Tony Alexander: Don’t Bet on Falling House Prices

Despite the new government tax regulations, investors aren’t being discouraged from the property market. Economist Tony Alexander explains why we shouldn’t expect falling house prices any time soon.

Whenever we get big changes, such as the global pandemic, the 2008-09 Global Financial Crisis, monetary policy shifts, or tax policy alterations, such as those announced on March 23, most of us can take a view on what the likely impact will be. Sometimes these views can be horribly wrong, as has been the case for the past year in regard to the pandemic’s impact on house prices.

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But often it’s a case of the magnitude of the change people expect being unrealistic. And the clear tendency that I have observed over the past three decades is that people tend to over-estimate the impact of changes.

They tend to forget that markets. such as those for housing, contain a lot of participants for whom policy changes do not matter much at all. Markets can retain momentum in the face of shocks.

This is why I try to get people to adopt more realistic, less sensational views on what will happen by running monthly surveys of what different groups of people are seeing and what they are planning. In that regard my monthly Spending Plans Survey has recently thrown up a very interesting result.

What are the predictions?

The popular view is that housing tax policy changes will drive investors away from housing. I’ve been questioning that view on the basis of things like housing being the only asset a bank will eagerly gear the average person into (lend them money), continued low interest rates, a strong economy delivering a firm labour market, plus about five other things.

In my recent Spending Plans Survey, only a net 2% of the 1304 respondents say that they plan cutting back spending on investment property. This is important because the May survey result was a net 9% planning to cut back, and in April a net 10% responded that way.

The shock and awe following the government’s March 23 announcement is passing very quickly. And that has implications for housing market activity – especially once we get through winter, when things traditionally quieten down a bit.

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Investor activity

The chances are strong that while long-term investors with sizeable portfolios will continue their process of selling some old stock and reducing debt, these investors plus others will start looking more intently at purchasing additional property assets.

After all, every day brings news of shortages of rental accommodation around the country, which delivers a message that rental returns are likely to rise over the coming year or so.

First home buyers

And seeing that, we can expect to see young, first home buyers to start coming back into the market as well. For the moment, they remain concerned about the prospect of falling prices.

But we have been here before many times over the past three decades, when prices have risen around the country at a compounding rate of close to 6.8% p.a. Periods of price decline tend to be short-lived if they occur at all. Those who purchase during such periods generally have more stock to choose from. But that is when the second interesting thing happens.

There has been no rush of fresh property listings since March 23. Some investors are rationalising their portfolios, but most are holding tight. Most of the time, vendors are still seeing firm demand in auction rooms and through tenders.

At some stage this year housing market participants will question the possibility of prices flattening, let alone falling, and activity will pick up once again. My survey results suggest the timing for this could be closer than one might think.

This post first appeared on the Squirrel website, and is reproduced here with permission.

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