Why I never believe the property naysayers (and you shouldn’t, either)

Remember in early 2020, when media headlines were awash with ‘doom and gloom’ predictions about Australian property prices?

A number of predictions, forecasts and financial modelling papers were released, and the information contained within them was not good news.

No matter which way you sliced it, property prices were set to crash – some predictions suggested they could fall by as much as 20-30%.

Actually - that also sounds a bit like today, doesn't it?

So what happened next?

Well, the property market didn’t collapse – did it?

The value of almost every property in Australia increased considerably, some by as much as 30% and over $2 trillion was added to the total value of the residential property market  in 2021 last year alone!

Sure this is partly because credit had never been cheaper, which has made the prospect of home ownership far more affordable than it had been in a long time.

And of course, the various government stimulus packages and bank support helped us get through.

No one wanted the property market to collapse

If property prices didn’t crash, what were all of these predictions about, then?

First of all, it’s important to understand that some of these forecasts were not coming from “dodgy” sources.

No, in fact, it was the opposite: research reports and studies were being released at that time by all sorts of reputable industry groups and organisations, from economists and major banks to the Reserve Bank of Australia.

But just because a prediction, forecast or economic modelling report is coming from a well-known or trusted source, that doesn't mean they're always going to be right.

Many economists, research firms and experts are "wrong" every day.

What they are doing is taking a set of data and then they’re using their expertise and analysis to make a forecast, which is really nothing more than an exposition about what could happen.

Nothing is ever set in stone, especially not when it comes to real estate.

Here are a few “the sky is falling” property predictions that didn't eventuate…

• 32% decline:  CBA, warned back in May 2020 that Australia risked experiencing a 32 per cent fall in house prices, in a worst-case scenario of a prolonged economic downturn. But instead, property values rose strongly in almost all parts of Australia.
• 40% price crash: When the Reserve Bank of Australia did some financial modelling of what could happen under a worst-case economic scenario, they modelled the impact on households if prices fell 40%. The media went crazy with this headline only a couple of years ago which led many people to worry that a big crash was coming.
• Revised by half: After previously expecting a 10% fall in national house prices between April 2020 and June 2021, Westpac chief economist Bill Evans revised his forecast to just a 5% fall, owing to several capital cities proving to be more resilient. But again there was no fall in property values
• We were told unemployment would rise to double-digit figures because of Covid, yet it fell to historically low levels
• Remember how the property pessimists were worried that we would fall off a fiscal cliff due to the many deferred home loan after banks gave temporary relief to borrowers impacted by COVID-19, allowing them to defer of payments for a period of time. That didn't eventuate - did it?

These are just some of the examples of property predictions that haven’t come true in the last 2 years alone.

What happened to that other cliff?

Another example of financial “experts” getting it wrong related to JobKeeper and all of the other financial boosts the government provided, which either ended or were wound back around September 2020.

Many predicted we would fall off an economic cliff and the economy would be decimated come September 30th 2020.

Well, we didn’t fall off that cliff, just like we didn’t fall off the cliff that so many nervous Nellys suggested would happen when a number of investors’ interest-only loans reverted to principal and interest.

All of this said, there’s no denying that 2020 was a very confusing time – one that has tested the resolve of even the most experienced of investors.

And they're at it again, aren't they?

Again we are in "interesting times" -  booming inflation, rising interest rates, worry about our economic stability and the media is once again full of pessimistic predictions, some from the same people who made the ones I've just quoted.

The banks are predicting property values might fall 10% to 15% in 2023 and someone prominent commentator is suggesting a 30% fall in Australia's housing markets is on the cards.

When that feeling of uncertainty enters the picture, I think it’s really important to focus on the facts.

This way, you can work to remove the emotion from the equation and think critically about what you really want to achieve with your investments.

So what are the facts?

1. Fact is.... a fall of this magnitude has never happened before.

Not during the recession of the 1990s, not during the Global financial crisis, not during the credit squeeze in 2017- 18.

In fact the largest fall in the "overall" Australian property market experienced was 9.9% over 18 months between December 2017 and June 2019.

Sure selected segments of the property market have significantly fallen in value for a period of time, but the "Australian property market" as a whole has never experienced that kind of fall.

And considering the current state of the economy, our financial health and undersupplied nature of our housing markets, there's no credible reason to suggest a fall of this magnitude should happen now.

 

Sure we have entered the correction phase of the property cycle in some locations, but property values are still increasing in other locations – we're in a multispeed property market, but this is more normal than the type of market we experienced last year were almost all properties increased in value at the same time.

So while property prices will correct in some locations, and already have at the more expensive end of the market, 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 times 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.

And we know from the recent Covid experience that the banks don't want to take over your home in mortgage holders' default.

They will do whatever they can to help, including extending mortgage terms or giving mortgage repayment holidays.

