Tuesday, February 27, 2007

House prices and the business cycle: What goes up...

Sense in the Herald on house prices and the business cycle from one Christopher Niesche, who makes two important points about rising house prices and those who argue they'll keep rising for ever. The business cycle hasn't been repealed yet, says Niesche,
So when people start saying this property cycle is different from the last time and there may no longer even be a property cycle, then that's probably a cue to have a close look at the property market.
And when you do have a closer look, you realise that there is something that makes this cycle significantly different: it's more vulnerable than before. There are more rental investors in the market than ever before, "for the first time in living memory - it's investors and not owner-occupiers who are setting prices and have been doing so since 2003," and these investors are not going to put up for ever with the lowest yields in 35 years.
This means that one way or another rental yields will eventually have to rise back to their more usual levels of between 5 and 6 per cent to justify holding housing as an investment.

The question for investors and home owners is how will this happen? Rents will have to rise sharply or house prices will have to fall. And there's nothing to suggest that rents will rise sharply.
Much though people might wish otherwise, the business cycle still hasn't been repealed.

LINKS: Christopher Niesche: Investment looks safe as houses - and dotcom stocks - NZ Herald [hat tip AB]
Austrian business cycle theory: A brief explanation - Dan Mahoney, Mises Daily
Business cycle primer - Lew Rockwell, Mises Daily
The Austrian theory of the trade cycle - Richard Ebeling, ed., Mises Institute

RELATED POSTS ON:
Housing, Economics

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