A ticking time bomb for property investors. Prices will fall 40%. Is 60 Minutes right?

Are property prices in Melbourne and Sydney really going to fall by 40 percent?

Well if you believe Channel Nine’s 60 Minutes show last weekend we’re really in for trouble.

Here’s how reporter Tom Steinfort opened the segment:  property market

It’s no secret that Australia is experiencing a downturn in the property market. But for Aussies who own their own home or have a mortgage, there’s worse news. Many believe calling it a downturn is foolishly optimistic – the slump we are in is more like falling off a cliff.

“Real estate and finance experts you’re about to meet predict the value of your house could slide by as much as 40 percent in the next year. Yes…two fifth of your home’s worth wiped out in the next 12 months…”

Now that’s scary stuff!

It triggered a flurry of emails, Facebook posts and tweets to me as well as a desperate phone call from my sister who has just purchased a house and was in a panic, fearful that she had made a terrible mistake.

My response to one concerned tweeter was that I found it curious how Channel 9 ran two fantasies shows one after the other pretending they were reality shows – The Block followed by 60 Minutes.

It’s Groundhog Day.

Every few months, the media finds someone who’s willing to stick their necks out and offer a property market doomsday scenario, predicting the end of the world for property owners in Australia.

This happens in spite of the fact that such predictions have been proven wrong time and time again… 

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It’s the property version of the Women’s Magazines telling us Jennifer Anniston is pregnant again or Prince Harry and Megan are having a baby. It’s amazing the click bait they get and how many magazines they sell using the same headlines that prove to be wrong over and over again.

It’s not the first time we’ve had apocalyptic property market predictions in the media, and it won’t be the last…

Earlier this year I interviewed US author Harry Dent on my Podcast.

He was on a tour of Australia once again to promote his latest book predicting a coming Global Crisis worse than the GFC or even the Great Depression.

In my interview with him he said, “I think this time your real estate will come back 20, 30, 40, 50 per cent.”

Of course, he was wrong, just like he was when he came to Australia and made similar predictions in 2014 and the time before that. And interestingly the time before that too!

And there have been others that 60 Minutes is given too much airtime to:

  • In 2016 they featured previously unknown US “macroeconomic researcher” Johnathan Tepper who predicted that Australian property prices would crash by 30% to 50%. But after that dire prediction our largest housing markets – Sydney and Melbourne – actually boomed.
  • In 2010 Australian controversial economist Steve Keen told anyone who was prepared to listen to him that house prices would fall 40% in a year. In fact, based on his concerns he sold his house in Sydney only to see the market boom and values double. At the time Keen lost a public bet he made with Rory Robertson, a Macquarie Bank analyst, and had to walk 15 km from Parliament House in Canberra to Mount Kosciuszko wearing a t-shirt that read “I was hopelessly wrong on house prices – ask me how”.

But is the sky really going to fall this time?

The simple answer is no.

Sure, we’re in the slow down phase of the property cycle, but that’s how the property markets work. Booms don’t last forever.

They’re just one stage of the property cycle and eventually lead to the next stage the downturn phase.

But prices are not about to crash, we are experiencing a soft landing.

I’ll explain why in a moment but first…

It’s worth mentioning that two of the commentators featured in the 60 Minutes program publicly defended themselves afterwards saying that significant portions of their arguments had been omitted from the show.

Louis Christopher from SQM Research tweeted that the program did not cover his comments about “the safety valves that are still present in the market. E.g. strong local economies, strong population growth, banks very unlikely to fail, etc. The program covered my comments on the risks and the overvaluation only…”  Housing Market Bubble Burst

Similarly Martin North of Digital Finance Analytics explained that the segment did not discuss his central (most likely) scenario, and only portrayed a scenario that he rated as a 20 percent chance.

I also spoke with another prominent property commentator who had been interviewed for the program, but his more conservative ideas were not aired.

I found this interesting considering the good long-term track record of his forecasts.

Here’s why I think it’s highly unlikely our property market will crash

For a property market crash, and that’s different to price growth slowing or the normal cyclically correction, you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them.

