Predictions of a house price collapse fail for one key reason

High interest rates couldn’t kill property prices, and the latest forecasts of a collapse will fail because of one important factor.

The email message last week screamed from my inbox “ALERT! Global property collapse is coming”, a scary proposition for any real estate owner or investor.

However, my reaction after reading it was not to worry or panic, but to smile and sigh. Here we go again.

During 25 years of writing about finance and real estate, I’ve seen countless warnings of impending real estate doom. Despite them all, Aussies have never actually had a huge property collapse, and least when compared with the 50 per cent falls that share markets sometimes dish out.

My scary new email focused on international real estate issues, centred on China’s struggling property market, but promoted a workshop to discuss how to safeguard your assets from the impending “collapse”.

These constant messages of property doom and gloom fail to address one of the most fundamental rules of finance and investment: supply and demand.

When there is not enough supply to fuel demand for any product, whether it’s oil, Oreos or real estate, price rises are likely, and the chance of a collapse is tiny.

For Australia, there are more than 500,000 reasons why a property price plunge is highly unlikely – even if prices head south globally.

Building approvals are too slow and demand too high. Photo: NCA NewsWire/David Crosling

New data from the Bureau of Statistics for the year to March 31 illustrates the demand side of the equation. The nation’s population surged by a record 563,200 people in that 12-month period, to 26.5 million, largely driven by more than 454,000 migrants moving to Australia.

I support a big Australia that welcomes newcomers who bring skills, youth and cultural diversity, but the big issue with migration right now is that we do not have the housing supply to put roofs over everyone’s heads.

Building approvals are actually down 15 per cent year-on-year – not the direction you want to see to house hundreds of thousands more people.

Supply is being further squeezed by building company collapses. The post-Covid boom in materials and labour costs has sent several builders to the wall as their fixed-price contracts became loss-making machines.

Other barriers to housing supply, according to the building industry, include a lack of land releases and shortage of tradies. Using properties for short-stay accommodation rather than traditional renters also shrinks supply.

While the federal government’s $10bn Housing Australia Future Fund has now been legislated in parliament, houses don’t just spring up overnight, and there probably will be high demand and low supply for years to come.

In recent years there have been some sharp falls in house and unit prices – particularly in the biggest cities of Sydney and Melbourne – but the rebound appears well under way.

It seems every time our property prices head significantly lower, potential buyers flood back into the market seeking a bargain.

I remember in the early days of Covid the Commonwealth Bank warned of potential property price falls of more than 30 per cent. We got nowhere near that, and if the brightest boffins at our biggest bank couldn’t forecast house prices accurately, how can the average Aussie homeowner or investor?

Originally published as Predictions of a house price collapse fail for one key reason