Are our property markets really going to crash like so many economists and commentators are suggesting?
Over the weekend I saw a headline suggesting the recent unemployment figures will be the final “knockout blow” for our housing markets.
Unemployment has now fallen to a 48-year low of 3.5 per cent and, while many see this as a good thing, the stunning June jobs data all but guarantees the Reserve Bank of Australia will lift the official interest rate by at least 0.5 percentage points again in August.
Some economists are even tipping a 0.75 percentage point increase.
Also by Michael Yardney:
I agree, the RBA is going to have to ramp up interest rates and this will further stunt consumer confidence because, of course, that’s what it is intended to do.
And yes, property values will fall, but I can’t see falls of 15-20 per cent and definitely not 30 per cent, as one prominent commentator is suggesting.
The fact is property price falls of that magnitude have never happened before.
Not during the recession of the 1990s, not during the Global Financial Crisis and not during the period after the credit squeeze of 2017/18.
In fact, the largest annual fall in modern history was when the “overall” Australian property market fell 5.5 per cent in 2018.
The largest peak-to-trough fall – the drop in house prices around Australia from their peak values to the bottom of the cycle - was recorded in 2018/19 when Australian property values fell 9.9 per cent.
Back then, just like today, we were being bombarded by scary media headlines of an impending property crash.
At that time, we had just worked our way through an APRA-induced credit squeeze, the banking royal commission and were concerned about the upcoming election, with Labor promising to cut negative gearing and other tax incentives to property owners.
There is not ‘one’ Australian housing market
Sure, there will be a housing market correction - in fact it started at the beginning of the year in Sydney and Melbourne - but property values are still increasing in Brisbane Adelaide and Perth.
History shows that each market behaves differently, and that there are markets within markets – houses, apartments, townhouses and villa units - located in the outer suburbs, middle-ring suburbs, inner suburbs and the CBD of each capital city.
Then there are hundreds of regional property markets and, as I said, they all behave differently.
The following chart shows the largest peak-to-trough house price declines in our various capitals since modern records began in 1987.
And there is no reason to suggest this correction will be worse than ones we’ve experienced in the past.
Sure, our housing markets are facing some headwinds, including:
Consumer confidence has taken a significant hit and that's affecting our housing markets, with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
Fear of rising inflation and cost-of-living pressures is sidelining many property buyers.
Rising interest rates are reducing borrowing capacity
Uncertainty about our economic future with all the talk of a recession overseas, ongoing geopolitical problems, the share market falling is dampening buyer and seller confidence.
Affordability issues will constrain many buyers: The impetus of low interest rates - allowing borrowers to pay more - has worked its way through the system.
Now, with property values being 20-30 per cent higher than at the beginning of this cycle - and at a time when wages growth has been moderate at best and minimal in real terms for most Australians - this means the average home buyer won’t have more money in their pocket to pay more for their home.
Pent-up demand is waning: While many buyers delayed their home-buying plans over the past few years because of COVID, a significant volume already made their move. There are only so many buyers and sellers out there, so we can expect there will be fewer looking to buy in 2022.
FOMO (Fear of Missing Out) has disappeared: Buyers are being more cautious and taking their time to make decisions. This is in stark contrast to last year when many took shortcuts to enter the market.
On the other hand, there are many strong fundamentals underpinning our housing markets, including:
A shortage of good properties for sale and virtually no properties to rent.
International immigration is picking up and this will increase demand for housing.
Little new construction in the pipeline – we’re just not building enough dwellings - and increasing construction costs at a time of a shortage of labour means the end value of new projects will need to be up to 20 per cent higher to make projects financially viable for developers.
Our economy is still growing strongly and is very resilient.
Unemployment is at historically low levels, meaning anyone who wants a job can get a job (so they'll be able to pay the mortgage repayments.)
Wages are starting to grow.
Household balance sheets are strong - we have a ‘natural buffer’ with $250-$260 billion in aggregate savings nationally, much of it in offset accounts.
Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank, recently said three-quarters of the bank’s loans were approximately two years ahead on repayments.
We have a strong banking system that has been strict in its lending criteria, meaning there are very few non-performing loans.
There are still government incentives to encourage first home buyers into the market.
Property Forecasts for 2022
The past few years have shown us how hard it is to forecast property trends but recently, Andrew Wilson, chief economist of My Housing Market, made the following projections for house price growth across the remainder of 2022:
Sydney property values will end the year down -6 per cent, led by the more expensive end of the market, but this is after home values increased by 31.6 per cent over the past three years.
Melbourne property values will also fall -6 per cent over the calendar year after growing by almost 19 per cent in the past three years.
Brisbane property values will end the year 11 per cent higher
Adelaide property values will grow by 12 per cent in 2022
Perth property values will finish the year 9 per cent higher
Taking a weighted average, the overall Australian mean property value will end up much the same as at the start of the year, after increasing 30.8 per cent over the past three years.
The bottom line
We've moved into this next adjustment stage of the property cycle faster than some expected, pulled forward by the RBA’s earlier and more aggressive interest-rate-tightening cycle - in response to a surprisingly strong surge in inflation.
While much of this is due to offshore factors that can be expected to ease over time, the high starting point for inflation and tight labour market domestically means the RBA is moving aggressively on interest rates – taking them from COVID 'emergency' lows to more 'normal' levels.
And while all this will dampen consumer confidence and slow our property markets, there is no property crash in sight.