MELBOURNE’S property market has slumped dramatically over the past three months – and by a staggering 44 per cent over the past year.
We must reiterate that buyers are on hold because land prices have escalated to such epic proportions. Auction prices now constitute over 7 times the average wage, more than double the long term average.
70 – 80% of each auction price is accounted for by the land component. Any 0.25% increase in interest rates has as big an impact as a 0.5 – 1% increase in interest rates from bygone eras. Why? Because the lump sum amount, read land price, is so much larger than in the past.
Buyers must be watching the 15% reduction in property prices in the US. The UK has had a 10.5% drop in the last year. Australia’s property boom and accompanying credit boom has outstripped both those countries.
Land prices will drop back to their earning capacity, assisting affordability. It is the length of this correction that determines the pain we all feel. Will there be unnecessary government bailouts for those developers that over-invested? This will only keep land prices above their earning capacity.
The further question is – how much will this looming recession hurt the economy? How many people have been coerced into buying a house by the media snowstorm that housing prices only ever go up? Let’s hope the public take the time to learn about the economic fundamentals causing this crunch.