7 reasons Australian property won’t crash

Professionals Armadale Real Estate Latest News 26th November, 2015 No Comments

Is Australia’s property market really a precarious house of cards waiting to topple? There’s a property debate raging at present – some say the future for property is bright while others suggest our markets are set to crash.

BY MICHAEL YARDNEY

crawford

After a number of boom years,  we’ve entered a more mature stage of the property cycle and obviously it would be good to know who’s right if you’re considering investing in property or about to buy a home.

But remember, there isn’t one property market around Australia. Our markets are fragmented – not only is each state at its own stage of its property cycle, but within each state different segments of the markets are behaving differently. So it doesn’t really make much sense to say the “Australian property market” will crash.

Interestingly, I’ve heard many theories as to why the property bubble will burst. Some doomsayers are predicting a property crash because house prices have risen too high and are now unaffordable. Others suggest we’ve taken on too much debt both personally and as a nation.

However, just because houses prices are high or unaffordable to some, it doesn’t mean we have a property bubble. In fact, I’m going to give you seven good reasons why the property markets won’t crash, but first…

To understand what’s ahead, let’s look at what happens when property markets got ahead of themselves in the past.

Sydney had a terrific boom between 2001 and February 2004. In fact it was one of the best performing property markets between 1996 and 2004, helped in part by the excitement related to the Olympic Games. After this boom the Sydney property market corrected. It didn’t collapse, it just corrected – with values falling from peak to trough by -9.3 per cent and this fall took a total of 23 months to play out. Of course, not all parts of the Sydney market dropped in value equally – some areas held their values well. And even in the regions where values fell, property prices didn’t plummet – they gently followed a downward path. The doomsayers were out then also, but just look at where Sydney property prices are today.

A similar pattern occurred in Brisbane and Perth, where values peaked in February 2008 after a long boom in both cities pushed their house prices well above the average national price growth. Again, property prices didn’t collapse – they just sauntered along allowing the fundamentals to get back into alignment.

Much the same happened in the early 1990s, when we experienced “the recession we had to have”. After the remarkable property boom of the late ’80s, interest rates rose to peak at around 17 per cent and the property markets around Australia stalled. But once again they didn’t collapse. They just flat-lined for a few years as affordability, supply and demand, and other economic fundamentals caught up.

And when property prices peaked in late 2010, the last time the Reserve Bank pushed up interest rates, property prices gently eased in our major capital city markets – they didn’t plummet.

Yardney graphic Nov 20

Source: CoreLogic RP Data

The only time Australian property values dropped significantly (albeit for a short time) was after the Second World War and during the Great Depression. In the 1940s house prices dropped 17 per cent over a two-year period but then jumped back and grew strongly for many years after that.

Property values also dropped during the Great Depression when unemployment was high, but times are different today. No one is suggesting that Australia’s heading for a depression. Sure, our economy is slowing a little, but it’s still the envy of most developed nations. That’s why talk of a property market collapse is nonsense.

Why don’t Australian property markets collapse?

Well, some do! Just look at the mining towns where the values of some properties have fallen by more than 50 per cent. Or some holiday destinations like the Gold Coast. But here’s why…

The mining towns were driven to dizzy heights by speculators and the Gold Coast was also driven more by speculation than by underlying supply and demand fundamentals. The large fall in prices there was because there was too much developer stock on the market.

In general, our capital city property markets don’t collapse because they’re illiquid. People don’t sell up their homes just because interest rates rise or when times get tough.

What could cause a property market collapse? 
Looking at what has happened in the past, both here and overseas, the factors that could make our markets collapse (rather than correct) are:

  1. A depression or severe recession – no one is suggesting this is likely in the near future.
  2. Unemployment levels so high that a mass of people can’t afford to keep their homes. Again, this is unlikely to occur with unemployment levels being as low as they are.
  3. Interest rates rising to levels that cause homeowners to default on their mortgages. Hopefully the Reserve Bank of Australia won’t allow this to happen.
  4. huge oversupply of properties because developers have built too many. We’re currently seeing this in the overheated inner-city off-the-plan market segments, especially in Melbourne, Brisbane and Perth.
  5. Credit market illiquidity or a credit squeeze. Currently, APRA is trying to slow down the growth of our property markets to underpin the banking system, but it’s not looking to choke the markets. That wouldn’t be good for anyone.

Why property won’t crash
There are a number of reasons why we won’t see major falls in home prices in our capital cities any time soon:

  1. Robust population growth fuelled by immigration and, to a lesser extent, strong natural population growth. While immigration levels have dropped, we’re still growing at a faster rate than any other country in the developed world.
  2. healthy economy that, while slowing a little, will continue to perform at a level that’s the envy by of much of the Western world and will create jobs for anyone who wants one.
  3. sound banking system with reasonable interest rates, tight lending practices and low default rate.
  4. Business confidence is rising as we seem to have stable government at both the federal and state levels.
  5. Consumer confidence has been rising since Malcolm Turnbull was elected Prime Minister.
  6. healthy level of household debt. Sure, we’re borrowing more, but the debt tends to be in the hands of those who can afford it. Many Australians are saving more, taking on less credit card debt and paying off their mortgages faster than they need to, which improves the state of their personal finances. This in turn reduces the risk of house prices collapsing if interest rates rise or the economy hits a speed bump.
  7. A culture of home ownership – 70 per cent of us own or are paying off our homes. In contrast to some overseas markets, Australians have high equity in their properties and a conservative debt position. In fact, half of all homes have no debt against them.

What’s ahead?
There’s no sugar coating it – property price growth will slow in 2016. Decreasing affordability, changing sentiment and oversupply in several sectors such as CBD and off-the-plan apartments will create a volatile mix that will fragment and slow our property markets, moving some from a seller’s to a buyer’s market. This is already evident with falling auction clearance rates, particularly in the Sydney property market.

Yet there’s still a large demand for housing – people are still getting married, having babies, getting divorced and coming from overseas. And if they can’t afford to buy their homes they’re going to rent, and this will force rentals up.

As Australia’s economy bumbles along I can see little wages growth over the next year or two, but I do see interest rates rising some time in 2017 and both these factors will affect some suburbs more than others. Rising rates are likely to affect suburbs that are more interest-rate sensitive like blue-collar areas, regional locations and first-time buyer locations. On the other hand, property values are likely to increase in the more affluent, gentrifying, middle-ring suburbs of our major capital cities, where the locals’ income is less dependent on CPI rises in wages and where rising interest rates are less likely to have an impact on disposable incomes.

So, my top picks for suburbs that will outperform would include suburbs where people have higher disposable incomes and are able to, and prepared to, pay a premium to live there because of the amenities in the area.

Property price growth in Sydney will likely slow to around 5 per cent over the year ahead and Melbourne prices should grow a little more than this (+7 per cent). Prices will fall a little more in Perth and Darwin as the mining boom continues to unwind, while Hobart’s likely to see continued moderate property growth, but the Brisbane property market should start to pick up further as it plays catch-up, rising around 7 per cent over the year.

I can’t really see a reason for regional or mining town real estate to have much capital growth. There’s no influx of new people moving to these regions, little to strengthen their economies and investors are no longer buying up big in these regions.

But rest easy – there won’t be a property market crash in our capital cities.

 

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 and one of Australia’s leading experts in wealth creation through property.