Seven reasons Australian property won’t crash

There’s a debate raging at present – some say the future for property is bright while others suggest our markets are set to crash.

After a number of boom years, especially in the Sydney and Melbourne markets, we’ve entered a more mature stage of the property cycle, and obviously, it would be good to know who’s right if you are considering investing in property, or about to buy a home.

But remember there is not one property market around Australia.

Our markets are fragmented – not only is each state at its own stage of its property cycle, but within each state different segments of the markets are behaving differently.

So it doesn’t really make much sense to say the “Australian property market” will crash.

Let’s look at how property markets corrected in the past.

To understand what’s ahead, let’s look at what happens when property markets got ahead of themselves in the past.

Sydney had a terrific boom between 2001 and February 2004.

In fact, it was one of the best performing property markets between 1996 and 2004, helped in part by the excitement related to the Olympic Games.

After this boom the Sydney property market corrected.

It didn’t collapse – it just corrected – with values falling from peak to trough by -9.3% and this fall took a total of 23 months to play out.

Of course, not all parts of the Sydney market dropped in value equally – some areas held their values well.

And even in the regions where values fell, property prices didn’t plummet – they gently followed a downward path.

The doomsayers were out then also, but just look at where Sydney property prices are today.

A similar pattern occurred in Brisbane and Perth where values peaked in February 2008 after a long boom in both cities pushed their house prices well above the average national price growth.

Again property prices didn’t collapse – they just sauntered along allowing the fundamentals to get back into alignment.

Much the same happened in the early 1990s when we experienced “the recession we had to have.”  After the remarkable property boom of the late 80s, interest rates rose to peak at around 17% and the property markets around Australia stalled.

But once again they didn’t collapse. They just flat-lined for a few years as affordability, supply and demand other economic fundamentals caught up.

And when property prices peaked in late 2010, the last time the RBA pushed up interest rates, property prices gently eased in our major capital city markets – they didn’t plummet.

Source: Corelogic

The only time Australian property values dropped significantly (albeit for a short time) was after the Second World War and during the Great Depression.

In the 1940s house prices dropped 17% over a two-year period but then jumped back and grew strongly for many years after that.

Property values also dropped during the Great Depression when unemployment was high, but times are different today.

No one is suggesting that Australia is heading for a depression. Sure our economy is slowing a little, but it’s still the envy of most developed nations.

That’s why talk of a property market collapse is nonsense.

Why don’t Australian property markets collapse?

Well some do!

Just look at the mining towns where the values of some properties have fallen by over 50%.

Or some holiday destinations like the Gold Coast.

But here’s why…

The mining towns where driven to dizzy heights by speculators and the Gold Coast was also driven more by speculation than by underlying supply and demand fundamentals. The large fall in prices there was because there was too much developer stock on the market.

But my point is that, in general, our capital city property markets don’t collapse because they are illiquid.

People don’t sell up their homes just because interest rates rise or when times get tough.

Why property won’t crash.

There are a number of reasons why we won’t see major falls in home prices in our capital cities any time soon. We have:

1. Robust population growth fuelled by immigration and to a lesser extent strong natural population growth. While immigration levels have dropped, we’re still growing at a faster rate than any other country in the developed world.

2. A healthy economy that, while slowing a little, will continue to perform at a level that is the envied by of much of the Western world and will create jobs for anyone who wants one.

3. A sound banking system with reasonable interest rates, tight lending practices and low default rate.

4. Business confidence is rising as we seem to have stable government at both the federal and state levels.

5. Consumer confidence has been rising since Malcolm Turnbull was elected prime minister.

6. A healthy level of household debt. Sure we are borrowing more, but the debt tends to be in the hands of those who can afford it.  Many Australians are saving more, taking on less credit card debt and paying off their mortgages faster than they need to which improves the state of their personal finances. This in turn reduces the risk of house prices collapsing if interest rates rise or the economy hits a speed bump.

7. A culture of home ownership – 70% of us own or are paying off our homes. In contrast to some overseas markets Australians have high equity in their properties and a conservative debt position. In fact, half of all homes have no debt against them.

What’s ahead?

There’s no sugar coating it…property price growth will slow in 2016.

Decreasing affordability, changing sentiment and oversupply in several sectors such as CBD and off-the-plan apartments will create a volatile mix that will fragment and slow our property markets – moving some from a seller’s to a buyer’s market.

This is already evident with falling auction clearance rates particularly in the Sydney property market.

Yet there is still a large demand for housing – people are still getting married, having babies, getting divorced and coming from overseas.

And if they can’t afford to buy their homes they are going to rent and this will force rentals up.

As Australia’s economy bumbles along I can see little wages growth over the next year or two, but I do see interest rates rising sometime in 2017 and both these factors will affect some suburbs more than others.

What I mean by this is that rising rates are likely to affect suburbs that are more interest-rate sensitive like blue-collar areas, regional locations and first-time buyer locations.

On the other hand, property values are likely to increase in the more affluent, gentrifying middle ring suburbs of our major capital cities where the locals’ income is less dependent on CPI rises in wages and where rising interest rates are less likely to have an impact on disposable incomes.

So my top picks for suburbs that will outperform would include suburbs where people have higher disposable incomes and are able to, and prepared to, pay a premium to live there the because of the amenities in the area.

Property price growth in Sydney will likely slow to around 5% over the year ahead and Melbourne prices should grow a little more than this (+7%).

Prices will fall a little more in Perth and Darwin as the mining boom continues to unwind, while Hobart and Brisbane are likely to see continued moderate property growth, but the Brisbane property market should start to pick up further as it plays catch up rising around 7% over the year.

And I can’t really see a reason for regional or mining town real estate to have much capital growth. There is no influx of new people moving to these regions little to strengthen their economies and investors are no longer buying up big in these regions.

But rest easy – there won’t be a property market crash in our capital cities.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.