8 reasons our property markets could crash
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.
Not surprisingly this is allowing some of the property pessimists to rub their hands in glee saying “I told you so.”
Sure our property markets are experiencing a slowdown, and yes prices are falling a little in some locations, however we’re not in for a property crash and in a moment I’ll explain why.
But let’s look at what really needs to happen to cause dwelling prices to fall significantly.
Now just to make things clear… while at this gathered eight events that could cause a significant fall in Australian property values, 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” (not cyclically correct, but collapse) when people are forced to sell their homes and there is no one willing to buy them.
I accept that properties are expensive in some locations of Sydney and Melbourne and that recently home prices are falling a little, but that doesn’t mean property values will crash in our big capital cities.
In fact, they’ve never have crashed since housing market data has been collected in Australia.
Instead what tends to happen prices is an orderly correction, with prices only falling slightly, because people choose to simply remain in their home and ride things out, while most property investors also try and hold on rather than realising their capital loss.
A true collapse in house prices would require some large external shock such as:
- 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.
- 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 with the money markets factoring in lowish interest rates for another decade.
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 and considering our prevailing low interest rates, a rise of just 1% could lead to a 20% increase in your mortgage repayments.
- A “credit squeeze”
Difficulty obtaining finance, such as interference by APRA or tightening of bank lending criteria, could significantly slow our markets, but unless it is severe, this is unlikely to cause our property markets to crash.
Since our banking system is underpinned by residential property lending and has a vested interest in keeping dwelling prices at least stabilised and hopefully rising, it’s in nobody’s interest to cripple the markets.
- A severe recession that would cripple our economy.
A severe recession would increase unemployment and cause homeowners to default on their mortgages, but our economy is performing well and a downturn doesn’t seem to be on the radar of any respectable economist.
This means any Australian recession would most likely to be brought on by events overseas.
But even looking back at “the recession we had to have” in the 90’s, this did not cause our property markets to “crash.”
- 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 undersupply of the right type of property that most home buyers want.
- A halt to the rising population.
Infrastructure Australia predicts Sydney’s population will increase by around 80,000 people and reach 6.1 million in 2031.
In Melbourne the population curve is steeper with the population likely to be 6 million people by 2031, or an increase of 100,000 people a year.
The other capitals are set to experience similar, but not as dramatic population increases.
Population growth has slowed over the last year and is currently concentrated in our four big capital cities, but if our population does not rise by anything like these estimates, then there will be dwelling surpluses, which will cause prices to fall in some locations.
- A slowdown in foreign investment in Australia
Foreign residents are restricted to buying new properties, and currently Chinese residents are buying around 80 per cent of the apartments being built in inner Sydney and an even higher proportion in 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.
- Changes to government legislation making property investment less favourable.
Over the years property investors have accounted for around 30% of our real estate markets, but more recently, especially in Sydney, investors have accounted for close to 50% of property sales.
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.
O.K. – so that’s what could cause our property markets to crash. Now let’s look at…
Seven good reasons why our property markets won’t crash this year.
- Our robust population growth
- A healthy economy
- A sound banking system
- Rising business confidence
- Consumer confidencehas been rising
- A healthy level of household debt.
- A culture of home ownership– seventy per cent 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.
They’ve told us we’re in denial about the impending gloom blinded by the consistent performance of our property markets over the last few years.
I’ve just explained what could cause a property market collapse, but I’ve also explained why I don’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.