How bad will the property downturn be?

How bad will the property downturn be?

That’s a question I get asked a lot at present, and the answer is…

Well... it depends!

 

We have now entered the next phase of the property cycle, one where the market is cooling and prices are adjusting.

While property prices will correct in some locations, they'll remain steady in others and increase is certian locations

And there will not be a property “crash” as some commentators are predicting.

For house prices to “crash”, you need to have forced sellers and nobody there to buy their properties.

This only happens at time of high unemployment, but currently anybody who wants a job to help to get a job and with rising wages, it’s unlikely that we will see many distressed sellers forced to sell.

Sure some recent buyers will find high mortgage costs a financial challenge, but there is likely to be little mortgage stress in Australia as 50% of homeowners have no mortgage on their home at all and most of the other homeowners – those who bought more than a year or two ago – will have substantial equity in their properties and are months in advance of their mortgage payments.

However, some who recently purchased a property and haven’t experienced market cycles will find the current market conditions are concerned.

They should take comfort in the fact that property corrections tend to be short lived, and the Reserve Bank doesn’t want to crash the housing market – it wants that about as much as it wants another strain of coronavirus.

These property owners should remember that property values are once again going to rise substantially over the long-term, underpinned by our rising population at a time of significant undersupply of properties and the increasing wealth of our nation meaning we’ll be able to pay more for our homes.

And the situation will only be exacerbated with the opening the floodgates for migrants who don’t bring a home with them when they come to Australia.

fact, it’s already started, but even though our property market will be correct, it will not crash and then certain property markets will be back stronger than before.

Why am I so certain there won't be a crash?

You need to look at the history of financial markets.

Since the early 1900s, we have been experiencing similar cycles; markets overheat fuelled by the inflated demand and then they inevitably flounder or falter.

I’ve personally traded through the last 5 property cycles and have learned to recognise these patterns.

In this article I've given 10 reasons why there won't be a property market rash

So when will this correction occur?

As you read many differing opinions in the media you will find even the experts are struggling to give you any certainty as to the timing.

For mine, we've already entered a period of slower growth, but there is still plenty of growth ahead in selected markets that moved from fifth gear into second or third gear – these particular markets are not in reverse.

However, if the last few years have taught investors anything, it is to expect the unexpected.

That’s why I suggest you should prepare for the worst while hoping for the best.

In other words, maximise your upside while at the same time covering your downside.

Some of the ways you can prepare for the inevitable storms ahead are:

1. Ensure you have a holistic, strategic property investment plan

Property investment is a process, not an event, and the property you will eventually purchase will be the physical manifestation of a whole lot of decisions that must be made in the right order.

That’s why you can’t just run off and buy any property or speak to a buyer’s agent.

You need to plan to become the person you plan to become, and that way you know what you should and should not be doing. It will stop you from getting sidetracked by the “white noise.”

If you want to understand more about the benefits of a Strategic Property Plan, click here.

2. Correct asset selection

To see you through the ups and downs of the economic and property cycle you need to own the types of properties that are strong and stable.

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By strong, I mean your property should outperform the averages and increase in value at wealth-producing rates of return.

By stable, I mean the value of your property should not fluctuate much when the property cycle slumps.

This is why you must only own investment-grade properties – the type of property that will be in continuous strong demand by a wide demographic of more affluent owner-occupiers and one that is situated in the big capital cities of Australia because these locations are underpinned by multiple pillars of economic support.

3. Diversification

As your portfolio grows, it makes sense to own properties in various states, so that when one market is flat, you’ll benefit from the growth of your properties in another state.

It’s also worth remembering that at the slump stage of the property cycle when fewer people are buying property, more people are renting and this usually increases rentals and this is good for your cash flow.

4. Don’t speculate or overcommit

Enough said.

5. Have a financial buffer

Rather than gearing to the max, strategic investors take a more prudent approach by building an emergency financial buffer to buy themselves time to ride through the storms.

6. Build a buffer or buy a bargain

The other beauty of being financially prepared is that when everyone else puts the brakes on and competition in the housing markets slows down, you’ll be in the position to take advantage of the opportunities that abound by using some of your LOC or the funds in your offset account as a deposit on your next property investment.

Remember – you need to be proactive with your property strategy and be in control of your situation before the market changes.

There has been a game-changer for our property markets

Only this week RBA Governor Philip Lowe said:

“It's going to be some years, I think, before inflation's back in the 2-3% range.

But over the next couple of years, it will gradually come down.

We don't see a recession on the horizon

If the last two years have taught us anything, we can't rule anything out.

But our fundamentals are strong and the position of the household sector is strong, and firms are willing to hire people at record rates.

It doesn't feel like the precursor to a recession.

And interest rates, while they've gone up, are still low.

The cash rate is still less than 1% at a time when the unemployment rate is at a 50-year low, so the fundamentals here are still pretty positive."

But it’s clear the RBA will go hard and fast now in response to the highest level of inflation we’ve experienced in decades has lots of Australians concerned about the future of our property markets.

This is one of the two game-changers which means many forecasts made earlier this year are now out of date.

So this Thursday I’m conducting an online live MasterClass with Ken Raiss where we will share with you…

The recent updates that have changed our views on what’s ahead for property in 2022-23.

In this special Masterclass, we will answer the following questions plus more:

1. What’s really happening on the ground on property – and it’s not what the media is telling you.
2. A big-picture macroeconomic overview of what's happening to Australia's economy and what's likely to be ahead as we move through a high inflationary and interest rate environment.
3. The main drivers affecting our housing markets in the next few years - positive and negative.
4. Which areas of our property market are going to suffer the most in the year ahead and which will not.
5. Our investment lessons were learned from investing through challenging times in the past.
6. And I'm going to give you three recommendations and show you why you will need to pivot to take advantage of what's ahead rather than step on the landmines.

Please click here now to register for this session which will be held on Thursday, June 30th @ 4:30 pm.

And Ken and I will set time aside at this live event to answer your questions.

Click here now and register for this educational session and discover the things property investors need to know about the changing landscape.

See you at the Online Market Update.