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By Michael Yardney
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When Will Australian House Prices Crash?

key takeaways

Key takeaways

The probability of an Australian property crash is deemed very low.

A crash typically occurs when forced sellers significantly discount properties due to an absence of buyers. Such a scenario could arise from severe recession, high unemployment, or skyrocketing mortgage costs, none of which are prevalent factors in the current market.

Several factors contribute to the resilience of the Australian property market, including robust household wealth, minimal mortgage stress for the majority of borrowers, stable interest rates (potentially on the decline), conservative loan stress-testing by banks, chronic housing supply shortage, substantial overseas migration, and a strong national economy.

While high household debt, declining affordability, decreased sales, rising inventory, oversupply, policy changes, external shocks, speculative activity, banking sector instability, worsening affordability, and global economic factors can influence market dynamics, they are unlikely to lead to a crash without the presence of forced sellers.

Despite periodic concerns and predictions of a property crash, adopting an evidence-based approach and focusing on long-term outcomes by investing in high-quality properties in prime locations is recommended for investors to navigate market fluctuations successfully.

This question is one of the most common questions I come across from beginning property investors.

You see, in markets like today, investors, buyers, and even renters are waiting to find out whether they should take the plunge now or wait for prices to come down… or even crash entirely.

I’ll say right now that an Australian property crash is very unlikely, and in a moment I’m going to share 10 reasons why.

Crash

Put simply…for a property market to "crash" there must be forced sellers and nobody on the other side of the transaction to purchase their properties, meaning sellers have to give away their properties at very significant discounts.

Remember, home sellers are also homebuyers – they have to live somewhere, and the only reason they would be forced to sell and give up their home would be if they were not able to keep up their mortgage payments.

This means a property crash could occur if:

  • Australia experienced a severe recession. This is very unlikely in the foreseeable future, but even in the severe recession of the early 1990s, other than in the State of Victoria which was hardest hit by the downturn, our housing markets held their own.
  • Unemployed levels are high and homeowners can’t keep up with their mortgage payments. However, today, anybody who wants a job can get a job with unemployment levels at record lows.
  • Mortgage costs (interest rates) zoom up – yet today, despite the 13 interest rate rises, mortgage arrears are still very low, and we’re now at the peak of the interest rate cycle.

Sure the Australian property market has shown extraordinary resilience in recent years due to strong population growth and supply shortages, but it has also done so over the long term because it is underpinned by the fact that around 70% of all residential properties are owned by home occupiers and around half of these don’t even have a mortgage on their homes.

It’s true that housing affordability is becoming an increasing concern today, and there will always be property pessimists out there warning of a housing crash, but the fact is that Australia has never experienced a “property crash”.

Of course, the market regularly experiences corrections after a period of rapid growth, but a significant price decline has never occurred in the past and seems unlikely at any time in the foreseeable future.

Negative

Key indicators of a housing market crash

Let’s look at a few of the factors that the Negative Nellies suggest could lead to a severe property downturn.

1. High household debt

Of course an elevated level of household debt, especially mortgage debt relative to income, can increase the risk of default if borrowers face financial stress due to job loss or interest rate hikes.

While some first-home buyers and naïve investors have overcommitted financially, overall Australians are coping well with their debt.

2. Declining Affordability

A significant decrease in housing affordability, where a large portion of the population struggles to afford homeownership due to high prices and/or rising interest rates can dampen demand and contribute to a market downturn, but this doesn’t lead to a crash as new buyers will enter the market to soak up the bargains.

3. Decreased Sales and Rising Inventory

A noticeable decline in home sales coupled with a rise in housing inventory levels suggests weakening demand and potential oversupply, which could exert downward pressure on prices and trigger a market correction.

But again, this won’t cause a crash if there are no “forced sellers”.

If you think about it, homeowners would rather eat Maggi Noodles than give away their homes.

4. Oversupply of Housing

Although unlikely given the current supply and demand imbalance in Australia’s property market, an oversupply of housing, particularly in certain markets or property types, could lead to lower occupancy rates, increased vacancy rates, and downward pressure on prices.

But as I keep saying, this may cause a “normal” cyclical correction – not a crash.

Policies

5. Policy Changes

Changes in government policies related to taxation, immigration, or housing regulations could impact housing demand or affordability, potentially leading to price declines.

However, the Australian government has been proactive in implementing policies that support the property market. Neither they nor the banks want the property market to crash.

Initiatives like the First Home Owner Grant (FHOG) and other first-home buyer incentives, stamp duty reliefs, and temporary measures like the HomeBuilder program during the pandemic, have all played a role in stimulating market activity.

Additionally, regulatory bodies ensure a balanced approach to foreign investment in real estate, which helps maintain a healthy level of external investment without overheating the market.

6. External Shocks

External factors such as global economic downturns, geopolitical tensions, or natural disasters could negatively impact home buyer and investor confidence, but are unlikely to trigger a significant sell-off in the housing market.

7. Speculative Activity

Speculative buying, particularly by investors seeking short-term gains rather than long-term occupancy, can contribute to housing “bubbles”.

Each property upturn paves the way for the next stage in the market cycle – the property correction phase, when speculative activity diminishes or reverses and this could lead to a correction in prices.

This occurs more in investor driven markets rather than in markets underpinned by a large percentage of owner occupiers.

Bank

8. Banking Sector Instability

Any instability in the banking sector, such as a credit crunch or a crisis in the financial system, could restrict lending and reduce access to credit, dampening housing demand and prices.

But Australia’s banking sector is highly regulated and is in a sound, stable condition.

