The good news for home owners is that house prices have continued rising over the last few years. The bad is that sales are well down. The ugly is that the price bubble continues to inflate, even through hard times. Even though there has been much press about falling house prices this year, it’s a small aberration in an upward trajectory. Sydney house prices, for example, might be 1 percent down this June quarter over last, but they’re still 16 percent up on two years ago. There are two schools of thought on why Australia’s property prices keep rising, out of kilter with comparable nations. One is that lack of supply is making people pay a premium for what’s available. The other is that banks have made credit too readily available, giving us more money to pay higher prices. Pretty much what made the US come unstuck. There is the third argument that it’s all to do with interest rates — when they’re low house prices shoot up. Really? You are on the property ladder most of your life, but you’ll decide how much you will borrow based on what the rates are this month, how can that be sensible? Anyway, that argument also assumes we all rush out to buy, yet now we have lower rates and a big reduction in the number of loans. Yet, despite everything, house prices keep rising and rising. You would have hoped that the consumer trend towards reducing debt would see us wanting to borrow less, causing prices to subside. But that’s not what’s happening. As you can see in these graphs, over the last few years, sales are down, but we are prepared to borrow more and more to pay for what houses do come on the market. The lack of supply — perhaps from owners reluctant to sell for fear of not getting the best price — ironically seems to be pushing prices up even more. Could we really be silly enough to save more money on the one hand, only to use this money as equity on a bigger home loan? The increase in loans doesn’t seem to have anything to do with our two-speed economy. If it was we wouldn’t expect to see drops in new home loans in Queensland and Western Australia, but we do. Between January and July 2011 there were 448,197 new housing commitments in Australia, a quarter less than the same period in 2009. With a drop of 38 percent, Queensland fared worse than anyone. I suspect the real reason prices continue to rise despite everything, is because people see the family home as their superannuation. Many have the intention of downsizing, and living off the capital-gains-free income. We ignore the notion that the value of our homes could fall, so it seems like a safe bet at the time. And so we march, with our eyes closed, into the future. How ugly will it get? Data sources: ABS 5671.0 – Lending Finance, Australia, Jul 2011 ABS 5609.0 – Housing Finance, Australia, Jul 2011 First published on CBS News