How House Prices Are Determined (Part 2)

Determining What the Price of a House Should Be

Several factors affect the demand for residential property, and that in turn has an impact on the price of homes in Australia. We will look at each one in detail below:

1. It may surprise you to know that demographics also include what is known as the “household formation rate.” For example, while the population of Australia increased by just 24% in recent years, the number of households grew b 45 %. A century ago, the average size of a household was 4.5 individuals. Fifty years later, it had dropped to 3.55, and it is now about 2.5 people per household.


2. The federal government plays an essential role in regard to residential housing. For example, the following events took place in 1999:
– With the introduction of the capital gains tax discount, if people held an investment property for a minimum of 12 months, they only had to pay 50% of the capital gains tax.
– Announcement of the Goods and Services Tax prompted people to take action because they assumed that the price of property would increase automatically by 10% on 1 July 2000.

3. In 2000, the First Home Buyers Grant was implemented to defray the extra costs home owners were required to pay when the GST became law, and its impact was felt, for the most part, in the new home market. First home buyers who purchased a brand new home received a grant of $14,000.

4. All of these activities prompted a property boom in Australia, and the more recent Firs Home Owners Boost (FHOB) was intended to provide a similar initiative, but it was not as effective because of the current global economy. However, the FHOB has helped the country to avoid a recession, up to this point.

5. Difficulty in obtaining a mortgage also has a significant effect on the demand for residential property and the related prices. Prior to the collapse of the housing market in the United States, home loans were available to virtually anyone at extremely low rates, the demand for housing increased, and prices zoomed upward. Now, the entire world is suffering the consequences of those poor lending practices.

6. Today, it is very difficult for people to obtain a loan, especially property developers and those who have little or nothing to deposit. Credit has been tightened to such an extent that the demand for property has decreased, and prices for residential property have either stagnated or fallen dramatically.

7. When rents are high, people begin thinking about buying a home of their own, and the demand for property increases. This is especially true in certain suburbs near our major cities, where rental yields equal 6% , along with interest rates of 5%.

8. If speculators feel that the price of real estate is about to rise, they will want to take advantage of an opportunity to make a profit, and both the demand and the price of property will go up. Also, if they think the property values are about the decline, they often decide to sell their real estate at once.

Property and share investors
It is sometimes said that when the property market is down, the share market is up, that the opposite is also true, and that investors act accordingly in regard to their buying and selling activity. However, this may be a false assumption.

Economists tell us that, in most cases property investors will stick to what they know, and that share investors tend to do the same. Ordinarily, property investors avoid dealing with shares because they are used to dealing with tangible assets, and share investors are usually not interested in dealing with tenants. Also, if property investors become involved with shares at all, they seem to prefer dealing with them in very small amounts.

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