What determines house prices?
5 Dec 2013
90 month(s) ago
SMSF investors are increasingly considering property for investment. Many are warning of the dangers, because trustees are in part relying on capital gains in what already seems an inflated market. What is a good predictor of those gains?
A great deal of effort is expended by economists into what is a good predictor of house prices. Is it credit growth as indicated by the RBA. It turns out that this is not a good correlation:
House finance growth works better:
This is a better correlation. What does this suggest? That it is the banks that determine house prices. If they are feeling reckless they will encourage lending and prices will go up. If they are fearful they will squeeze lending and prices will stall. Ifc they start dropping the process becomes self reinforcing because the banks will come under stress and stop lending even more.
In other words, we are in hock to the banks. They determine sentiment far more than is acknowledged. Investors do, too, but they are heavily influenced by what banks will lend them.
Governments can set interest rates on the sidelines, but that is all.