Tuesday, July 5, 2016

Australian housing bubble. When will it PoP!

Is it a good time to buy a home? Not really. Let’s see why.

For first time home buyers, It’s worth waiting for few more months or a year to get a great bargain. Well, it cannot be called a bargain, just a fair value for a normal dwelling. 

If first-time home investors are thinking of purchasing a second home for renting, it’s going to be a sad way of investing their capital. Reduction of interest rates and easy financing motivate more home renters to be home buyers. This leads to few renters chasing more rental properties which according to supply and demand will bring the rent prices down.  Furthermore, purchasing in a middle of a housing bubble makes investors pay exuberant monthly payment on a mortgage while pocketing less and less rental income, generating a negative cash flow each end of the month.  On top of that, seeing the perceived value of your home going down is not a pleasant experience. I used the term perceived value in here because, the reduction in price will be temporary and it will go up again, which I have explained in the last paragraph.  

Housing bubbles are formed when easy credit is available. But sustaining a bubble (to make the prices go up and up) is made possible by the acceleration of signing in to new mortgages.  Therefore, having a constant mortgage signing numbers is not sufficient enough to sustain a bubble. Mortgage signing numbers has to grow positively. When banks tighten their lending policies, increase initial deposit amounts and place barriers for foreign nationals to enter in to the housing market, it will cause acceleration to go negative. This negative acceleration takes some time to leak in to the economy and to housing market and I believe 2017 will be the time it will show up as a great reduction to house price tags.

Australian government's take on this matter will be pretty obvious though. Since some time, many countries are avoiding and postponing a contraction in their economy which are by the way natural in a capitalist economy as a boom-bust cycles through deficit spending and facilitating easy credit. I believe it will continue to happen in this time too. So there will be a temporary reduction in housing prices for 1 or 2 years and then it will start raging ahead again.  So a good time to buy is in late 2016 to mid 2017. If you miss that window , you may have to wait for 4-7 years more to get a sweeter deal.

To grow GDP and to provide jobs, government will encourage more housing projects in various ways and we all know where that’s going to end. You won’t need to go to China to see Ghost cities and Suburbs. YeY !! ?

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