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HAVE WE REACHED THE BOTTOM OF THE PROPERTY PRICE CORRECTION?

The media have been having a field day in recent weeks banging on about the impending property price Armageddon, which all started with a 40% price fall scare headline on a 60 Minutes TV program, but has since been discredited by several credible experts.

 

So to put things into perspective, let’s have a look at Peter Switzer’s* 10 reasons not to be spooked by all the bad news stories and media hype about the house price collapse scenario, particularly for Sydney and Melbourne.

 

10 reasons not to be too spooked about a house price Armageddon:

 

1. Experts from the likes of BIS Oxford Economics and Deloitte Access Economics have predictions that Sydney and Melbourne property prices will fall from top to bottom by 10-15%. BISOE are closer to 10%, while Access’s Chris Richardson might be closer to 15%. AMP Capital’s Shane Oliver was at 10-15% but has moved to 15-20% but say for Sydney, there has already been a 7-8% fall. As you can see, these numbers are a long way from 40% and Armageddon-ville.

 

2. The Aussie economy is actually growing faster than 3% and when that happens, unemployment falls. Even the IMF thinks we have two years of 3% plus growth ahead. If people don’t lose their jobs, then they should be able to pay off their home loans. And as growth leads to more jobs, this should create more buyers at auctions and open houses.

 

3. The US economic outlook is strong and the earliest credible prediction of a US recession is 2020, which implies Wall Street should avoid crashing for at least a year, possibly two. And of course, a stock market collapse could rock consumer confidence and feed on to house prices locally. That said, market crashes can spark a flight to quality and property fits that bill. This happened with the 1987 stock market crash.

 

4. Not even when unemployment went to 10.4% in the 1990-91 recession, our price fall was around 5%.

 

5. Interest rate rises from the Reserve Bank are expected until late 2019 or even 2020, so the likelihood of mortgage repayments scaring off homeowners and homebuyers is unlikely for at least two to three years.

 

6. There’s a lot of scary stories around about people going off interest only loans and being forced into principal and interest loans but my research shows that these loan rates are actually lower than interest only loans and the monthly repayments can be lower! That shocked me and we don’t know how many people are involved and it isn’t likely they’ll be kicked off their interest only loan all in one go. And the RBA, who should know about this, aren’t stressed about this.

 

7. Those worried about our exposure to home loans always point to our household-debt-to-income number, which is very high, even on global standards. But we were really high when the GFC started and we got through those bad economic times without real estate devastation. The Reserve Bank of Australia’s Assistant Governor, Michele Bullock, who heads the bank's financial stability department, in September this year, explained the surge in household debt since 1990. The ratio of household-debt-to-income has climbed to 190%, from around 160% five years ago, and from 70% 30 years ago. In the early 1990s, Australia had debt-to-income ratio lower than two thirds of countries in her sample; now we’re among the top 25%. Ms Bullock points out that a lot of households have a buffer after over-paying their mortgages because rates are so low. Also, as a country, we have more households as landlords, compared to similar countries where companies hold most of the rental stock. That means a lot of these indebted households are helped by the tax office. All up, our household-to-income numbers are not quite as internationally scary as they look when we’re compared to similar countries.

 

8. The RBA’s Assistant Governor said this five days ago: “Australian banks are well capitalised and profitable, and have sound lending standards and plenty of liquid assets. The major banks are already very close to meeting the Australian Prudential Regulation Authority's unquestionably strong capital benchmarks. This is good for the resilience of the banking sector in the face of any downturn.” If the banks looked dodgy, that could be a trigger for a house price problem but the RBA says the opposite is the case.

 

9. A doomsday merchant mob, Moody’s, which always looks for reasons to downgrade governments and banks, in June predicted that the worst was over for house price falls in Sydney and Melbourne. I think they’re wrong and we’ll see some more falls but I can’t see them being terribly wrong. Moody’s Analytics housing economist, Alaistair Chan, said dwelling values in Australia's Housing Market are seeing slower growth as a result of past value increases. “Which has exceeded income and rental growth, past supply increases, and actual or expected increases in borrowing costs,” Chan said. “That said, the worst is over, as less housing supply and Australia’s strengthening economy will support income and rental growth, and this dwelling values, beginning next year.” Also, as Chris Richardson from Deloitte points out, our population growth will also help stop prices falling too heavily.

 

10. Finally, Australians can’t easily be compared to other countries when it comes to home ownership. Our full recourse loans and our passion for property make it hard to look at price-to-income ratios like you might for stocks and say what we’re paying is irrational. We are irrational when it comes to property, like those who have been buying Amazon, Netflix and Facebook on ridiculous values. But many of the people who have overpaid will stick with their properties, as long as they can make their payments. Many who have negative equity won’t know it unless they try to sell it. Being economically rational about what we’ve paid for property shows you don’t understand we Aussies when it comes to our beloved quarter acre block or trendy inner-city apartment.

 

Who do you believe, the media or the likes of the RBA, BIS Oxford Economics, the Economist Intelligence Unit, Moody’s, et al, as well as the history of property prices in this country.

 

 


 

So thanks to Peter’s valuable insights above, you should now have a much better understanding of where we are at in the Australian property market.

Below is also an extract from a Domain Property report of 28th November, 2018.  The forecast for each of the Australian states property markets are listed for both houses and units.

 

House price forecasts*
2018 (estimate) 2019 (forecast) 2020 (forecast)
Australia (combined capitals) -6% 1% 4%
Sydney -8% 0% 4%
Melbourne -9% -1% 4%
Brisbane 0% 4% 5%
Perth -5% 5% 3%
Adelaide 2% 2% 2%
Hobart 12% 2% 2%
Canberra 2% 4% 4%

* Annual change to December quarter

Notes: Darwin excluded from forecast due to small volumes and market volatility. Stratified median house price forecasts.

Unit price forecasts*
2018 (estimate) 2019 (forecast) 2020 (forecast)
Australia (combined capitals) -3% 2% 3%
Sydney -3% 3% 5%
Melbourne -1% 1% 1%
Brisbane -6% 3% 3%
Perth -6% 2% 2%
Adelaide -1% 2% 2%
Hobart 0% 0% 3%
Canberra -5% 2% 2%

* Annual change to December quarter

Notes: Darwin excluded from forecast due to small volumes and market volatility. Stratified median unit price forecasts.

We are certainly not about to experience a bubble or a balloon!

So if you have been sitting on your hands waiting for prices to plummet 40% before buying or investing in property then you need to reconsider and do it sooner rather than later.

S Baker & Co have many property contacts.  If you let us know what type of property you are after and where, we can put it out to our contacts to find it for you.

Don't forget that S Baker & Co can assist you with your loan pre approval.  All banks, inside or outside of super and foreign buyer loans.  No cost, no obligation.

 

Sam

This article is not a substitute for independent professional advice. We do not warrant the accuracy, completeness or adequacy of the information or material in this article. All information is subject to change without notice. We and each party providing material displayed in this article disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of the information or material in this article. Please ensure you contact us to discuss your particular circumstances and how the information provided applies to your situation.

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