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Property Values double every 8 years—false or true, what is the limitation of the willing buyer and why fail economists to predict the housing market?


House Prices double or not

Debts lifetime long does it make sense?

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Property Values double over time


Still amazed, I was talking just few days ago with somebody who attended a home buyer seminar. He was totally brain washed with theories about property values, which double in average  every 7-8 years verified by history. Well, that history repeats itself is not proven otherwise we would risk ending up in the stone-age again.


When browsing the media you will find lots of predictions from property marketers, and articles written by economists about their expectations.  Well, I like the idea to sell in 8 years time and cash in a million or more... That just won’t happen.


I’ve got a simple explanation for that. Economists discuss the cost of living based on the Consumer Price Index. But these concepts don’t explain market values in isolation. The housing market has different speeds and values in different areas. Remember 2010 Auckland was already booming, Wellington’s housing still had negative growth.


A far better concept is to look at population growth, purchasing power and the regional economy (jobs and wages). Income is not only purchasing power, it gives people borrowing power for instance being accepted for a mortgage when buying a house. That might surprise you when following the debates about property prices and affordability.


Being realistic here, reading the crystal ball does not seem to be easy. If you want to sell your 500k Dollars home in 7 years time for 1 Million, there must be somebody found who is willing and able to pay that money based on income. Looking at the inflation driven economy it is easy to see that the rich become richer and the number of poor people increases steadily. In other words for the middle class (citizen who pay for government spending and deficits) widens the gap between income and expenses.



Property prices—who can read the crystal ball?


Economic growth and inflation cause prices to go up.  Fifteen years ago I paid for one liter petrol $0.65 now two Dollars. With housing it is similar, however also different. Property values come with an overlaying scarcity value of the attached land. In these days humans can build nearly everything but not creating land.


So, the answer is yes, property prices continue to rise. Aside from the price here is something more to consider. It is the intention to purchase a house for your family to live in or as investment property. The price for an investment is limited by the ROI (return on investment). Buying an owner-occupied property is more an emotional decision in terms of price, size and location.


That also explains why the media wrongly blaming investors for ceiling prices or triggering the market to overshoot. If you accept that the market is driven by willing buyers and less than 10% of them are actually investors, then you need to find a different culprit. In contrast investors wait for making a profitable decision. Private home buyers probably start house hunting as soon as they need housing (or fear of missing out) and have the money for it. Subsequently  market price and interest rates are very influential.




Debts lifetime long—does it make sense?


The short answer is – it depends on.  Using a family home as enforced saving plan is common and a mainstream profitable business for the bank. On the other hand it is a truism that you could pile up the money for investing that people pay to the bank as interests on their mortgage. Believe me the amounts are huge!


The problem with cash in the bank is you pay tax on returned interests and price inflation eats away a part of the value. More risky is the human nature—available cash is easy spent for a nicer car, holiday, etc — how can you set up your brain for forced saving?


People who have discipline and are money savvy find better options to grow wealth than in slavery to the bank.  Using earned money for controlling debts is a better strategy. For instance investing or buying an investment property before owning a home to minimize personal debts had my preference. In this way my private home was in few year debt-free. Ask yourself thoroughly what might be possible over the coming 20-30 years before selling your rational soul to the bank.




Take Away


Certain is that property values tomorrow will not be the same as they are today. In the past  home ownership has provided solid capital gains and that even with lower margins at selling point. So, homeowners still get rewards for carrying a mortgage lifetime long.


However, the upward pressure of market values remains due to the demand outrunning the supply of housing. Low cost finance keeps that trend going, but a willing buyer must meet tightening lending rules—when did you get last time a pay-rise?



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