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Blog // Thoughts
October 8, 2007

Housing Crisis Or New Reality?

For anyone interested in the current (near-worldwide) crisis in housing prices and housing finance, there are some formidable and troubling words from Ross Gittens, economics editor for the Sydney Morning Herald, in his piece Only Ourselves To Blame As We Keep Borrowing. “For one thing, especially in a global city such as Sydney, if you […]

For anyone interested in the current (near-worldwide) crisis in housing prices and housing finance, there are some formidable and troubling words from Ross Gittens, economics editor for the Sydney Morning Herald, in his piece Only Ourselves To Blame As We Keep Borrowing.

“For one thing, especially in a global city such as Sydney, if you have a lot of older, more skilled and more moneyed immigrants coming in, it’s possible for them to outbid the local young people. We’ve seen a fair bit of that already and may see a lot more.

For another thing, all members of the next generation aren’t equal. Some have greater ability to pay the going rate for first homes than others. Those others are more likely to miss out.

But the biggest change in my thinking has been the belated realisation that the worsening in affordability is largely self-inflicted.”

Those comments, together with the balance of the article are applicable not just to the Australian context, but also to what is happening to the property markets in and around many global cities.

“Our homes are at the centre of our material ambitions. As well, they’re one of the main ways we compete with friends and neighbours to prove our superior social status.

So we keep building homes that are bigger and more opulent – or achieving the same thing through renovations and extensions – and keep wanting to move to homes in more desirable suburbs.

Note, it’s not just that so many of the extra dollars that come our way get poured into our homes. We use them to cover the repayments on borrowing more to finance the purchase of a bigger and better place.

In other words, for every extra dollar we can afford to put into repayments, we may be able to borrow nine times as much.

See what this does? It keeps pushing up the prices of homes as they get bigger and flasher, and as we bid against each other for the most desirable locations (the supply of which is largely fixed).”

[tags] Economics, Housing [/tags]

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