By Simon Curtain, Director/Private Client Adviser
Research released by the Real Estate Institute of Victoria (REIV) last week has revealed that the medium house price in Melbourne fell by around 5 per cent last year.
Only 5 per cent? What happened to the bursting of the property bubble and the warnings of a disastrous decline of 30 – 40 per cent in property prices? Well, as we expected, it did not occur.
What needs to be remembered is that the property market, like all other financial markets, operates on the principal of supply and demand. If many people are looking to enter the property market or property is scarce then prices will rise, the converse occurs if there is an oversupply of property.
Now, of course this is a very simplistic view of what is a very complicated market, but often simplicity is the key.
Generally speaking, most people want to live as close as they can to their workplace. Given a large number of people work in or around the city you would expect there to be strong demand for properties in this area. However, there is only a limited amount of land surrounding the city. These two factors combined make property surrounding the city the most expensive and highly sought after.
But why then have properties fallen in value over the past year? Well this is where it gets a little more complicated. There are a myriad of reasons as to why markets rise and fall in value, one of the reasons involves the market’s (or people’s) willingness to pay.
While properties in or around the city are scarce and in high demand, people are only willing to pay so much for a property before their limit is reached. A person’s limit is the absolute amount they wish to spend on a particular property; this could be due to lifestyle or financial reasons, or it may be because they are restricted by the bank’s limits on what they can borrow.
When people have hit their limit, property prices start to fall but only by a small amount (like 5 per cent) because once property prices are back within people’s limit, they will start bidding again.
We think property prices are currently close to the limit people are willing to pay, for this reason we expect to see prices remain stable, or perhaps soften, over 2012 - certainly not the 30 to 40 per cent declines some commentators have been predicting.
But as we continually preach, it is not "timing" the market, but "time in" the market that counts. If you are looking to purchase a good quality asset and intend to hold on it, then you don’t need to be concerned with short term volatility, as markets will generally trend upwards over the longer term.
Click here to view REIV property research.
