{"id":3141,"date":"2022-07-28T09:29:02","date_gmt":"2022-07-28T09:29:02","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/8-reasons-our-property-markets-could-crash\/"},"modified":"2022-07-28T09:29:02","modified_gmt":"2022-07-28T09:29:02","slug":"8-reasons-our-property-markets-could-crash","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/8-reasons-our-property-markets-could-crash\/","title":{"rendered":"8 Reasons Our Property Markets Could Crash"},"content":{"rendered":"

[ad_1]
\n<\/p>\n

\n

Following a once in a generation property boom in 2020-21 our property markets have moved into the next phase of the property cycle, with prices falling in Sydney and Melbourne.<\/p>\n

Not surprisingly this is allowing some of the property pessimists to rub their hands in glee saying \u201cI told you so.\u201d<\/p>\n

Sure our property markets are experiencing a slowdown, and yes prices are falling a little in some locations, however, we\u2019re not in for a property crash and in a moment I’ll explain why.<\/p>\n

But let\u2019s look at what really needs to happen to cause dwelling prices to fall significantly<\/em>.<\/p>\n

Following a once in a generation property boom in 2020-21 our property markets have moved into the next phase of the property cycle, with prices falling in Sydney and Melbourne.<\/p>\n

Not surprisingly this is allowing some of the property pessimists to rub their hands in glee saying \u201cI told you so.\u201d<\/p>\n

Sure our property markets are experiencing a slowdown, and yes prices are falling a little in some locations, however, we\u2019re not in for a property crash and in a moment I’ll explain why.<\/p>\n

But let\u2019s look at what really needs to happen to cause dwelling prices to fall significantly<\/em>.<\/strong><\/p>\n

Now just to make things clear\u2026<\/p>\n

While\u00a0I have\u00a0gathered\u00a08 events that could cause a significant fall in Australian property values, I’m not predicting that any of the events will take place, but they do provide danger signals for those watching our housing market.<\/p>\n

What could cause our property markets to collapse?<\/span><\/h2>\n

It\u2019s not as simplistic as the bubblers think.<\/p>\n

House prices \u201ccollapse\u201d (not cyclically correct, but collapse<\/em><\/strong>) when people are forced to sell their homes and there is no one willing to buy them.<\/p>\n

I accept that properties are expensive in some locations of Sydney and Melbourne and that recently home prices have fallen a little – especially in the more expensive suburbs of Sydney and Melbourne which initially led this property boom.<\/p>\n

But that doesn’t mean property values will crash in our big capital cities.<\/p>\n

As they say…past performance is no guarantee of future performance, but we\u2019ve never had a “property crash” since housing market data has been collected in Australia.<\/p>\n

Instead what tends to happen to prices is an orderly correction, with prices only falling slightly, because people choose to simply remain in their homes and ride things out, while most property investors also try and hold on rather than realising their capital loss.<\/p>\n

Sure some Negative Nelly’s are predicting house prices will fall 15% to 20%, but the fact is…. a fall of this magnitude has never happened before.<\/span><\/p>\n

Not during the recession of the 1990s, not during the global financial crisis and not during the period of a credit squeeze in 2017-18.<\/span><\/p>\n

The worst slump in the overall Australian property market was after the credit squeeze on 2016-17 and when there were concerns around proposed changes to negative gearing before the 2019 election.<\/p>\n

And at that the peak to trough drop between December 2017 and June 2019 was 9.9%<\/p>\n

And considering the current state of the economy, our financial health and property markets there’s no credible reason to suggest a fall of this magnitude should happen now.<\/span><\/p>\n

\"House<\/p>\n

Sure there will be a housing market correction – it started at the beginning of the year in Sydney and Melbourne – but there will be no property market crash.<\/p>\n

In fact, the decline in property values is slowing suggesting we have a benign correction.<\/p>\n

On the other hand, a true collapse<\/strong><\/em> in house prices would require some large external shock such as:<\/p>\n

1.\u00a0Unemployment high enough to trigger a wave of forced home sales.\u00a0\"20863570_l\"<\/strong><\/span><\/h2>\n

When people lose their jobs they have difficulty keeping up their mortgage payments and that results in forced sales or <\/span>mortgagee sales, but currently, we have record low <\/span>unemployment and more jobs available than people looking for jobs.<\/span><\/p>\n

And when rising rates cause mortgage repayments to rise, homeowners will tighten their belts and keep up their mortgage payments, even if it means eating Magee Noodles.<\/span><\/p>\n

2. High-interest rates that would cause a raft of homeowners to default on their mortgages.<\/span><\/h2>\n

Again this doesn\u2019t seem likely in the near future with anyone who borrowed in the last few years has been stress tested to be able to manage their loan repayments even if interest rates rose 3%.<\/p>\n

\n

In fact, CBA Bank CEO Mat Comlyn reported that two-thirds of their borrowers are on average 2 years ahead in their loan repayments.<\/p>\n

3. A \u201ccredit squeeze\u201d<\/span><\/h2>\n

Difficulty obtaining finance, such as interference by APRA or further tightening of bank lending criteria, could significantly slow our markets, but unless it’s severe, this is unlikely to cause our property markets to crash.<\/p>\n

