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Housing Affordability: RBA submits on home ownership - Summary by Pete Wargent


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Great analysis of Australian Housing Market. Most significant and surprising analysis for me:

Probably the most significant part of the RBA submission for my money was the section noting that there are "no examples of large falls in nominal house prices" either in Australia or overseas without there being significant reduction in the capacity to pay (which generally means very high interest rates, a deep recession or high rates of unemployment):

"There are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment). 

There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can – safely and sustainably – service the obligations involved in paying the higher price.“

This echoes closely what housing economist Michael Oxley argued in London back in 2004. While an increase in the supply of dwellings is both necessary and desirable, this alone will not cause a material correction in house prices while the capacity for households to repay existing mortgage debt remains comfortable. 

In larger cities, where only a small percentage of the housing stock is new in any given year, this is even more so the case.

This suggests that the risks of a material housing market correction are considerably higher in smaller cities and towns where unemployment rates are elevated - or at risk of becoming so - and where the new supply of dwellings as a percentage of existing stock can be higher.

I believe that. 

In general housing prices go up.

Except when interest rates are high or unemployment rates are high. 

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