rents fall well behind home price surge, page-13

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    Unlike goods or services, house prices are not only determined by supply and demand for houses but even more so by supply and demand for credit (especially since house prices became fuelled by market speculators thereby becoming an investment asset and no longer simply a home to live in).

    The lower the price of goods or services the more people want to buy them (simply because they are cheaper to consume). Whereas falling house prices results in falling demand for credit to purchase them.

    And also unlike goods or services, the higher house prices rise the more demand there is for credit to speculate on that asset (like any other financial asset fuelled by credit).

    This explains why so many people are lured into the market near major tops and also why so many people eventually capitulate and sell near major market bottoms.

    We've seen this human behaviour throughout history in stock markets, and ever since houses became an 'asset' to speculate on we've seen this same behaviour in every housing boom and inevitable bust that follows. This is a key determinant of house prices that economists and pundits still fail to grasp.

    So this is why the current record level of household debt (ie. mortgage debt) to income in Australia should be so concerning - especially with the record number of property investors now speculating on even higher house prices.
 
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