Why property prices won't drop by 30%

By Gerv Tacadena | 15 May 2020

Property investors should not be frightened by the projections of a sharp decline in house prices, says an expert.

Doomsday headlines about a sharp price decline are making rounds in several news sites, highlighting Commonwealth Bank of Australia (CBA) 's recent projection of a 32% drop in values.

A quick google search of CBA's latest projections will show that many news sites have highlighted the 32% drop in prices. Michael Yardney, director of Metropole Property Strategists, said it is crucial to understand that this was CBA's "worst-case scenario".

"This scenario, which is not their base case or most likely scenario, assumes a two-year recession, and that's not what the RBA or the International Monetary Fund believes will happen," Yardney told Your Investment Property.

According to CBA, the most likely to happen is for prices to fall by 11%.

"CBA suggests a shorter downturn is more likely. In fact, if CBA really believed that house price falls of 30% are likely, they would not be lending borrowers 80% or even 90% loan-to-value ratios, wouldn't they?" Yardney said.

Also read: Thinking Long-Term Is Key

In a TV interview with ABC's The Business, CBA CEO Matt Comyn said the 32% price fall assumes unemployment will hit 9% before hitting 6.5% by 2022.

"We need to be prudent and consider a realistic downturn but also plan for a worst-case scenario, and that would see a sustained increase of unemployment," he said.

In an earlier think piece in Property Update, Yardney said investors need to be able to take a long-term perspective when considering price projections.

"To be a successful property investor, you need to step back and take a big picture view and refuse to be scared by the next bogeyman jumping out from behind the bushes," he said.

Yardney believes that the long-term fundamentals of the property market remain very sound, and investors need to act on opportunities that could arise.

"As always, while some people worry about the bad news and sit on the sidelines, strategic investors will set themselves for their future financial freedom by purchasing well-located real estate, recognising they only get a few chances in their lifetime to invest at the beginning of a new property cycle," he said.

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