However, there is no indication that APRA is inclined to interfere any time soon since the most recent property boom was driven by home buyers rather than speculating property investors.<\/p>\n

And since our banking system is underpinned by residential property lending and they have a vested interest in keeping dwelling prices at least stabilised and hopefully rising, it\u2019s in nobody’s interest to cripple the markets.<\/p>\n

4. A severe recession that would cripple our economy.\u00a0\"51170403_l\"<\/strong><\/span><\/h2>\n

A severe recession would increase unemployment and cause homeowners to default on their mortgages, but our economy is performing well and a downturn doesn\u2019t seem to be on the radar of any respectable economist.<\/p>\n

This means any Australian recession would most likely be brought on by events overseas.<\/p>\n

But even looking back at \u201cthe recession we had to have\u201d in the \u201990s, this did not cause our property markets to \u201ccrash.\u201d<\/p>\n

5. A severe oversupply of property.<\/span><\/h2>\n

In the past, an oversupply of new apartments as a result of overzealous new development created a glut of apartments and languishing prices.<\/p>\n

But the situation is the exact opposite at present,<\/p>\n

We have a significant undersupply<\/strong> of property at present with vacancy rates at historic lows.<\/p>\n

6. A halt to the rising population.<\/span><\/h2>\n

While Australia’s strong population growth underpinned past property price growth, closing our international borders during the pandemic didn’t put a halt to price growth.<\/p>\n

But now that our borders have reopened and industry is crying for us to import more skilled workers this will only add to the demand for property at a time when we have a severe undersupply..<\/p>\n

7. A slowdown in foreign investment in Australia<\/span><\/h2>\n

Foreign residents are restricted from buying new properties, and in the past\u00a0 Chinese residents were buying around 80 per cent of the new apartments being built in inner Sydney and an even higher proportion in Melbourne and Brisbane\u2019s CBD.<\/p>\n

Foreign interest in Australian property has slowed down as we’ve pulled out the welcome mat from under foreign investors slugging them with taxes and imposts while at the same time China has made it more difficult for them to take money out of the country.<\/p>\n

\"Foreign<\/p>\n

And while the cessation of foreign investment would have had a negative impact on the new apartment market in the past, currently there are very few new complexes coming out of the ground as developers struggle with supply and trade shortages and difficulty getting banks to finance their projects.<\/p>\n

8. Changes to government legislation making property investment less favourable.<\/span><\/h2>\n

Any change to negative gearing or self-managed superannuation funds buying property, or adjustments to capital gains tax rates could discourage investors and this could put downward pressure on property values at least for a short time.<\/p>\n

Over the years property investors have accounted for around 30% of our real estate markets, but more recently the markets have been driven by established home buyers upgrading and first home buyers getting into the market.<\/p>\n

Investors are now returning and with a chronic shortage of accommodation causing a rental crisis in all our capital cities, we need even more investors to provide accommodation.<\/p>\n

O.K. \u2013 so that\u2019s what could cause our property markets to crash.<\/p>\n

Now let\u2019s look at\u2026<\/p>\n

    \n
  1. There is a shortage of good properties<\/strong> for sale and virtually no properties to rent.<\/li>\n
  2. International immigration<\/strong> is picking up and this will increase the demand for housing.<\/li>\n
  3. There is little new construction<\/strong> in the pipeline \u2013 we\u2019re just not building enough dwellings and increasing construction costs<\/strong> 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.<\/li>\n
  4. Our economy is still growing<\/strong> strongly and is very resilient.<\/li>\n
  5. Unemployment<\/strong> is at historically low levels meaning anyone who wants a job can get a job (so they’ll be able to pay the mortgage repayments.)<\/li>\n
  6. Wages<\/strong> are starting to grow.<\/li>\n
  7. Household balance sheets are strong<\/strong> – we have a \u2018natural buffer\u2019 with $250- $260 billion in aggregate savings nationally much of it in offset accounts.<\/li>\n
  8. Many borrowers are ahead in their mortgage payments<\/strong> – Matt Comyn, chief executive of Commonwealth Bank recently said that three-quarters of their loans are approximately two years ahead on repayments.<\/li>\n
  9. We have a strong banking system<\/strong> that has been strict in its lending criteria, meaning there are very few non-performing loans.<\/li>\n
  10. There are still Government incentives<\/strong> to encourage first-home buyers into the market.<\/li>\n<\/ol>\n

    The bottom line:<\/span><\/h2>\n

    For a number of years now bubblers and doomsayers have been predicting the bursting of Australia’s property bubble<\/a>.<\/p>\n

    \"housing_bubble\"<\/p>\n

    They\u2019ve told us we\u2019re in denial about the impending gloom blinded by the consistent performance of our property markets over the last few years.<\/p>\n

    I’ve just explained what could cause a property market to collapse, but I\u2019ve also explained why I don’t think we should be worried.<\/p>\n

    However, we need to be vigilant.<\/p>\n

    As investors, we need to be aware of what’s happening in the world’s economies as Australia does not operate in isolation.<\/p>\n

    Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.<\/p>\n