Kuta Beach

Kuta Beach

Saturday, 25 October 2008

Property a Safe Haven from Volatile Shares?

Some people are saying that dropping share markets in Australia will see most investors putt their money into property, which is allegedly safer. The Rudd Government has also increased the First Home Owners Grant (FHOG), which makes it tempting for some people to buy property.

However, I will argue that the share market and the property market do not exist independently. One affects the other.

When the recession hits, Aussie businesses will not longer require as many immigrants, which will reduce the numbers coming here, which will reduce demand for houses, which will reduce house prices.

As unemployment increases, people will have less money to buy houses, which means demand decreases, decreasing prices of houses. Many of those workers laid off will not be able to pay off mortgages, meaning they will be forced to sell, meaning more houses flood the market, which decreases prices.

I have been looking at the economic analyses of economists Steve Keen at UNSW and Robert Shiller at Yale University. They show that real house prices in all countries over many centuries are constant at approximately 3 times average yearly income. Australia currently has the most expensive houses in the world at 7 or 8 times annual income. We are in the same position as California was before property crashed there, causing house prices to decline 40% in one year.

Some people say that property increases in the long term. They say that it may be the case that American house prices are going down, but in the future it will increase again. This may be true, but consider that historically property prices stagnate for long periods of time. Take house prices in Tokyo. After the 1990 Banking Crisis in Japan, property prices in Tokyo plunged by 70 per cent from then (1990) till today (2008). This means that in 18 years property prices have gone down by 70 per cent. Who knows how many more decades it will take before Tokyo property prices go back up to the levels it reached in 1990?

Related Podcast: The Property Bubble (Counterpoint)

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