Expert Advice with Simon Buckingham 24/09/2018
Here we go again!
Every few months, the media spotlight focusses on a property market doomsday scenario, predicting the end of the world for property owners in Australia - in spite of the fact that such predictions have been proven wrong time and time again...
Recently, Channel Nine's '60 Minutes' ran a feature with the sensational and alarming headline:
"Aussie housing prices could fall by as much as 40% in next 12 months"
A handful of market commentators were featured in the article, including Louis Christopher of SQM
Research who stated, "On our numbers, Sydney was effectively over 40% overvalued. And Melbourne was overvalued by about the same amount".
Another analyst, Martin North from boutique consulting firm Digital Finance Analytics was quoted as saying:
"At the worst end of the spectrum, if everything turns against us we could see property prices 40-45 per cent down from their peaks, which is a huge deal."
A huge deal indeed! And it certainly sounds scary...
That is, until you remove the sensationalism and look at what was actually said in context...
Martin has since clarified on his own blog that he thinks there's only a 1-in-5 probability of such an "apocalyptic" scenario occurring, and that it would require a global financial crisis as the trigger:
"I rate it 20%, and it is not my central scenario. My best call would be in the region of 15-20% from top, over 2-3 years, but with some risk of a worse outcome. Nine chose not to cover these alternatives, though I went through each in the recording…"
But it's not the first time we've had apocalyptic property market predictions in the media, and it won't be the last...
A Brief History of Property Market 'Doomsday' Prediction
In early 2018 it was US author Harry Dent, on a tour of Australia to promote his latest book predicting a coming global crisis worse than the GFC or even the Great Depression. Mr Dent was quoted in the Australian media as saying: "Your problem is you've got the second highest real estate costs compared to income in the world... I think this time your real estate will come back 20, 30, 40, 50 per cent."
Back in February 2016 there was another '60 Minutes' feature in which US author and 'macroeconomic researcher' Jonathan Tepper predicted that Australian property prices would crash by 30% to 50%.
(And then over the following 2 years our largest markets - Sydney and Melbourne - actually boomed!)
In 2014 and 2015, Harry Dent was again on the scene forecasting housing prices to fall in Australia by at least 27%.
(Instead, according to REIA statistics, Sydney's median house price is now around 31% higher than it was in 2014, Melbourne's is around 24% higher, and Australia's overall median house price is around 21% higher over the same period!)
And going back even further to 2010 it was Australian economist Steve Keen who lost a bet with Macquarie Bank analyst Rory Robertson that house prices would fall 40% in a year (and had to walk from the steps of parliament to Mount Kosciuszko wearing a t-shirt that read "I was hopelessly wrong on house prices - ask me how").
Is the sky really going to fall this time?
There's no doubt that fear sells, and a cynic might observe that these kinds of alarming predictions are a great way to capture attention in order to boost ratings and sell advertising (or more doomsday books).
However, it's unfortunate to see that many investors buy into this fear-mongering and make emotional, sometimes panicked decisions about their property portfolio as a result.
Sophisticated property investors keep their emotions in check, and invest not on extreme 'Chicken Little' predictions about the sky falling, but on an informed opinion about what is MOST LIKELY to occur in the market.
While no-one can predict the future with absolute certainty (and if you encounter someone who thinks they can, then my advice is to run away very quickly), here's some of the reasoning behind why I think it's highly UNLIKELY that the property market will crash…
5 reasons why a property market crash is extremely unlikely...
REASON #1: "Affordability"
Some so-called 'experts' (frequently from the US) keep telling us that housing in Australia had become so unaffordable that a property market crash is inevitable.
The problems with the affordability argument are many, but in particular they place reliance on an increase in a single measure of affordability, being the ratio of average incomes to median house prices in major cities.
This single measure ignores the facts that interest rates today are less than half what they were 25 years ago, and that most home buyers these days are dual-income households.
