If property prices fall, that makes houses and apartments more affordable. Yes… Actually no….It doesn’t.
Wait… how can that be?
Broadly there are 5 factors that determine property prices.
If we look at the current market there really only 2 things impacting it.
- Cost of living has gone up
- Interest rates have gone up. (as discussed here in Nov 21)
In relation to affordability, there are 3 factors that determine how much a buyer can afford to pay.
- Size of their deposit
- Cost and availability of debt
- Job security and income.
The recent rise in the cost of living makes people more cautious financially. They notionally reallocate some of the money earmarked for a property deposit to the “rainy day fund”. To meet the future cost of day to day spending. This therefore reduces their deposit and hence the amount they can afford to spend on a home.
Rising interest rates (and hence the increase cost of debt) further reduces the amount they can afford to borrow.
When the buyer market cannot afford as much, they have 2 options.
- Adjust their sights to lower value property such as apartments.
- Rent for longer until they can save and afford to pay more.
The combination of an increased cost of living and the rise in interest rates, mean buyers can’t afford to pay as much for a property. Hence the market price falls.
Therefore you can see a decline in the property market is a direct result of buyers inability to pay the previous prices. It does not make it more affordable.
The same is true in a rising market. Property markets rise and fall because of changes in buyers affordably. Not the other way around. It can be argued therefore that for the general market the affordability of property from cycle to cycle, never changes. This (as well as the cost of transacting) is why it a long term play.
