Step right up. Around and around it goes where it stops nobody knows.Step right up. Around and around it goes where it stops nobody knows. No more bets.

This housing cycle is almost complete – although last week’s auction clearance rates would argue strongly against that statement – the reality is that housing cycles are fuelled by a few hard dynamics. We’ll explore some of these below:

Supply

This cycle was first fuelled by a lack of supply (particularly in the capitals of Sydney and Melbourne). We believe that the supply in apartments has reached saturation point and there is more to come. Last week’s article about non-residents being unable to source funding will provide a clue as to why but, more broadly, there are too many apartments being built.

However, houses are a different beast. Outside of the traditional growth corridors housing stock is unlikely to increase considerably. The exceptions are those cities with an oversupply due to the end of the mining boom (Perth, Darwin).

Interest Rates

Low interest rates are here for the duration. Anyone that thinks interest rates will climb to double digits has rocks in their heads. This will fuel a demand but it won’t, on its own, create one.

Government and Taxes

The two main levers that government has are negative gearing and capital gains tax. Take one of these away – remember, that it’s the policy of one of the main political parties in the federal election on 2 July – and you will curb demand. State Governments are also imposing higher taxes on non-residents.

The Supply of Money

Here’s one not often discussed because it really hasn’t happened much before. For the first time in living memory, banks are trying to control the housing market (albeit in an election campaign) by restricting the supply of money to non-residents. Add this to the already strong controls currently in place for the rest of us and it can become problematic. Here’s a prediction: When the housing market cools, many of these controls will be relaxed.

Unemployment

The last time we had a housing crash was in the recession of 1991. Unemployment was at around 11%. Obviously if people don’t have a job they can’t repay their mortgage. Keep your eye on this number but it appears to be under control for now.

Demand

Finally, with all of the above in place it’s amazing that there is any demand left in the market. But there is and here’s why: Punters don’t know where else to put their money –

  • The volatility in equity markets has scared people away,
  • Term Deposits are paying around 2-2.5%
  • The Government is fiddling with superannuation.

Housing is seen as something tangible and a safe bet. Sure, the current demand cannot continue. Let’s just see how it all plays out post election.

But as the housing roulette wheel goes around and around and as it inevitably slows there will be no more bets…for now.