Furthermore, inner-city median prices are hardly representative of the true range of property prices to be found across suburbs and regions. For instance, while the Melbourne median house price at the time of writing is currently over $800K according to the REIA, localised median house prices across Melbourne's suburbs span anywhere from a much more affordable mid-$300K range, right up to over $4M!
Market commentators frequently confuse housing "affordability" with the ability to afford a house in the most desirable and sought-after locations around a capital city. They're not the same thing!
Just because someone can't afford to buy a house in the suburb where they'd really prefer to live, doesn't mean that housing in general is "unaffordable". If you want a cheaper house, then be prepared to compromise about where you want to live, and expect to commute if you work in the city! Don't expect the forces of supply and demand in the most tightly held areas to bow to your personal desires.
Measuring affordability is actually a very complicated subject, and I'm wary of over-simplifying. But it's a fact that wages have generally increased over the past five years (albeit they're rising at a slower rate presently), interest rates remain at historical lows, and those rates - while rising slightly - are unlikely to trend upwards quickly.
The cost of borrowing is low, and there's a strong argument that property prices in general are currently around where they ought to be based on the combination of historical wage growth, low interest rates, and the prevalence of dual income families when it comes to property ownership.
REASON #2: Employment
Before seeing mass foreclosures and people flooding the market attempting to offload heavily discounted properties, we'd need to see a significant jump in unemployment.
As long as people have jobs, they are more likely, rather than less likely to hang on to their house.
Unemployment trend statistics published in September 2018 by the ABS show that around 29,000 jobs were ADDED to the economy, with trend unemployment sitting at around 5.3 percent. Unemployment is quite low by historical standards, and far cry from countries like the US and parts of Europe that witnessed property market crashes off the back of unemployment levels in excess of 10 percent.
While some sectors of the Australian economy (particularly the resources and retail sectors) have undoubtedly been doing it tougher than others, the number of people in jobs and the proportion of the population in work have both been trending upwards.
In fact, the Australian Bureau of Statistics noted in September 2018 that "Over the past year, trend employment increased by around 300,000 persons or 2.5%, which was above the average year-on-year growth over the past 20 years (2.0%)"
Given the trend of rising employment, something very dramatic and unforeseen would have to happen for unemployment to soar to the kind of level that would trigger a property market crash.
REASON #3: Robust Lending Standards
Australian banks weathered the GFC extremely well, and continue to be regarded as some of the most robust and stable financial institutions in the world.
Australia implemented strict responsible lending regulations following the GFC, and our finance environment is a far cry from the lax and irresponsible pre-GFC lending practices of the US that led to the collapse of property values in many parts of that country ten years ago.
Furthermore, as any active investor would know, lending standards have become even tighter in the last three years, with higher servicing tests and greater scrutiny of borrower's existing financial commitments and living expenses.
The Reserve Bank commented in it's September meeting minutes that "Lending standards are also tighter than they were a few years ago, partly reflecting APRA's earlier supervisory measures to help contain the build-up of risk in household balance sheets."
In other words, fears of a debt crisis are overblown.
It's worth noting also that recent estimates by CoreLogic RP Data put the value of the Australian housing market at around $7.6 trillion - with the value of mortgages only around a quarter of that at a 'mere' $1.76 trillion.
It can be argued therefore that Australian households are not highly leveraged as a whole
REASON #4: Natural Resistance
What tends to happen when the property market softens is that, unless they really need to sell, vendors who are unable to get the price they want for their property eventually just take their property off the market and sit tight, rather than taking a bath on price. As such, prices tend to drift rather than collapse.
As long as a property owner can afford to keep holding their property (which really comes back to points #1 and #2 above), then there'll be a 'natural resistance' to dropping the price too far. Instead, many vendors will simply remove their property from the market, or not list it at all.
Fewer properties get listed as time goes by, and eventually the available 'stock' on the market comes back into balance with the number of buyers, and prices stabilise. Once buyers outnumber sellers, then we can expect competition to start driving up prices again.
