[anon46121]

As an analyst who works a lot with housing data. The dynamic in Melbourne is very similar to what is seen here in Toronto. I particularly agree with the comments regarding the economic leverage and wealth effect built into home ownership. It has been the classic way of building wealth in Australia for all income groups. And it is indeed powerful. The effect for home asset class is particularly high to by the Basil II (and probably Basil I) banking regulations which allow banks to lend out much higher ratio of loans to capital where the security is housing. I believe this is the primary reason why home loans charge a lower interest rate than say a loan to buy stocks or a business loan. It is indeed a powerful 'gift' to be lent money at a subsidized rate. And this has been given to all home buyers. I also feel that eventually this positive feedback loop will stop or go into reverse. My guess is a new equilibrium point of housing value will occur at about the point where the long term interest rate + turnover costs = rental yield + long term rent inflation. At that point borrowing money to invest in housing should not in the long run make or lose you any money. Unlike housing prices, rents are tied to what people can afford. Over the past 10 years in Victoria rents in metro Melbourne have increased by 3.3% p.a. This is actually lower than regional Victoria (3.6%). This is higher than inflation but quite close to income growth. Note: Metro Melbourne makes up 80% of the states 6.4 million population and the higher rates in country areas probably represents bleed over from the Melbourne into satellite commuter towns. Gross rental yield (rent/property value) is 2.5% for houses, 3.5% for flats/apartments (probably what you call condos). But this is probably on the high side. Maintenance costs are probably at least 1% for houses, and probably higher for flats due to their higher depreciation and construction costs. Call it 1.5% for houses and 2% for flats. Houses have a premium due to their ability to be developed more easily into higher density housing. Cost for selling a house is about 8-10% of value. If you sold every 20 years that would be 0.4-0.5% p.a. Current interest rates in Australia for a home loan is about 4%. So the current equation for flats would look something like 4% + 0.5% < 2%+3.3%. The right side is higher than the left, so flats might be below the long term equilibrium price, but not by much and if you need to put a 20% deposit down, then the opportunity cost of not having that 20% invested in, say, shares might mean that it is already at equilibrium price. Interest rates could drop, but currently in Australia, the banks have shown little inclination to drop their rates even if the central bank has. Back to the original post. I don't count housing affordability as property prices. I would count it in rental prices. And for this I do think that building new homes does effect housing affordability for renters. From the data I have tight supply or surging incomes = increase in rental prices. While loose supply or low income growth = stagnant rents.