Following a couple of booming years some of our property markets have stalled, and the latest stats show that house prices have dropped a little in a number of our capital cities. While Melbourne’s median is up 0.7%^ this quarter, not surprisingly the drop in other cities is allowing some of the property pessimists to rub their hands in glee saying “I told you so – the property market is about to crash.” According to Michael Yardney, we’re not in for a property crash and in a moment we’ll explain why. But first let’s look at what really needs to happen to cause dwelling prices to fall significantly.
Yardney states “now just to make things clear… I’m not predicting that any of the events will take place, but they do provide danger signals for those watching our housing market.”
What could cause our property markets to collapse?
It’s not as simplistic as the bubblers think. House prices “collapse” when people are forced to sell their homes and there is no one willing to buy them. Yes, properties are expensive in some locations and that recently home prices are falling a little in some capital cities, but that doesn’t mean property values will crash.
Instead what’s likely to happen is an orderly correction. A true collapse in house prices would require some large external shock such as:
1. Unemployment high enough to trigger a wave of forced home sales.
Our economy is slowly improving with more jobs being created, particularly in the service industries, so it’s unlikely that we’ll have a crippling unemployment rate in the foreseeable future. Of course as the mining boom wound down we saw job losses dampening the property markets particularly in Perth and Darwin.
And with less manufacturing occurring there have been job losses in the motor industry and the like; but overall we’re creating more jobs than we have for a long time, with the New South Wales economy going from strength to strength and promising employment data coming out of Queensland and Victoria.
2. High interest rates that would cause a raft of homeowners to default on their mortgages.
Again this doesn’t seem likely in the near future, but since Australian banks rely on overseas markets for about a third of their funding, higher interest rates overseas could play a role in higher Australian interest rates locally in the future.
3. A “credit squeeze”
Difficulty obtaining finance, such as interference by APRA or tightening of bank lending criteria, could significantly slow our markets. Since our banking system is underpinned by residential property lending and has a vested interest in keeping dwelling prices at least stabilised, it’s in nobody’s interest to cripple the markets.
4. A severe recession that would cripple our economy.
A severe recession could cause homeowners to default on their mortgages, but our economy is performing well, meaning any Australian recession would most likely to be brought on by overseas events. But even looking back at “the recession we had to have” in the 90’s, this did not cause our property markets to “crash.”
5. A severe oversupply of property.
While an oversupply could occur in a few isolated markets, such as the CDB high rise apartment markets in Melbourne and Brisbane, in general we have an under supply of the right type of property that most home buyers want.
6. A halt to the rising population.
Population growth has slowed over the last year and is currently concentrated in our four big capital cities. If growth halts significantly, we’re likely to find pockets where prices fall due to oversupply.
7. A slowdown in foreign investment in Australia
Foreign residents are restricted to buying new properties, and currently account for a significant portion of new apartment purchases in Sydney, Melbourne and Brisbane’s CBD. If for any reason this buying stops, and the two most likely causes are our governments’ actions that would make Asian investors feel unwelcome or events back home that require the money tap to be turned off, then property values in our inner CBD high-rise sub markets will fall.
8. Changes to government legislation making property investment less favourable.
Any change to negative gearing or self managed superannuation funds buying property, or adjustments to capital gains tax rates could discourage investors (at least for a short time) and this could put downward pressure on property values at least for a short time.
So that’s what could cause our property markets to crash. Now let’s look at…
In summary they are:
- Our robust population growth
- Our healthy economy
- A sound banking system
- Rising business and consumer confidence
- A healthy level of household debt.
- A culture of home ownership– 70% of us own or are paying off our homes.
The bottom line:
For a number of years now bubblers and doomsayers have been predicting the bursting of Australia’s property bubble. Yardney has explained what could cause a property market collapse, but also explained why he doesn’t think we should be worried. However, we need to be vigilant. As investors we need to be aware of what’s happening in the world’s economies as Australia does not operate in isolation.
Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.
Author: 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.
Source:^REIV Median Prices – http://www.reiv.com.au/property-data/median-prices