What causes property values to increase - Short Term

Now we know all about property market cycles and at what stage in the cycle we’re currently in, let's talk about property price rises, and how and why they grow.

There are

The short-term factors - which are what most of the media is concerned about and…

The long-term influences - which is what strategic investors pay attention to.

Some Short Term reasons values increase

Interest rates

Obviously, low-interest rates make it easier for buyers to borrow more, as money is cheaper.

But interestingly, the converse isn’t true.

In the past, property values continued rising for some time, despite the RBA raising interest rates

Supply and demand

Generally, if demand for accommodation outweighs supply, property prices will rise.

But if supply outstrips demand, such as when we go on too many apartment tours, prices tend to decline.

Availability and cost of land

The lengthy time taken to release new land supplies and the vast amount of taxes and charges developers must pay to subdivide new estates have positively contributed to housing price inflation in Australia.

Access to credit

Now I’m not talking about interest rates here, but a borrower's actual access to credit.

Rising interest rates tend to prompt lenders to tighten their lending standards so borrowers can’t borrow as much.

When our Banking Regulator APRAwas concerned about the rapid growth in lending to property investors which led to steep increases in property prices in 2014, it instructed the banks and other lenders to be more cautious and set stricter criteria for determining whether borrowers could repay their loans if interest rates were to change.

This warning had the desired effect and the share of new loans to investors fell from over 40% during 2014 -15 to less than 30% the next year.

On the flip side, during the pandemic boom, banks eased lending standards in a move designed to free up credit and revive the economy - and it worked, hence the price surge.

The general economic climate

Here we’re talking about things like inflation and employment levels.

It seems obvious that periods of low inflation and high employment would see an uptick in borrowing as consumers look to spend the extra cash in their back pockets.

And as we know, when buyers fight over property purchases, values are only going to go upwards.

Consumer confidence

Increasing consumer confidence increases consumer spending.

The aggregate demand curve shifts to the right, indicating an increase in demand for goods over services.

In other words, a robust economic climate and rising property prices cause a "wealth effect " which leads to higher consumer confidence where buyers think it's the opportune time to spend their spare cash on a property.

Government incentives for first-home buyers

When the government wants to inject more demand into the market it looks to incentives for first-home buyers.

Just look how well this worked during the Covid pandemic as first home owner grants and incentives boosted jobs in the construction industry as well as in many associated retail industries.

Our new Labor government currently has a few schemes in place for first-home buyers: the Help to Buy program (where the government owns a portion of your property and you pay it off down the track), the Home Guarantee Scheme where you can buy with a 5% deposit or regional first home buyer support.

And what do these incentives do?

It broadens the pool of property buyers, flipping the supply/demand balance and putting pressure on property values.

Investor appetite

Over the long term, property investors make up about 30% of the housing market.

When the market conditions are favourable this leads to high investor demand and we all know what that leads to.

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Jason Gwerder
Wednesday, 27 July 2022

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