Curtis Roddy, CEO @ RealTrac Info Systems, on Housing Prices

On paper, the economy looks good. We have global growth, low unemployment, historically low interest rates, and steady inflation. Why, then, are the markets indecisive and home prices dropping? As prices drop, people are wondering if a soft landing or hard landing is on the horizon.

Going up always what precedes coming down. And up is the direction we have seen home prices go over the past couple of years. Elevated house prices in Sydney and Melbourne have been driven by low interest rates and higher consumer confidence.

As prices rise, so does the wealth confidence of homeowners because they view their home’s equity as real wealth. The problem with this perception is it has also inflated their confidence in spending and borrowing.

Taking on more debt is not always the best decision, especially when it’s done to fund a lifestyle which a home’s perceived value may not be able to sustain. At some point, money borrowed must be repaid.

Once repayment of the additional debt begins, reality sets in. Homeowners often reduce overall spending which affects the larger economy because we are an economy of consumers.

But what if you are the government?

After borrowing money, feeding money into the global economy, and building a mountain of debt, they cannot just stay home and pinch pennies. The debt must be repaid or refinanced. The economy must continue. That’s when government action can affect housing prices.

Interest rates may rise and monetary policy may be implemented which affects the stock and bond markets. Other government actions make buyers and seller nervous. The US trade war with China, the UK’s disruptive exit from the European Union, and banking misconduct allegations, just to name a few.

Two things are happening on the world stage that helps drive home prices down. First, the very thing that caused them to rise, causes them to fall. As confidence in money falls so does the desire to take on a debt payment which stagnant wages may not be able for cover.

Second, because most homeowners buy with a loan, interest rates dictate how much any person can borrow in order to buy the home. When interest rates go down, which is what we have been seeing, you can borrow more money. Home prices have adjusted in an upward direction as a result of this opportunity.

But remember, what comes up eventually falls down. So, when interest rates increase, you can borrow less money, and most likely home prices will adjust in that downward direction because people cannot afford to pay more when their real wages do not support the purchase.

Originally published at curtisroddy.org on January 2, 2019.