The House Price Dilemma !

 It is remarkable how land used for grazing cows suddenly increases in value the moment someone suggests it is suitable for housing sites.  Landcom has just bought an 873 hectare block at Wilton, inland from Wollongong for $ 258 million dollars, despite an independent valuer setting its price $ 102 million lower just a year ago

  A similar price evaluation is under way at Jamberoo, inland from Kiama.  This is traditional dairying country and there is strong opposition to development because existing housing is struggling to get connection to an inadequate sewerage system, and the narrow farm roads could not stand volume traffic.

The price of housing is determined by supply and demand. We have an ever growing Australian population and we are not building enough new houses and consequently the stock of existing housing is ever increasing upwards to the point the median price has now passed the million dollar mark.

Interest rates are at a traditional low level and this has brought many first home buyers into the market with mortgage repayments taking a dangerous slice of their income stream.  This home price inflation has been their safeguard.  If the repayment pressure gets too great they can return the house to the market and probably make a profit.

New housing at Wilton and Jamberoo will initially be cheaper than homes in Sydney because the residents will lack road and rail connection to city jobs and it will take a long time for civic amenities, like shopping centres and schools to catch up.

That has been the situation for as long as the city of Sydney has grown ever outward.  Eventually, these new estates become enveloped as an integral part of the city and feed into the job market.  We despair at the ever rising price of homes and yet the catalyst to disaster is the inevitability that at some time interest rates will edge higher.

In many ways, this housing market is like the game of Musical Chairs.  A group of people circle a number of chairs and each needs to find a seat when the music stops.  Of course, there are more people than chairs and consequently some people miss out on a seat and are eliminated.

The money market is the great unknown.  Downturns are cyclical, and for home owners failing to make their mortgage payment that is where the music stops.   The buyers melt away and home price realization sets in. In such a situation a price drop is the only way to make a sale.

The danger zone is in the amount of new people entering the housing market with a minimum  deposit and repayments taking a major slice of their income.   Ever a small increase in the interest rate could take them to tipping point and create a " buyers market " - devoid of buyers.

It stands to reason that if we indulge in overpriced land on the city perimeter, we perpetuate the over priced value of new housing and that caused the median price to rise ever higher.  Perhaps a time for the prudent to give thought to what happens when the music stops !