start moving upwards, even incrementally, until 1997."

In my opinion, the government should do its bit to prevent speculative buying. Housing is a basic human necessity, not an option. When people's income is largely spent on servicing a home mortgage so that the rich can get richer through speculative buying, the overall quality of life declines accordingly. Until the current global financial crisis, so-called democratically-elected governments of the world seem to be "of the people, by some people, for few rich people."

* p/s This ideal scenario excludes investors or speculators. In reality, investors moving in and out of the market can also make an impact on house prices. The Howard government implemented the previously-abandoned negative gearing scheme, thereby ensuring that investors remain in the market through up and down cycles by providing tax offsets for losses. This essentially provides a perpetual upward lift to house prices in Australia. Ugh!

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