What’s really going to happen to our property market?
Are they going to crash like many economists and market commentators suggest?
I recently read a headline suggesting the recent unemployment figures will be the final knockout blow for our housing markets.
Now I agree the RBA will keep ramping up interest rates, which will further stunt consumer confidence because, of course, that’s what it is intended to do.
And yes…property values will fall, but how much will they fall, and how worried should you be?
That’s what leading independent financial advisor Stuart Wemyss, and I discuss in today’s podcast.
To make things clear, we are not eternal optimists, and I believe will offer you a realistic view of the risks ahead and the supporting fundamentals.
I hope that at the end of today’s show, you’ll be able to sleep a little better.
- Bubbles invariably bust, and when they do, housing prices end up much lower than where they started.
- On the other hand, property booms eventually run out of steam with an occasional small price correction followed by a prolonged period of little to no growth.
- The issue is that they both look the same at the start, as this graph shows.
- It’s the type of buyers causing the growth.
- Buying demand from investors grows when prices rise; the more they increase, the more that investors want to buy properties.
- Owner-occupier booms take place despite price growth, and the more prices rise, the more demand slows down and stops as prices become unaffordable.
Investor-led booms can become bubbles because investors don’t buy properties to live in as owner-occupiers do.
- Profit is their only consideration, and fear of losing is their only concern. This means that when price growth slows down or stops, investors start to put their properties on the market and try to sell.
- Owner-occupier booms merely slow down; when they end, prices don’t crash because the purchased properties are people’s homes. When buyer demand comes to an end, there’s no motivation to sell. Only those homeowners who really need to move for personal, family, or business reasons will do so.
- A property bubble is a form of economic bubble normally characterized by a rapid increase in market prices of real property until they reach unsustainable levels relative to incomes and rents and then decline.
- the recent boom was driven by home buyers, not speculative investors
- No real definition of mortgage stress.
- Let’s look at the real world – very few loan defaults, many mortgage holders are 2 years in advance in their payments,
- Unemployment is high enough to trigger a wave of forced home sales.
- High-interest rates would cause a raft of homeowners to default on their mortgages.
- A “credit squeeze”
- A severe recession that would cripple our economy.
- A severe oversupply of property.
- A halt to the rising population.
- A slowdown in foreign investment in Australia
- Changes to government legislation make property investment less favourable.
- There is a shortage of good properties for sale and virtually no properties to rent.
- International immigration is picking up, which will increase the housing demand.
- There is little new construction in the pipeline – we’re just not building enough dwellings, and increasing construction costs at a time of a shortage of labour means the end value of new projects will need to be up to 20% higher to make projects financially viable for developers.
- Our economy is still growing strongly and is very resilient.
- Unemployment is historically low, meaning anyone who wants a job can get a job (so they'll be able to pay the mortgage repayments.)
- Wages are starting to grow.
- Household balance sheets are strong - we have a ‘natural buffer’ with $250- $260 billion in aggregate savings nationally, much of it in offset accounts.
- Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank, recently said that three-quarters of their loans are approximately two years ahead on repayments.
- We have a strong banking system that has been strict in its lending criteria, meaning there are very few non-performing loans.
- There are still Government incentives to encourage first-home buyers into the market.
There’s really no need to lose sleep or worry about the value of your home or investment property in the long term.
And if you're not selling for refinancing in the short-term doesn't really matter if the value of your property drops 5% or so, does it?
Especially if it is appreciated 25 to 30% over the last couple of years.
It really doesn’t matter what the markets do in the short term as long as you have sufficient financial buffers to ride out the storm.
And don't let emotions drive your investment decisions because it’s likely it will take a while for inflation to come under control, and then the Reserve Bank will again start lowering interest rates because they always seem to overshoot the mark.
Links and Resources:
Stuart’s Book – Rules of the Lending Game & Investopoly
Some of our favourite quotes from the show:
“Apart from what’s in their offset accounts, people have significant financial buffers to see them through.” – Michael Yardney
“The other thing that has caused property values to drop but not crash is the credit squeeze. More than interest rates, it’s really the flow of money.” – Michael Yardney
“While fear of missing out drove the markets in 2020 and 2021, now it’s fear of buying too early, fear of looking silly.” – Michael Yardney
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