Are property prices in Melbourne and Sydney really going to fall by 40 percent?
If you believe recent reports about the Aussie property market falling off a cliff, we’re really in for some trouble.
Every few months, some property experts are willing to stick their necks out and offer a property market doomsday scenario, predicting the end of the world for property owners in Australia.
This happens in spite of the fact that such predictions have been proven wrong time and time again.
It’s not the first time we’ve had apocalyptic property market predictions in the media, and it won’t be the last.
Earlier this year I interviewed US author Harry Dent who was on a tour of Australia to promote his latest book predicting a coming Global Crisis worse than the GFC or even the Great Depression.
In my interview with him he said, “I think this time your real estate will come back 20, 30, 40, 50 per cent.”
Of course, he was wrong, just like he was when he came to Australia and made similar predictions in 2014 and the time before that. And interestingly the time before that too!
But is the sky really going to fall this time?
The simple answer is no.
Sure, we’re in the slow down phase of the property cycle, but that’s how the property markets work. Booms don’t last forever.
They’re just one stage of the property cycle and eventually lead to the next stage the downturn phase.
But prices are not about to crash, we are experiencing a soft landing.
Here’s why I think it’s highly unlikely our property market will crash
For a property market crash, and that’s different to price growth slowing or the normal cyclically correction, you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them.
This means for a collapse of 40 percent or so, therefore we need one or more of the following things to occur:
- A major depression (not just a recession). Neither the RBA nor any credible economist is suggesting this will occur in Australia.
- Massive unemployment with people not able to keep paying their mortgages. Instead we’re creating more jobs than ever
- Exceedingly high interest rates so that home owners won’t be able to keep up their mortgage payments. Again, this isn’t on the horizon.
- An excessive oversupply of properties and no one wanting to buy them. Other than in a few spots this is not occurring in Australia.
The positive factors underpinning our property markets include:
1 – We have a sound economy.
2- Our strong population growth underpins our economy and housing markets.
Interestingly most of these new Australians want to live in our four big capital cities and in many cases in many of the same suburbs.
And this won’t change in the near future. Australia will grow to 40 million residents in the next 3 decades.
This means we will be adding the equivalent of a city the size of Canberra each year for the next 30 years.
It took over 200 years to reach 25 million people, but now it will take only 3 decades to reach that milestone to 40 million.
3- We’re creating more jobs than we have in a long time, underpinned by our many new infrastructure projects.
The Australian Bureau of Statistics recently noted that “Over the past year, trend employment increased by around 300,000 persons or 2.5%, which was above the average year-on-year growth over the past 20 years (2.0%)”.
4 – Our banking system is sound, lending standards are tough and mortgage arrears are low.
Yes, some investors took on too much debt and became speculators, taking out interest only loans with very small deposits, hoping (speculating) that capital growth would occur.
This worked out well for some who bought the right properties, but others who over paid for off the plan apartments or who bought properties in regional or mining towns learned that properties values don’t only go up as today’s hot spot can quickly become tomorrow’s not spot and property values fall.
But, in general, over the last few years lending to investors has been more responsible.
Anyone who borrowed in the last few years was “stress tested” – they could only borrow if they were mot be able to repay their interest if interest rates rose and if they paid principal and interest
5 – Our household wealth is the highest it ever has been, and most household budgets are in good shape.
6 – Inflation is contained, interest rates are low and likely to remain so for a while and other than in a few specific markets (especially Brisbane high rise apartments) we do not have an oversupply of property.
But aren’t we drowning in household debt?
Household debt in Australia has risen substantially relative to income over the past few decades and is now at a high level relative to other countries.
Then they ask what’s going to happen to all those property investors who took out interest only loans and may now have to convert to Principle and Interest?
Sure all these raise potential vulnerabilities but a recent speech by Michele Bullock Assistant Governor of the RBA , suggested while these issues are worth watching the situation is not as dire as some commentators would have us believe.
In particular much of Australia’s household debt is in the hands of those who can afford it – our wealthiest household sector and strong employment prospects and a relatively steady ratio of repayments to income have meant arrears rates on housing loans remain very low.
The facts are that although debt has risen with houses prices, the proportion of household income required to service higher debt has fallen over recent years despite low incomes growth and low real wages
What is likely to happen to property values this year?
Firstly, it is important that there is not one property market in Australia, and each state is at its own stage and its own property cycle.
What will happen moving forwards will depend a lot on local factors such as economic growth, jobs growth, consumer confidence and supply and demand.
Overall, the Sydney and Melbourne property markets are likely to fall another 3 to 5% over the next 12 months but digging into the latest figures from Corelogic there are some locations were property values are holding up and a number of suburbs where property prices are increasing.
And remember, you are not buying the market.
You’ll be buying an individual property within that market, at a price you couldn’t have purchased the property for a year ago, and one that you’ll be happy you paid today when you look back in five years’ time.
One more thing…
For as long as I’ve been investing in property, and that’s over 40 years now, there have been doomsayers and “chicken little’s” warning the sky is falling.
And the media has lapped up their stories.
In the meantime, while smart investors and homebuyers were out buying the right type of property, others who were more cautious were sitting on the sidelines waiting to see how things pan out.
While this may seem safe to them, they are likely to miss out on some great opportunities.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.