9. Worsening Affordability

Persistent affordability challenges, where a large portion of the population struggles to afford housing due to high prices relative to incomes, could eventually lead to reduced demand and price corrections.

However, this is very different from the situation required to cause property crash where homeowners have to sell up and virtually give away their homes.

10. Global Economic Factors

Events in the global economy, such as changes in interest rates by major central banks, fluctuations in commodity prices, or shifts in investor sentiment towards Australian assets, could impact housing market dynamics and contribute to price volatility, but again, not a crash.

Positive

Factors that keep Australian housing market resilience

Here are 7 reasons why Australia’s property market is just as resilient as ever:

1. The average Australian is wealthier than ever

According to the latest ABS figures, household wealth rose for the 4th straight quarter late last year, by 2.3% or $339 billion.

Total household wealth was $15.3 trillion in the September quarter, which was 7.0% ($998 billion) higher than a year ago.

And not surprisingly this was largely driven by residential real estate, which contributed 1.7% to quarterly growth.

Not only does the average Australian have significant savings, but surging property prices mean many homeowners have significantly more equity in their homes than prior to the pandemic.

Combine these 2 things with a strongly performing superannuation and shares portfolio and the average Australian is now wealthier than ever.

2. No sign of mortgage stress for the majority of borrowers

There is no doubt that rising interest rates and inflation have created a substantial squeeze on households with mortgages, nudging many to recalibrate their budgets.

Yet despite rising interest rates over the last couple of years and all the talk about mortgage stress, to date, households have prioritised their repayments, and there is little evidence of mortgage arrears or motivated selling.

Sure, some first homeowners have overextended themselves, and some investors have borrowed too much on the wrong properties, but, in general, the percentage of borrowers in "real trouble" is low.

In reality, half of all homeowners have no mortgage at all.

And those who do have a mortgage are well ahead in their mortgage repayments - it is estimated that a total of $1.37 billion is sitting in offset or redraw accounts

Interest Rates

3. Interest rates look to have peaked

The Reserve Bank has raised interest rates 13 times since May 2022 in an effort to dampen climbing inflation.

But so far in 2024, the Reserve Bank has kept the rates on hold.

Many expect that after a series of hold decisions, rates might begin to decline later this year.

The Commonwealth Bank, Australia's biggest lender, is forecasting 6 interest rate cuts in 2024 and 2025 starting in September this year.

Others are suggesting rate cuts will now come a little later on because inflation is remaining stubbornly high.

4. Banks are conservative with stress-testing loans

When you borrow money, the bank or lender has a responsibility to ensure you have the financial capacity to service the mortgage repayments now and in the future.

Each bank and lender has its own stress test assessment based on the bank’s own appetite for risk, which is why your borrowing capacity can vary significantly from one lender to another.

On top of the assessment rate, the bank will also apply certain other factors and will load your existing (other) loans by a buffer, they account for all your incomes including wages and rental income(s), and they also include the limits on all of your credit cards.

The lender will also account for the number of financial dependants you have in your household, and apply a cost of living, which is the living amount used by the bank and may or may not be the same as what you and your household actually spend.

And if you’ve tried to borrow money recently, you’d know that the banks are incredibly conservative with stress-testing loan applications.

5. There is a dire property supply shortage

Australia is suffering from a chronic supply shortage with a thin pipeline of residential construction or a viable solution to help the problem.

While this is dire news for Australians looking to get into the property or rental market, the sharp shortage of housing does help to outweigh the negative impact of rising interest rates on property prices.

Which in turn, helps with market resilience.

Migration

6. Overseas migration is climbing rapidly

Strong overseas migration plays a pivotal role in bolstering Australia's housing resilience.

The influx of migrants contributes significantly to population growth, fostering sustained demand for housing across the country, which supports property values and stimulates construction activity, addressing housing shortages in high-demand areas.

Moreover, migrants often bring diverse skills and expertise, fuelling economic growth and creating employment opportunities, which further strengthens the housing market by boosting purchasing power and consumer confidence.

7. Australia’s economy is strong

A strong economy typically correlates with low unemployment rates and steady income growth, which in turn, enhances consumer confidence and improves investor and buyer confidence even amid fluctuating interest rates or other economic indicators.

A thriving economy also helps to attract foreign investors and skilled migrants, further fuelling housing demand and stimulating construction activity, helping to maintain a healthy balance between supply and demand in the housing market.

A resilient economy also creates stability in mortgage markets and lending practices - low unemployment and economic uncertainty reduce the risk of mortgage defaults and create a stable property market.

Prices

So will Australian house prices crash in 2024?

I think you know my answer to this question already.

No, I don’t think we’ll see an Australian house price crash in 2024.

Predicting future movements in housing prices with certainty is challenging due to the multitude of factors that influence the market.

But what we can see is that economic conditions are robust, interest rates are at (or close to) their peak), supply is scarce while demand is strong, and our economy and property market have made a strong recovery from the market lows.

The problem is, there will always be property skeptics.

That is, people who believe that property is overvalued and, as such, is a bad investment.

And these predictions are made regularly - I think I see a major crash prediction made most years.

I don’t think it will ever change.

But at some point, you must stop listening to attention-grabbing headlines and follow an evidence-based approach.

The best response to any concerns about property prices is to level up on a property’s quality and focus firmly on long-term outcomes.

That is, to focus on buying investment-grade property in A-grade suburbs which will withstand the test of time and fluctuations in the market.

That’s right, buy the ‘right’ property and play the long game.

About Michael Yardney 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 one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.
2 comments

WW3 and the threat of war on Australian soil will no doubt leave a negative impact the Australian property market.

1 reply

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