Why property values have been declining

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Supply is a main driver for Australia’s falling house prices, according to Reserve Bank of Australia Governor Philip Lowe.

The country is facing a property downturn. Lowe said that over the five years to 2017, Australian house prices rose nearly 50%. Since then, values have dropped 9% and returned to mid-2016 levels.

The reason? The population grew significantly in the early 2000s, and it took almost a decade for the pace of home building to respond.

"It took time to plan, to obtain council approvals, to arrange finance and to build the new homes. Not surprisingly, house prices went up," Lowe said at The Australian Financial Review's Business Summit.

Lowe said that when the supply finally came, values had to respond to the supply again.

Strong conditions for foreign and domestic investors also contributed to dropping prices. Finance conditions have become more challenging recently.

"Only 10% of people borrow the maximum they are offered. Sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large," Lowe said. 

In a much larger context, though, the rise and fall of house values are having a wealth effect on the economy.

For a 10% rise in net housing wealth, the level of consumption climbs by 0.75% in the short term, and 1.5% in the long term, according to figures from RBA.

Australian Financial Review reported that the biggest impact from rising household wealth is on the purchase of motor vehicles and household furnishings.

However, Lowe claims that house prices are not as important for consumption as household income.

“My conclusion here is that wealth effects are influencing consumption decisions, but they are working mainly through expectations of future growth income. Swings in housing prices and turnover in the housing market are also having an effect, but they are not the main issue," Lowe said.

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