Is Property Finally Cheap?

As I scrolled down my Facebook feed yesterday, a video ad popped up.

Before you judge, yep, I still have a Facebook account. I’m not very active in it though. I mainly use it for finding workshops and events around me.

Anyway, I stopped scrolling to watch the ad.

The video caught my attention because it had the completely opposite view that I have on what property will do next. And, it’s always good to listen to points of view that are different to yours.

The gist of the ad was that 2019 could be a big year for the property market in Melbourne, precisely because, according to the ad, property has turned into a buyer’s market. It could mean that you can find more opportunities.

But, what was most interesting for me about the video was reading the comments. Let me tell you, there were a LOT of comments.  And people were very much divided on what to do about property.

Some agreed it was a good time to buy…others said it was folly. Why? Because they think property is set to fall more.

Is now a good time to buy property?

Is it a good time to buy? Or is it not?

If you are a regular reader of Markets & Money, you’ll know that I think that property has more to fall.

Obviously, no one can predict the future, I could be completely wrong. But I have some reasoning backing up my argument.

After years of increases, property prices in Australia are falling.

The fall in prices may be good news for first home buyers that are looking to get into the market but were priced out. Yet in my opinion this that doesn’t mean property is ‘cheap’ now.

The thing is, prices haven’t really fallen much compared to the increases we have seen in recent years.

As you can see below, Sydney has fallen 9.9% from the peak, and Melbourne 4.1%.


Source: News.com.au

Yet prices for Sydney increased by a whopping 110.9%, and Melbourne saw a jump of 95.3% between January 2009 to June 2017, according to Corelogic figures.


Source: Corelogic

Meanwhile, salaries have barely increased during that period.

My point is, property price increases haven’t kept up with salary growth, which means that people have had to borrow increasingly more to get into property. And, there is only so much you can stretch a stagnant salary to buy property…

Another point is home loans are facing more scrutiny. It is becoming harder to access debt to buy a home, and this is showing in home loan figures.

In fact, UBS recently issued a warning on this.

From news.com.au:

Banking giant UBS has warned that Australia’s falling house prices could be about to plummet even lower still.

‘The alarming claim was made following the release of the latest Australian Bureau of Statistics (ABS) home loan figures, which revealed the number of new mortgages taken out across the country plunged by nearly 20 per cent last year — the lowest point since the global financial crisis.

‘That is a big clue that houses are about to get even cheaper, the bank’s economics team said. […]

‘“The accelerating fall in home loans shows tighter credit is playing out. […]

‘UBS also claimed the results would be even more dire for our two biggest cities, Sydney and Melbourne, which could see prices drop almost 20 per cent — more than double the 7 per cent plunge recorded to date.

‘CoreLogic also recently tipped values in Sydney and Melbourne to fall by 18-20 per cent from peak to trough this year.’

If salaries aren’t growing, and it’s getting harder to access credit, then this makes it tougher for people to buy a home.

If you jump in now, and prices keep falling, then you risk buying a property when prices are still near the top.

I saw this in Spain in the aftermath of the property bubble. The people that got burned the most were the ones who bought closer to the peak.

Many people that bought near the top saw their home values fall, which meant that, all of a sudden, they owed more than what their home was worth. They had to stay put for years because if they sold, they would lose money.

In fact, it even affected divorce rates, couples were staying together longer because they couldn’t afford to split.

Yes, property prices are falling. Yet stagnant salaries and tighter credit conditions could mean that people have a harder time getting into property. It could mean more price falls.

To me, buying now seems a lot riskier than staying put.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find, in her opinion, the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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