Price Drops Are Good for Home buyers - and The Reserve Bank

Graeme Salt

This week’s RP Data house price figures may have given the media a wake-up call.  But for others, they represented a buying opportunity.


 


The RP Data analysis showed that house prices had fallen by 1.9 per cent in May. Some journalists saw this as evidence of the bursting of a housing bubble. But others, with better qualifications, were more philosophical. AAP’s Chief-Economist, Garry Shilson-Josling, noted that house prices always drop in May. He said, “If the usual pattern is to be followed, by the end of June prices should be just about back up to where they were before the downturn through May.”


 


No, the sky is not falling down; this is good news – cheaper prices create opportunities for those who have been priced out of the market. Pretty much in the same week, the Commonwealth Bank-Housing Industry Association produced research that housing affordability is the best it has been for 12 YEARS.


 


But it’s only good news if buyers are confident that prices will not drop further. It's a bit like one of those summer thunderstorms Australia gets; sure it’s dark and wet when it's happening, but we know that we will see the sun in an hour or so.


 


In the same week, BIS Shrapnel produced research predicting 15 per cent price growth for Sydney's units over the next two years.


 


There are two compelling reasons why we know the sun will come out tomorrow. The first is fundamentals - next year, Australia’s population is due to reach 24 million and the country is still not building enough properties to meet national demand. The second is that interest rates will remain low for some time.


 


The Reserve Bank has forecast a considerable period of interest rate stability – something that Saul Eslake (Bank of America Merril-Lynch’s Chief Economist) predicts will go on well into 2015.  The RP Data property price drops will only convince The Reserve that it is right to keep interest rates low.


 


Property prices may well have dropped last month. But that is hardly apocalyptic. Due to sound economic fundamentals the chances are that, after a brief period of pessimism, economic fundamentals will ensure that property has a blue-sky future.


 


Graeme Salt is a Sydney-based mortgage consultant.  For a no-obligations consultation, he can be contacted on 02 9922 5055