This means for a collapse of 40 percent or so, therefore we need one or more of the following things to occur:

  • A major depression (not just a recession.) Neither the RBA nor any credible economist is suggesting this will occur in Australia.
  • Massive unemployment with people not able to keep paying their mortgages. Instead we’re creating more jobs than ever
  • Exceedingly high interest rates so that home owners won’t be able to keep up their mortgage payments. Again, this isn’t on the horizon.
  • An excessive oversupply of properties and no one wanting to buy them. Other than in a few spots this is not occurring in Australia.

The positive factors underpinning our property markets include:

  • We have a healthy economy that is the most developed nations.

The mining downturn has come and gone and now the mining sector is a positively influencing our economy

  • Our strong population growth underpins our economy and housing markets.

Interestingly most of these new Australians want to live in our 4 big capital cities and in many cases in many of the same suburbs.

And this won’t change in the near future.

Australia has a “business plan” to growth 40 million residents in the next 3 decades.

Australia National House States

This means we will be adding the equivalent of a city the size of Canberra each year for the next 30 years.

I took over 200 years to reach 25 million people, but now it will take only 3 decades to reach that milestone to 40 million.

  • We’re creating more jobs than we have for a long time.

The Australian Bureau of Statistics recently noted 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%)”

  • Our banking system is sound, lending standards are tough and mortgage arrears are low.

Yes, some investors took on too much debt and became speculators, taking out interest only loans with very small deposits, hoping (speculating) that capital growth would occur.

This worked out well for some who bought the right properties, but others who over paid for off the plan apartments or who bought properties in regional or mining towns learned that properties values don’t only go up as today’s hot spot can quickly become tomorrow’s not spot and property values fall.

But, in general, over the last few years lending to investors has been more responsible.

Anyone who borrowed in the last few years was “stress tested” – they could only borrow if they were mot be able to repay their interest if interest rates rose and if they paid principal and interest.

  • Our household wealth is the highest it ever has been, and most household budgets are in good shape.
  • Inflation is contained, interest rates are low and likely to remain so for a while
  • Other than in a few specific markets (especially Brisbane high rise apartments) we do not have an oversupply of property.

But aren’t we drowning in household debt?

If you follow the mainstream media you would think we should be worried about the rising level of Australian household debt. Financial Debt 300x200

They keep reminding us that household debt in Australia has risen substantially relative to income over the past few decades and is now at a high level relative to other countries.

Then they ask what’s going to happen to all those property investors who took out interest only loans and may now have to convert to Principle and Interest?

Sure all these raise potential vulnerabilities but a recent speech by Michele Bullock Assistant Governor of the RBA , suggested while these issues are worth watching the situation is not as dire as some commentators would have us believe.

In particular much of Australia’s household debt is in the hands of those who can afford it – our wealthiest household sector and strong employment prospects and a relatively steady ratio of repayments to income have meant arrears rates on housing loans remain very low.

The facts are that although debt has risen with houses prices, the proportion of household income required to service higher debt has fallen over recent years despite low incomes growth and low real wages

What is likely to happen to property values this year?

Firstly, it is important that there is not one property market in Australia, and each state is at its own stage and its own property cycle. 17034015_l

What will happen moving forwards will depend a lot on local factors such as economic growth, jobs growth, consumer confidence and supply and demand.

Overall, the Sydney and Melbourne property markets are likely to fall another 3 to 5% over the next 12 months but digging into the latest figures from Corelogic there are some locations were property values are holding up and a number of suburbs where property prices are increasing.

And remember, you are not buying the market.

You’ll be buying an individual property within that market, at a price you couldn’t have purchased the property for a year ago, and one that you’ll be happy you paid today when you look back in five years’ time.

One more thing…

For as long as I’ve been investing in property, and that’s over 40 years now, there have been doomsayers and “chicken little’s” warning the sky is falling.

And the media has lapped up their stories.

In the meantime, while smart investors and homebuyers were out buying the right type of property, others who were more cautious were sitting on the sidelines waiting to see how things pan out.

While this may seem safe to them, they are likely to miss out on some great opportunities.

WHAT CAN YOU DO TO STAY AHEAD?

