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Residential market shows signs of price growth levelling off Nerida Conisbee The Australian 12:00AM May 11, 2017 It goes without saying that we’re in the midst of a house buying frenzy. The acceleration of demand over the past 12 months has eclipsed anything we’ve seen since we started monitoring it in 2013. But are we really crazy for pouring so much money into the market? After all, it’s treated us so well. Increasing demand is more often than not a precursor to price growth and we now find ourselves talking constantly about whether Australia is becoming too unaffordable. Despite a slight drop in April, we’re still seeing one of the highest levels of demand recorded. Some analysts including Citi’s are suggesting that the market has peaked, but the reality is that it’s still too early to tell. Last November the banks started increasing interest rates independently of the Reserve Bank and in December, demand for property on realestate.com.au started to fall. It looked as if buyers were actually behaving rationally, but it didn’t last long. By January buyers flooded back into the market and by March we hit a new peak in demand. Australia is one of the most property obsessed countries in the world. Our “lucky country” is now home to some of the most unaffordable cities in the world, and yet we continue to pour money into property. We’re pretty comfortable adding to our already historically high levels of debt. There’s little wonder overseas commentators regularly have a crack at predicting that our market is about to blow. And if you look at markets like the US, where house prices only recently returned to where they were before the global financial crisis, or Europe, where in most places, prices are still below where they were 10 years ago, our obsession and constant investment in property does look completely irrational. One region that shares similarities with Australia is Asia. Cooling measures are regularly implemented, to varying degrees of success, in almost every large Asian city in a bid to put a stop to speculation and spiralling prices. The main reason people across Australia and Asia continue to be so obsessed with property is that, for the most part, it has served us remarkably well. We’ve seen drops in prices on occasion, but overall capital growth has been almost a sure deal. It’s incredibly rare for a borrower to be underwater and owing more than their property is actually worth. We’ve also grown fond of investing in something we can control. With housing we have complete control, whether that’s choosing the location, the tenant or the colour scheme for a new bathroom. Compare that to investing in shares with a large company where the average investor has very little control over the chief executive, where the company invests or how it does its marketing. It’s hard to say whether we’re at the peak of the market, but we do need to consider how much money we’re channelling into residential property, and the very high exposure of our banks to the sector. Residential investment has been a money maker for so long that beyond a Friday night viewing of The Big Short, we don’t really get how devastating a property crash could be. A couple of rate rises may trouble a few people, but rising unemployment would be catastrophic to far more. Losing the ability to pay off a loan means the higher prices climb, the bigger the potential to fall. For those of you secretly hoping for that day to come, the reality is that if everyone is selling and prices are falling, you’re also unlikely to see that as the best time to buy. In markets with rapidly falling prices, buyers that were previously priced out rarely jump back in. Maybe it’s because they also worry about losing their jobs, or they’re not sure how far the price fall would go. Either way, falling prices don’t necessarily prompt people to buy. Right now, it appears as though we’re in the early stages of price growth stabilisation in Australia and that’s a good thing. Sydney and Melbourne, our strongest markets, continue to see strong economic growth and there seems to be limited threat of job loss. Banks are likely to move carefully in increasing rates, potentially cutting into short-term profits to ensure there is no risk of widespread defaults, a far more catastrophic situation for them to be in. We’re definitely not crazy to invest so much in something that’s performed so well, but a slowdown in prices would be the best outcome for residential markets in Australia. Nerida Conisbee is REA Group’s chief economist.