There's also a culture of desiring home ownership in this part of the world ('The Great Australian Dream') and a psychological and social stigma associated with the idea of losing your home that should not be discounted. Aussies tend to sacrifice other things before their mortgages and houses, and as such this creates another form of 'natural resistance' towards just taking any price in order to sell a house when the budget gets tight or the market slows down.
History demonstrates that even in past economic dark days such as the Great Depression and - more recently - the GFC, house prices in Australia eased only modestly.
It's interesting to note that falls during the Great Depression were only around 15% (and that was spread out over several years). During the GFC, housing values in Australia dipped only temporarily and then rebounded quickly.
And (importantly) even while the 'median' Aussie house price fell during those times, values didn't fall in all areas - in fact some suburbs experienced rising values at the time!
With this in mind, an across-the-board fall of 40% in 12 months as suggested by the 60 Minutes feature would be historically unprecedented.
REASON #5: Economics 101
Most property market 'doomsayers' demonstrate a fundamental misunderstanding about how the forces of supply and demand drive price behaviour.
As any student of high school economics would have had drummed into them, prices of goods and services move up and down in response to the balance of supply and demand. And it's no different for property.
For example, when prices collapsed in many mining towns a few years ago, this was due to a sudden absence of demand combined with an oversupply of property.
The absence of demand was the result of mining companies and supporting industries requiring fewer people in the towns, and therefore needing less accommodation. In other words, the population requiring housing in these towns dropped.
The oversupply resulted from over-development of new housing in these towns, in addition to some mining companies deciding to build their own houses or 'fly-in-fly-out' camps to provide cheaper accommodation than what it cost them to rent established housing. Towns like Moranbah were left with a significant oversupply of housing as the mining investment boom ended.
It doesn't take an honours degree in economics to see that the dynamics are very different in our capital cities.
Yes, there are risky pockets of oversupply (most notably some CBD apartment markets and over-developed outer-suburban 'greenfield' housing estates), but in most inner and middle-ring suburbs the problem is more of a lack of housing supply, rather than massive oversupply.
Australia's population is still growing (now over the 25 million mark according to the ABS) so there are plenty of people who need a roof over their heads in most parts of the country.
I'd love to see prices fall 40%... but I'm not holding my breath!
Just in case you think I'm trying to 'talk up' the property market, personally I'd be ecstatic if we we're to see an across-the-board 40% fall in property prices.
At current rents, this would mean we'd have positive cash flow rental properties within 10km of the CBD in major cities - a great opportunity for cashed-up investors!
But unfortunately I don't think that's very likely... do you?
Until next time,
P.S. - To counteract the hype and misinformation bombarding property investors, Results Mentoring runs free in-depth workshops and briefing sessions for property investors where you can get the real FACTS about where the property market is headed (without sensationalism or sugar-coating), along with practical strategies, tips and techniques for investing successfully in today's changing property market. Details of upcoming events can be found here.
Simon Buckingham is Director of Results Mentoring and a highly experienced investor. Simon has been investing in property for over 15 years using a broad range of strategies including positive cash flow, renovations, property development and commercial properties, both within Australia and overseas.
Holding university degrees in Commerce and Law, and with over 10 years' experience as a business consultant, Simon turned his back on corporate life forever following the births of his two children and now spends his time investing, developing property, supporting multiple charities, and building businesses - while teaching others how they can do the same. He has personally coached hundreds of investors in techniques that can be used to profit from property in any market conditions, regularly facilitates public workshops and provides other free resources for property investors through ResultsMentoring.com, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand.
Simon writes the highly regarded Sophisticated Property Investor e-newsletter and his opinions on the property market and real-world investing strategies have featured in Your Investment Property magazine, Smart Property Investment, Channel7 News at 6, Kevin Turner's Real Estate Talk, and Property Observer. He is co-author of the critically acclaimed property book The Real Deal: Property Invest Your Way to Financial Freedom, and a founding Mentor in Australia's award-winning personal mentoring service for property investors: the RESULTS Mentoring Program.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now