The property market is going to crash. How many times have we heard that one recently?
2021 was a year like no other. Prices boomed, creating new records and, as the value of Australia’s housing market skyrocketed, the collective wealth of homeowners jumped by more than $2 trillion despite the pandemic.
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And sure, it’s clear that we won’t see the same level of overall price growth in 2022. But a housing market crash?
I don’t think so.
Here are 10 reasons why.
1. The average Australian is wealthier than ever
CBA economists estimate that during lockdowns, households have socked away $230 billion in excess savings, leading to a massive war chest of cash and deposits.
Not only does the average Australian have significant savings, surging property prices mean many homeowners have 30 per cent more equity in their homes than they had two years ago.
Combine these 2 things with a strongly performing superannuation and share portfolio and the average Australian is now wealthier than ever.
At the same time, Australia’s total residential property market is worth close to $10 billion, but with only $2 billion worth of loans owing against all residential real estate.
So even if some homeowners do begin to struggle to make mortgage repayments, or even default, the risk for Australia’s entire residential property market is still very low.
2. No sign of mortgage stress for majority of borrowers
There has been a lot of talk about the risk of mortgage stress, and while homeowners in some particular areas - mainly in certain areas of Sydney and Canberra, where an entry-level home represents more than 30 per cent of an average income - the percentage of these homeowners in the total market is still low.
In reality, half of all homeowners have no mortgage at all.
And those who do have a mortgage are well ahead in their mortgage repayments - it is estimated that a total $1.37 billion is sitting in offset or redraw accounts.
3. Interest rates are still low
Lower mortgage rates have been a significant driver of the property increase in prices seen over the past couple of years.
But the likelihood of a cash rate increase moving forward has increased significantly.
Since the onset of the pandemic, the Reserve Bank (RBA) has provided significant economic stimulus and support and has repeatedly stated it doesn't expect conditions for a rate increase will be met until 2024.
And the banks suggest that property owners could face higher mortgage repayments as early as June as financial markets and economists warn a rapid run-up in inflation could force the Reserve Bank to lift official rates above 2 per cent within the next 12 months.
But, if you think about it, even when rates do rise it will take five lots of 0.25 per cent rises to bring them back to where they were three years ago, and there was minimal mortgage stress then.
4. Banks are conservative with stress testing loans
When you borrow money, the bank or lender has a responsibility to ensure you have the financial capacity to service the mortgage repayments now and into the future.
Each bank and lender has its own stress-test assessment based on the bank’s own appetite for risk, which is why your borrowing capacity can vary significantly from one lender to another.
On top of the assessment rate, the bank will also apply certain other factors and will load your existing (other) loans by a buffer, they account for all your incomes - including wages and rental income(s) - and they also include the limits on all of your credit cards.
The lender will also account for the number of financial dependents you have in your household, and apply a cost of living - which is the living amount used by the bank and may or may not be the same as what you and your household actually spend.
And if you’ve tried to borrow money you’d know that the banks are incredibly conservative with stress testing loan applications.
That means most mortgage owners who borrowed over the past couple of years will be able to handle the interest-rate increase of 2.5 or even 3 per cent, and those who borrowed prior to these stricter requirements would have considerable equity in their properties.
5. Rising interest rates didn’t make the market fall in the past
This isn’t the first time we’ve headed towards rising interest rates.
Rates have risen before and it didn’t make the property market crash then, so why would it now?
Interest rates rose strongly for a six-year period - 2004-2008 - and then again 2010-11 after the Global Financial Crisis.
In most of those years that interest rates rose, property values also increased.
You see, how a particular property performs depends on a combination of factors - of which interest rates is just one.
Sure, many first home buyers have extended themselves and they will be the most vulnerable, but they’d rather eat Maggi Noodles and sell the entire contents of their property than sell up their homes.
6. Dire supply shortage ahead
According to the latest National Housing and Finance Investment Corporation (NHFIC) State of the Nation report, Australia could be in for a dire dwelling shortage ahead.
Data shows that while housing supply may appear healthy in the short term, there is in fact a major supply crunch on the horizon.
This is particularly the case as the economy and net overseas migration recovers, thanks to a newly opened border. The demand for new households will outstrip supply.
And such a supply shortage will act to put a floor under house price falls and only lead to increased prices going forward, with no property crash in sight.
7. Overseas migration is going to pick up
From February 21, 2022, the Australian Government opened Australia’s borders and welcomed double-vaccinated tourists and visa holders from around the world.
Eligible visa holders can come to Australia without a travel exemption or quarantining, and concessions are being granted to skilled visa holders in order to incentivise them to stay in the country for longer.
The latest overseas arrival data from the ABS shows total arrivals to Australia began rising sharply weeks earlier, as international students, permanent residents, and Australian citizens were welcomed back.
And those migration numbers are only expected to continue climbing.
As a result, we’re already seeing a pickup in demand in the rental market, once-abandoned central-city properties and also the unit market.
8. ‘Experts’ routinely get it wrong
It’s worth remembering that the “experts” who are currently predicting property markets will crash in 2023 are the same ones who have made multiple incorrect “doomsday” predictions over the past couple of years.
Remember the ‘Debt Bomb’? It didn’t explode.
Remember the fiscal cliff we were supposed to fall off? That didn’t happen.
Unfortunately, these commentators have a track record of getting their property-market predictions wrong, underestimating the strength and resilience of our housing markets.
9. Australia’s economy is strong
Economic activity in Australia contracted sharply in late-2021 due to COVID lockdowns.
This setback delayed but didn’t derail the economic recovery that was underway in the first half of the year.
But the RBA forecast a rapid bounce back in domestic demand in the December and March quarters as restrictions were further eased.
For mid-2022, the outlook is broadly in line with the pre-Delta recovery path.
Put simply, Australia’s economy is recovering, and it's recovering well.
At the same time, Australia’s income will improve thanks to renewed tourist spending as well as the Ukraine conflict.
That’s because the Ukraine conflict, thanks to the disruption and threats to the supply of energy, industrial and agricultural commodities and increased demand for metal-intensive defence goods, is providing a further boost to commodity prices.
This is particularly good news for commodity producers like Australia and further evidence of a strongly performing economy.
10. Australia is on the verge of a rental crisis
While the pace of house price growth has been slowing, rental growth has strengthened with vacancy rates around the country at the lowest they’ve been for a long, long time.
In fact, the nation is facing a chronic shortage of homes available for rent.
Similarly, a shortage of rental apartments is also developing, and will only get worse over the coming year.
Opening the international borders has also put additional strain on an already-tight rental market.
Domain’s data shows that the national vacancy rate continued its downward trend, now at 1.1 per cent, which is the lowest seen since Domain records began in 2017.
But these new figures are evidence yet again that we’re unlikely to see the property market crash.
While rental demand is surging and supply remains scarce, prices will only continue rising, bringing more investors back into the market.
So, there’s really no need to lose sleep or worry about the value of your home or investment property.
Don’t get me wrong, I’m not suggesting the value of properties always goes up. Far from it.
However, there is no property crash in sight.