how much will your house be worth next year?þ

not that i have anything against tiny houses...actualy quite the opposite but...time for some reading !

..."And if you're after some recent examples of the causes of inflation, look no further than the Bank of England website. They lay it out for everyone to read - unfortunately it seems as though BoE governor Mervyn King hasn't had the time to read it yet.

Because today we'll take another look at the property market...

Looking at the overflowing Money Morning mailbag, it is clearly a topic a lot of readers are interested in. However, a couple of emails we received yesterday stuck out from the crowd.

[Ed note: remember, if you have any feedback or comments on what you read in Money Morning, send a message to the mailbag at [email protected]. We won't be able to respond individually, but will try and answer your questions in your daily email.]

We received this email from Mark:

"Maybe you guys need to do a bit more real homework on the realstate industry, it almost sounds like sour grapes. If you do your homework right and buy in the right area at the right time you will be doing very well. More than I can say about the share market."

As a refresher, in Money Morning yesterday we wrote "Why There Will Be a Housing Price Crash."

Of course, we don't know that for a fact. But on the balance of probabilities, a house price crash looks more probable than a crash not happening.

In fact, Money Morning reader Mark also forwarded an email from a property investing outfit in which they made the following statement:

"Currently Perth is $466,000 down from the June figure of $680,000. Rents are now starting to climb in Perth."

That's about a 31.5% fall. Slightly more than the 6% fall in property values that the ANZ Property Outlook claims will be the average decline from the peak.

Now perhaps Perth is an anomaly. Having been built up in recent years on the growth in the resources industry, the housing bubble is likely to be felt there more than anywhere else.

And as for the rents starting to climb, well, they are bound to climb. Now, we aren't sure of their angle on rising rents, whether this is the incentive to buy property because it is cheaper than renting, or because the higher rents will produce an increased yield for the investor.

Either way, rising rents don't necessarily indicate that property prices have bottomed making a perfect time to buy.

Immediate factors are more likely to be an increase in demand for rental accommodation as people have voluntarily or involuntarily sold their homes. Or, landlords are having trouble meeting repayments on the mortgage. Don't forget, thanks to negative gearing, many property investors have been renting properties out for less than the cost to service the mortgage.

So even with recent interest rate cuts, many investors may only just now be matching rental income with mortgage costs.

But take another look at the figures for Perth: "$466,000 down from the June figure of $680,000."

Assuming the average person bought an average house for the average price of $680,000 last June, and this average person now needs to sell up for today's average price, they will still be significantly out of pocket - even with a 400 basis point cut in interest rates.

Even if they had saved up 20% of the total as a deposit, he/she is still out of pocket by $78,000. And that's not taking into account the costs of buying and selling such as stamp duty and agents' fees. And it doesn't take into account interest payments made on the mortgage either.

Now extend the argument further. Why should Perth be in a unique position? Is there really any reason why there won't be similar price falls in other states and cities?

Well, let's take a look at a chart. First this one that Money Morning reader Michael sent to us...





Click to enlarge

The major problem with property spruikers highlighting increased rental yields on properties is that it sounds all too familiar. Remember the arguments about the banks having great yields during the middle of last year?

Remember how many stocks were trading at historically low price to earnings (P/E) ratios?

That didn't stop the stock market from falling by half.

You see, what many analysts forgot is that the earnings were based on forecasts, and it didn't occur to them that the forecasts could be wrong and that companies would produce lower profits - or no profits. That's exactly what happened and share prices have continued to adjust lower to take that into account.

We're afraid the same scenario is about to play out in the property market. House prices down, rents up - what could possibly go wrong, buy in now.

Except of course if property prices fall further because people lose their jobs and have to sell their house and/or downgrade to a small house or unit. Higher rents aren't likely to be sustainable either.

Now, it may not all be doom and gloom. Eventually prices will reach a level at which demand picks up again. Property prices aren't going to go to zero, but is a house really worth 3, 4, 5 or 6 times more than it was six years ago?

What value has been added to the property to cause it to rise by so much? In most cases the answer is nothing.

Therefore, in housing, just as in other assets, the price is a function of supply and demand. In recent years the demand has been distorted by free money and easy credit. Lower interest rates today will probably distort that even further. But eventually interest rates will rise again, especially once inflation takes off even more than it is now.

Just think about the point above again, why should a house that was worth $200,000 in 2003 be worth $700,000 today?

[Time passes]

I'm still thinking, and do you know what? I still can't quite figure it out. Any answers gratefully received by email to ..."

full article at www.moneymorning.com.au