Are Australian Property Prices Going to Tank?Apr 02, 2019
Australian Property Prices
How low can it go?
You no doubt would have seen the multitude of media reports stating that the Australian
housing market is declining. Accompanied by a recent rise in interest rates and correlating
tightening of lending criteria, the headlines are screaming forecasts of doom and gloom.
But is this really the case?
During the past ten years, the Illawarra region has seen some fantastic growth in property prices.
Our proximity to Sydney, plus the fact it's a bloody good place to live, has resulted in prices
increasing by nearly 6.5% pa over the last ten years, (please note that is not after costs).
The fundamentals of strong population growth, a decent economy with job
creation and demand from foreign investors have helped underpin property
markets. We believe, however, that the biggest impact has been due to easy
lending standards and ultra-low interest rates.
Recently, we have seen an increase in newsflow and information discussing the
Australian property market falling from its high. This apparent in headlines such as:
While most reports focus on Sydney and Melbourne, Herron Todd White has indicated
that the Illawarra has also entered the 'starting to decline' phase of the property clock.
Operating the fifty years, Herron Todd White are one of the largest independent
property valuation firms in Australia.
They also cite examples showing that 'While many homes are not falling
backwards due to the large growth seen in 2017, a number aren't
meeting their price guidance.' - Property Observer
Is this the result of soaring property prices now settling down? Or is going to go further?
APRA is the government body responsible for the health of our financial system. In an effort
to ensure our financial system doesn't suffer too greatly in the event of a serious downturn,
like the GFC, the APRA has begun to impose greater restrictions on banks and other lenders.
The recent Royal Commission also placed increased scrutiny on banks' lending standards; now
those standards are tightening, people are less able to qualify for large loans. For example,
current potential borrowers have to prove they can afford loan repayments at 7.25% pa,
nearly double the actual current interest rates.
Interest only and investor borrowers have also experienced a rise in interest rates as well.
Also, NSW and Victoria have imposed higher costs and taxes on foreign buyers. These penalties are
more stringent in Australia than many other countries, as you can see below:
Courtesy of ANZ reasearch
So do property prices have further to fall and will it result in a market crash?
Or will property prices simply plateau for the next ten years?
Let's take a look at what happened in the last great property crash, way back in 1990.
At this time, Australia was experiencing the acceleration for the 'recession we had to have'
(thanks Paul Keating); the Pyramid Building Society collapse cost Victoria over $900 million,
unemployment stood at 11.25% and, in January 1990, interest rates hit a high of 17.5%.
So, it's not hard to see why property markets tanked at that time. But it is harder to imagine
this series of circumstances being replicated today. There are no guarantees that it won't happen,
but it will take a significant event to occur to cause unemployment rates to double and
interest rates to quintuple and therefore cause a large amount of forced property sales...
Thinking of buying property now?
For those thinking of buying, it certainly is a better time to start looking.
However it can be a costly mistake to wait for a property market crash that doesn't end up happening.
As Warren Buffet said during a TV interview in March 2017:
"...you are making a terrible mistake if you stay out of a game that you think is going to be
very good over time because you think you can pick a better time to enter it."
If you are currently planning to buy property, we believe your three most important questions are:
1) Have property market prices come down enough for you to feel comfortable
taking the plunge? (But will you ever feel they have reduced enough?)
2) Will property sellers decide not to sell and wait for conditions to improve?
3) Are you eligible to borrow money to finance your purchase?
In many cases, your family needs and personal circumstances will dictate when
or what property you want to buy.
As financial advisors, we have seen many people hold back from buying property because
of high property prices. Now that markets appear to be declining, you may think it's best to
wait it out and see what happens.
Although this thought process is totally understandable, we are concerned about what
may occur if the current restricted lending rules and limitations for foreign investors are
relaxed in the future. If this property downturn has been orchestrated by strict lending
standards, it could be quickly turned around again to help stabilise a falling market.
Indeed the RBA governor Phillip Lowe alluded to this recently:
By waiting for the decline to continue, you may miss the boat.
It's a tough one, made more difficult because there aren't any clear signs one way or the other.
We certainly sympathise because, in our experience, it's a dilemma that nearly all of our clients face.
Whether you are a first home buyer, established homeowner looking to upgrade,
or a downsizing retiree, we suggest you continue saving your deposit or cash reserves,
reduce your credit card limits and get a pre-approval in place for any future borrowing.
And, of course, do your homework so you understand your market and are well prepared
to make the decision when you find your perfect property.