No Stopping This Property Market Crash

From ABC News:

Daniel Johnston, 35, bought an investment property in Mandurah, south of Perth, as a joint venture with relatives at the height of the boom in 2007 for $580,000.

But plans to develop the block fell through.

The family now owes about $500,000 on a property that has dropped in value to $350,000, and Mr Johnston is concerned he will lose his family home.

The report says the family ‘now owes’ half a million against the property. We’ll wager it was that when they bought the property.

That would be especially so if, like many property investors, they opted for an interest-only loan. Why repay the principal when they no doubt planned to resell the property at a higher price anyway.

Makes sense. Until it no longer makes sense.

The folks in Perth aren’t (and won’t be) the only ones to suffer this fate. When the same market dynamics hit Melbourne and Sydney, the losses here will be even worse.

And make no mistake: It’s only a matter of time…

No rescue for property prices

As always, the government thinks it can come to the rescue in any situation.

As The Age reports:

The Turnbull government is prepared to further intervene in the housing market, Treasurer Scott Morrison says, if the federal budget’s housing package fails to calm rising house prices.

Mr Morrison told Fairfax Media there would be significant measures to increase housing supply and put downward pressure on prices in next Tuesday’s budget, while confirming a reduction in the capital gains tax discount and negative gearing changes were off the table.

So, what will the government do?

Before even attempting to answer that, it’s important to understand the government’s real objective.

It’s not to help house prices fall. If the government really wanted to do that, it could implement any number of measures.

The real objective is to ensure house prices keep rising, so that it helps those whom already own a home…but not too fast either, lest they annoy those who haven’t yet bought a home.

Hence the fiddling here and fiddling there. They want to make it look as though they’re doing something…without actually doing much at all.

Heck. For the most part, it has worked for the past 30 years. Why shouldn’t it keep working?

For us, the reason is simple. We figure every market has a maximum point it can reach before it lunges into reverse. The housing market isn’t any different.

Sure, we understand that land is a finite resource. But as folks in Melbourne know, the sky is less finite. Take a look at Melbourne’s Southbank. The value of many of these apartments is below the original buy price.

Look at the trend of subdivisions in the suburbs. Yes, folks who own the land now are getting a boost by subdividing, but how long will that boost last?

Our bet: Not long. The supply of housing is already increasing, thanks to high-rise buildings and subdivisions. We’re now just waiting for that tipping point…the single thing that will cause the east coast housing market to collapse.

Just what will that be?


Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money