We’ve heard it all over the last year or so.
How house prices are set to fall.
It’s all doom and gloom.
And the consensus view is that house prices have further to fall.
The headlines are full of emotional words like ‘meltdown’ and ‘plunge’ and so forth.
Houses are unaffordable, they say, and they have to come down.
The fact is, when has housing ever been affordable?
Land fixed in supply around all the amenities and services we enjoy, will always sell at the red line of what the economy can afford and what the locational advantages give.
But rather than give you reasons why property will fall further, here’s a couple more reasons why property prices can go higher still…
The easing of banking regulations
Here’s some news from the US that may have slipped under the radar. Four top federal regulators in the US have signalled a willingness to ease certain banking regulations.
Their getting rid of the ‘leverage rule’.
Regulators put the leverage rule in place after the last crash. They did this to limit the amount of money banks could borrow and leverage on their capital.
This marks a significant change to policy.
But see how tighter banking rules finally get whittled away. It happens every time.
This is how it goes. The easing of regulations and looser lending standards are all part of the real estate cycle.
So let’s bring it back home. Leading up to and in the wake of the Banking Royal Commission, lending for property has really tightened.
A crackdown in investment loans has somewhat curtailed development.
This is something to watch, because that could lead to bit of a housing shortage in a few years’ time.
Don’t expect the current tight lending standards to last forever. Watch then, in the years ahead, for a call to ease credit standards.
And should credit start to loosen once more, the combination of a potential housing shortage and looser lending will all feed into the bidding up of house prices once more.
Keep in mind, it’s what the bank allows you to borrow that sets house prices. Tighter lending standards has impacted house prices a lot over the last year and a bit.
So, should credit standards start to ease, this is one way house prices can go higher.
And here’s another reason why house prices can go higher still.
Innovative ways to bid land prices higher
Every real estate cycle throws up new and innovative ways to bid land prices higher.
Here’s a snippet of news that may have escaped your attention last month.
Australian company DomaCom Ltd [ASX:DCL], just entered an agreement with a Big Four bank last month.
For those not in the know, DomaCom is an Australian company that provides a platform which allows investors to make fractional investments in property.
In other words, it facilitates a pool of investors getting together and purchasing a property of their choosing.
The bank will trial DomaCom’s fractional property investment platform, which, if successful will lead to commercial deployment within the bank.
This could lead to mainstream use of the property platform.
For the first time it allows Aussie investors to treat property just like equities.
Just as you buy shares in a company, you’d buy shares in a residential property.
The roadblock of a large transaction size for a traditional property investment is gone.
And property investors don’t have to put all their eggs in one basket anymore. And all the risks that go with that.
Property investors can now invest in a number of properties with the money they have. And receive the rents in the proportion of ownership they have.
Everyone goes on about how property has become too expensive.
That people can’t afford to bid up the price on residential real estate anymore.
But they can.
And fractional property investing only occupies a small percentage of the market at present.
This is something that could really take off into the next decade.
My guess is it will lead to the bidding up of property prices.
Don’t be surprised if there’s a potential easing of prior lending standards in the years ahead. It’s always the way.
And that financial innovations like fractional property investing keep property prices on the boil into the next decade.
If history is to repeat, house prices are likely to go higher still.
Chartist, Phil Anderson’s Time Trader
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