On the value of price charts

After reading my last post, a humble soul told me house prices always go up in Australia. He even sent me a price chart to make his point. The problem was that the chart only spanned couple of decades. Surely, Captain James Cook didn’t sail uncharted areas of the globe to reach the eastern coastline because house prices always go up in Australia.

Anyway, the word 'always' got me to thinking; simply, because ‘always’ is too strong a word to be used in finance. Any enquiry starts with a question, which in this case was – Under what circumstances would house prices (or any asset prices) 'always' go up? It took me a while to come up with that question and write this post. For I have been slaving in Singapore.

My view is that asset prices can always go up under these circumstances – 1) buyers compete to pay higher prices i.e., the asset is sold using a bidding system and there are more buyers than sellers; 2) buyers have the capacity to pay higher prices, i.e., they have the money and/or credit to make the purchase; and 3) above all, the buyers have the motivation to pay higher prices.

It appears that these circumstances exist typically (not always) in the housing market – 1) buyers bid against each other compete to pay a higher price and there is only one seller at an auction; 2) buyers can borrow against houses to pay the higher price; and 3) finally, buying a house is closest thing to a religion in Australia; it is an ideology. So much for a price chart.

PS – A geographical map is useful tool for a navigator but a price chart offers no value to an investor.