New Topic - House Prices

They say necessity is the mother of invention. I find it necessary to find larger accommodation and my preferred form of that accommodation is a house - specifically one with three bedrooms, a laundry, a place to dry clothes undercover, a linen cupboard, a two car garage and lastly, the real icing of the cake, a study.

As such, I am switching the topic of this long neglected blog from the share market to the housing market and the question of whether it is a good time to buy or sell?

My main source of information on this topic will be that venerable institution www.businessspectator.com.au, where in a war seems to be being waged between Christopher Joye (on the buy side) and Steve Keen (on the sell side).


So first I will look at Chris's article "Housing affordability returns, but for how long?" in which he presents his company's approach to measuring house affordability.  The article doesn't draw many conclusions other than to say that the house price to income ratio peaked (bad) at what seems to be about a year ago and has since fallen back (good).

However, when I look at the last graph,  I can't help but think that from March 1993 to about March 2001, a fairly decent period and who knows how long before that, the ratio was between 2.5 times and 3.0 times. I am old enough to remember those years and I know people didn't spend much time worrying about house prices back then.

Then there is a steady rise until about March 2004 (I purchased my apartment in April 2004). During these years I remember people just holding out waiting for prices to drop at any moment, because the prices seemed absurd.  I took the view that house prices don't come down in absolute terms and I needed somewhere to live, hence I dived in. I'm glad I did, because house prices just kept going up.

From about March 2004 until now, the trend in the affordabilty ratio has been fairly flat and people have spent a lot of time complaining about house prices being too high.  I can't help but think that something's got to give and at some point we will see a return back to the 2.5 - 3.0 times band. When and how? Well that's the $64,000 question.