What happens when property values correct?

Debate has always been heated surrounding whether or not property prices will grow, fall, flat-line or do anything else. The interest in real estate markets should come as no surprise considering the value of Australian housing (more than $4 trillion) is more than double the value of the Australian share market.

Our strong belief is that a collapse in Australian home values is unlikely but the rate of capital appreciation recorded during recent years is unlikely to be repeated for some time.

In recent years there have been a number of examples where Australian markets have undergone a correction. In the main these markets have corrected after a period of exceptional value growth which has well and truly outpaced growth across Australia.

Over the last decade, the first example of a ‘correcting’ market was Sydney. Sydney has historically been the most expensive market in the country and between 1996 and 2004 it consistently recorded above average value growth. Sydney property values hit a high point during Feb-04 and they did not eclipse that peak again until Apr-09, more than five years later. From peak to trough, property values in Sydney fell by -9.3% and this fall took a total of 23 months. Importantly, the fall was not continual; on a monthly basis values would move up and down during this period however, the trend was clearly lower. From the time the market bottomed, it took 39 months for values to eclipse their previous peak. Currently Sydney values are 12.2% higher than that high point of 2004 thanks to the strong gains recorded during 2009 and 2010.

Another more recent example is Brisbane where values have been consolidating since the start of the GFC. Prior to the GFC the market peaked during Feb-08 and between this time and Jan-11 property values in the city have fallen by a total of -0.8%. The market recorded a slight rally during 2009 and early 2010 however, this is likely the result of aggressive interest rate cuts and the First Home Owner’s Grant Boost. Since Apr-10 property values in Brisbane have fallen by -4.7%.

The Perth market is experiencing similar conditions to Brisbane and as the graph details it recorded sustained capital growth well in excess of the national average between 2004 and 2008. Much like Brisbane, there was a small rally in value growth during 2009-10. Outside of this rally, pre-GFC property values in the city peaked during November 2007 and as at Jan-10 had only increased by 0.2%.

An interesting point to note is that after the Sydney market peaked, most other cities recorded one if not two periods of strong value growth resulting in Sydney property values appearing relatively more affordable, Similarly, since growth has stalled in Brisbane and Perth value growth in Sydney, Melbourne and Canberra has ramped up.

The proponents of a massive property price crash will potentially point to the Noosa Heads market in Queensland. Much like Sydney, Brisbane and Perth, Noosa Heads in recent years has recorded periods of capital growth well in excess of national averages. Also the market is almost entirely reliant on retirees, ‘sea changers’ and the tourism sector, none of these sectors are currently particularly active. Median house prices in Noosa Heads as at Dec-10 were -16.2% below their peak recorded in Aug-08. The unit market has fared even worse, median prices as at Dec-10 were -24.4% below their Feb-07 peak.

Whether you believe property prices will continue to grow, tank or flat-line, it is clear that you must be cautious when buying into markets which have had periods of surging property values and have yet to see a period of subdued growth or price falls (a correction).

Due to factors such as an ongoing demand/supply imbalances, a strong banking sector, low unemployment and improving economic conditions we don’t anticipate collapsing prices., However it is clear, based on the above examples that growth phases are often followed by a consolidation in values. Over time the combination of inflation, rising wages, rental increases and little or no value growth is likely to result in the property market once again becoming an appealing purchasing prospect. As the examples highlight, in some instances this may take a number of years as wages and rental yields catch up with the surge in home values and confidence in the market gradually returns.

Tim Lawless is the Director of Property Research at RP Data.