2. The average Australian is wealthier than ever

Over the Covid lockdowns, Aussie households have socked away some $230 billion in excess savings, leading to a massive war chest of cash and deposits.

Not only does the average Australian have significant savings, surging property prices means many homeowners have 30% more equity in their homes than they had 2 years ago.

In fact, ABS data show Australians are now wealthier than ever.

 

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

There has been a lot of talk about the risk of mortgage stress, but there is little evidence of this.

There are very few loan defaults as this recent chart from the RBA shows

 

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

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4. Interest rates are still low

Lower mortgage rates have been a significant driver of the property increase in prices seen over the past couple of years.

And sure Reserve Bank (RBA) governor, Philip Lowe, has warned Aussies that more interest rate hikes are on the way, pledging not to repeat the costly mistakes of the 1970s stagflationary period, and to “do what is necessary” to squash inflation before it becomes entrenched in the national psyche.

Lowe said inflationary pressures - ie the rising cost of living - were growing at a much faster pace than expected and the board had to act.

But if you think about it, even when rates do rise to "neutral" (no stimulatory) levels it will only bring them back to where they were 3 years ago, and there was minimal mortgage stress then.

5. 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 the money you’d know that the banks are incredibly conservative with stress testing loan applications.

That means that most mortgage owners who borrowed over the last couple of years will be able to handle the interest-rate increase of 2.5 or even 3%, and those who borrowed prior to these stricter requirements would have considerable equity in their properties.

5. Rising interest rates didn’t make the market fall in the past

The thing is… this isn’t the first time we’re experiencing rising interest rates.

Rates have risen before and it didn’t make the property market crash then, so why would it now?

Interest rates rose strongly for a 6-year period from 2004 to 2008 and then again from 2010 to 11 after the Global Financial Crisis.

In most of those years that interest rates rose, property values also increased.

• August 1994 to December 1994 - Cash rate up 275 basis points.
• November 1999 to August 2000 - Cash rate up 250 basis points.
• May 2002 to March 2008 - Cash rate up 300 basis points.
• October 2009 to November 2010 - Cash rate up 175 basis points.

You see… how a particular property performs depends on a combination of factors - of which interest rates are just one.

Sure, many first home buyers have extended themselves and they will be the most vulnerable, but they’d rather eat Maggi Noodles and sell the entire contents of their property than sell up their homes.

6. A supply shortage ahead

According to the latest National Housing and Finance Investment Corporation (NHFIC) state of the nation report, Australia could be in for a dire dwelling shortage ahead.

Data shows that while the housing supply may appear healthy in the short term, there is in fact a major supply crunch on the horizon.

This is particularly the case as net overseas migration recovers thanks to a newly opened border, the demand for new households will outstrip supply.

And such a supply shortage will act to put a floor under house price falls and only lead to increased prices going forward, with no property crash in sight.

7. Australia is experiencing a rental crisis

While the pace of house price growth has been slowing, rental growth has strengthened with vacancy rates around the country at the lowest they’ve been for a long, long time.

In fact, the nation is facing a chronic shortage of homes available for rent.

Similarly, a shortage of rental apartments is also developing, and will only get worse over the coming year.

Opening the international borders also has put additional strain on an already tight rental market.

An influx of migrants will likely affect Sydney and Melbourne in particular as these are the most popular tourist destinations.

Domain’s data shows that the national vacancy rate continued its downward trend, now at 1.1%, which is the lowest seen since Domain records began in 2017.

But these new figures are evidence yet again that we’re unlikely to see the property market crash.

While rental demand is surging and supply remains scarce, prices will only continue rising further, bringing more investors back into the market.

8 . Australia’s economy is strong

Economic activity in Australia contracted sharply in late 2021 due to the lockdowns associated with outbreaks of Covid-19’s Delta variant.

This setback delayed but not derailed the economic recovery that was underway in the first half of the year.

In fact, part of the reason we are experiencing inflation, and therefore rising interest rates, is because your economy is performing particularly well, and even though it will slow down over the next year, it will be supported by exports of fuel and food that will make a significant downturn unlikely.

As a country, Australia’s income will improve thanks to renewed tourist spending and also the Ukraine conflict.

That’s because the Ukraine conflict, thanks to the disruption and threats to the supply of energy, industrial and agricultural commodities, and increased demand for metal-intensive defence goods, is providing a further boost to commodity prices.

This is particularly good news for commodity producers like Australia and further evidence of a strongly performing economy.

Here are is the latest RBA forecast for our future economic growth

Similarly, the RBA is confident about our jobs growth

The bottom line.

So 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.

Don’t get me wrong… I’m not suggesting the value of properties always goes up – far from it.

We're in the correction phase of the property cycle at present and there is no property crash in sight.

Whether it's property, shares, or bitcoins — booms just don't last forever, and neither do downturns.

So, think long-term and don’t seek quick wins.

And don’t listen to all those negative messages in the media.

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.