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As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

NOW READ: A tsunami of forced sales more likely to be a trickle


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'A ticking time bomb for property investors. Prices will fall 40%. Is 60 Minutes right?' have 13 comments

  1. Avatar for Property Update

    September 23, 2018 steve weingarth

    Please let 60 Minutes know that they are predicting the end of the Australian economy as we know it with these hysterical housing predictions by so called experts.Where is the accurate and balanced reporting? Why is everything being dumbed down to create a sensation in a strong economy with low interest rates,rising population-all helping real estate demand? Shame on 60 Minutes becoming a non reality show. Time the poor folk who are now making buying and selling decisions based on 60 Minutes heard the truth . A mild correction in prices after years of rising prices is not falling off a cliff!

    Reply

    • Avatar for Property Update

      September 23, 2018 Michael Yardney

      Steve – you’re right – it’s a real shame that a program like 60 Minutes has dropped to that level. Someone famous once called it “Fake News

      Reply

  2. Avatar for Property Update

    September 21, 2018 Peter Fritz

    Michael – Fantastic analysis, as always. I’ve been waiting for you to respond to the latest round of nonsense, and this article is gold.

    Reply

  3. Avatar for Property Update

    September 21, 2018 Murray Mac

    These dire predictions are coming from these people who have predicted 14 of the last 3 downturns.

    Reply

  4. Avatar for Property Update

    September 21, 2018 Wayne Ehrlich

    Micahel
    While capital citys locations are not as volatile as mining areas they can still exhibit fairly volatile market values.
    As another example I helped my son buy his first property a 3 bed Townhouse in Ashgrove Brisbane about 6 years ago. We bought it as a forced sale and that time it turned out to be the bottom of the Brisbane market cycle. It steadily went up in value every year by 3-6% until it jumped by a massive 15%(>100k) in one year driven by local supply shortages. This has now eased somewhat with all the unit construction in Brisbane but a Queenslander on a large block next door to this Townhouse was moved sideways on the block and upgraded to a 3 pack townhouse with individual titles for each townhouse and one of these recently sold for >900K, a record for the location! Helps when the suburb has one of the highest average incomes in Brisbane!

    Reply

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      September 21, 2018 Michael Yardney

      Wayne – you’re right – the demographics of the location – high disposable income – makes a big difference

      Reply

  5. Avatar for Property Update

    September 20, 2018 Chetan

    Hi Machael, That was a well explained article. You have covered all angels very precisely. Please also explain how the banks lending restrictions influenced by APRA and Royal Commission is going to affect the investors limitations to borrow more will affect housing affordability…

    Reply

    • Avatar for Property Update

      September 20, 2018 Michael Yardney

      Chetan – thanks for your comments – I’ve already covered this in other articles and will do so again for you in future blogs

      Reply

  6. Avatar for Property Update

    September 20, 2018 Ian

    i remember in 2014 when Dent the dickhead said prices would fall 40% – how wrong was he. I am amazed any mainstream media gives him any air-time as any fool can make predictions that dont come true. If i had listened to him I would not have made some fantastic capital gains on my properties over the past 4 years.

    Reply

  7. Avatar for Property Update

    September 20, 2018 Wayne Ehrlich

    Michael
    Thanks for your very sensible comments on 60 Minutes programme. Those predictions are just that predictions!
    Property prices can and do move more than the 40% predicted in SOME areas. For example I live in South East Queensland and my family comes from what is now a western Queensland mining area. Our family’s were original settlers! A few years ago during the mining boom houses and rent out there was VERY expensive. Rent was the highest in Australia at $800/ week for a detached house. Today those same houses are renting for about $200 + / week. There were a lot of houses built to meet the mining boom demand and today you can buy a very nice brick 4 bed 2 bath 2 garage just like any new estate in the major citys for just $125,000! Thats more than a 40% correction over the build price. That town and region now has more infrastructure spent on it in terms of roads and public infrastructure than would have happened in 30 years without mining boom and this happened in less than 5 years! it now has Woolworths and Macdonalds and all the other chic coffee eg Coffee Club. My comment is that that location was dying without the mining boom. Today the area exports significant quantities of natural gas and coal which are both currently expanding. While I am not recommending buying a house in that town but if you are working in mining out there on an average 100k + salary it is worth buying a house there now!
    There will always be ups and downs in property. The challenge is to buy well to ensute your future.

    Reply

    • Avatar for Property Update

      September 20, 2018 Michael Yardney

      You’re definitely right Wayne – some segments of the market are much more volatile than others – that’s why we avoid those locations, but the “overall” market values are skewed by our big capital cities which are not so volatile

      Reply


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