There’s been plenty of debate in recent months about the true state of the Aussie property market. Are we living in a bubble? If so, how close is it to popping? And just who’s in it exactly? There are as many opinions on this as there are questions.
Worries over potential housing bubbles keep homeowners in Sydney and Melbourne up at night. The fallout of a crash would devastate both owners and investors. Many would end up owing far in excess of what their investments are worth.
Yet most of these concerns centre on one particular market: Sydney. It’s hard escaping this idea. The harbour city does exhibit some classic hallmarks of property bubbles.
Take its phenomenal price growth for instance.
Median dwelling prices in Sydney rose by 17% in the year to August. Even while prices in most other cities stagnated or fell.
But recent data suggests the property market is cooling. There’s a whole raft of factors putting downward pressure on prices.
For one, investor home loan lending is slowing. Two, the Aussie economy is slowing faster than many predicted. At the same time, household incomes growth is weak. And we’re also seeing population growth stall too.
All this weighs heavily on the property market. And yet…despite slowing price growth, things remain ‘stable’.
In August, median prices in Sydney grew 1.1%. Melbourne saw no price growth at all. But at least prices didn’t decline.
Now we’re seeing falling auction clearance rates too.
Sydney’s sold less than 70% of properties on the market this past weekend. Melbourne, too, cleared just 73% of listed properties. Clearance rates are well down on the 80–90% rates seen as recently as April.
So everything points to a prolonged cool down. Why then haven’t we seen a bigger crash in Sydney and Melbourne prices?
One answer, which goes beyond mere numbers, is psychology.
As a nation, we still haven’t realised how perilous our economic situation is. Talks of recession; of weak growth for years to come; it’s just that — talk. Most of us remain oblivious, whether we’re conscious of this or not.
We refuse to believe things will get worse over the next few years. And the effects this will have on household wealth and real estate.
Yet as we look around the market, we should question the foundation of Aussie real estate. House prices in hot markets are stable, but why? Why aren’t they declining more, and quicker? Why isn’t the bubble popping, so to speak? To answer that, we can start by looking at interest rates.
What this man reveals about the Australian property market goes against ALL popular commentary. But that’s nothing new — he’s used to causing a stir in the mainstream media. He predicted the 2008 US housing market crash as far back as 2004.
Download this free report now and learn why this man is now saying Aussie property will boom for another decade (and learn how you can profit).
PLUS you’ll get Markets and Money every weekday… absolutely free.
Simply enter your email address below and click the ‘Claim My Free Report’ button now.
You can cancel your subscription at any time.
The easy credit driven property boom
Today’s housing market would look much worse were it not for record low interest rates.
In 2012, the Aussie cash rate stood at 4.75%. Today, it sits at just 2%. Since February alone, the Reserve Bank has shaved 0.5% off interest rates.
There’s little doubt about the effects of rate cuts on property prices. Lower rates drive up demand because borrowing becomes cheaper. That makes interest rates somewhat of a perfect psychological instrument.
They embed in us the idea that buying homes is still cheap. Even if our incomes aren’t growing to keep up with rising property prices.
Instead, what’s important is that people feel like that buying homes is affordable. Whether that’s true or not is less relevant. Especially in a market where investor speculation is so rife.
Yet things are now changing. Australia’s days of high growth are over. If the economy grows at over 2% this year it will represent something of an achievement. Q3 could bear witness to the first recession in 23 years.
But it still hasn’t sunk in for most that the good times are over. At least not for the bullish property investors. Unfortunately, wherever the economy goes, the housing market isn’t far behind.
I tend to believe that house price growth is not only slowing, but on the cusp of something bigger. The kind of correction that many think unlikely.
Not everyone shares this view, even under our roof. Markets and Money’s property expert, Phillip J Anderson, is one such voice. He thinks Aussie real estate will boom over the coming decade. You can read his free report here.
Investment bank UBS is another that forecasts a stable housing market. Maybe Phil and UBS are both right. Maybe the market is just in a period of ‘moderating strength’, as UBS puts it. Maybe it isn’t facing a downturn.
Or maybe it is…
First, the facts.
As evidence, UBS points to a consumer survey asking whether people feel the timing is right for purchasing property. In this respect, consumer confidence is trending at a five year low.
Yet the same survey shows 28% of people still believe real estate is the best place to invest savings. At no point in the past 12 years have that many people felt this way.
We end up with a somewhat mixed picture of market confidence then.
Aussies still see real estate as a solid investment. Probably even more so today amid volatility in stocks and low returns on cash. You could say that, as a nation, we view real estate as the lesser of all investment evils.
But we can’t discount the effect of interest rates on all this. If the cash rate wasn’t at record lows, how robust would this demand remain?
Remember, Sydney’s market grew at 1.1% in August. Yet, between June and July, it grew by over 5%. Would it have grown at all in an environment of higher interest rates? Probably not. And that’s to say nothing of Melbourne, where prices remained unchanged.
The effect of banking regulations on property price growth
Of course we can’t pin all the blame on interest rates. The other big factor at play is the recent crackdown on investment lending.
Investor lending slowed 1%, to 0.6%, between June and July. NAB also reported weak growth in loans to owner occupiers as well.
In the context of this, it leaves us wondering why prices haven’t softened further. If the market really is on the cusp of popping, why isn’t it?
It’s because we haven’t woken up to what’s coming yet. We’re still living in the Australia of yesterday. The land of abundance and endless growth. We look towards low interest rates, and cheap credit. We see stocks crashing, and cash that provides small returns. It leaves us believing property is the only option.
But I’ve come to sympathise with this point of view. Everyone just wants to secure, and grow, their wealth. They can’t do it with cash. Stocks too are increasingly risky. So they’re opting for property. After all, you can’t wipe out $40 billion of property into thin air. At the end of the day, you’re still left with a free standing house.
And that’s what it boils down to. The housing crash could look much worse today. But it’s being propped up by helplessness. Aussies are pouring their wealth into the one asset where wealth preservation, and sustainable growth, still looks possible.
But it’s also setting us up for a trap.
We’re doing this even as income growth stalls. All the while house prices, and the cost of living, keep rising…
When the economy catches up with high growth property markets in Sydney and Melbourne, look out. Every homeowner may find out the hard way that what goes up, must come down.
Contributor, Markets and Money
PS: Markets and Money’s property expert, Phillip J. Anderson, is a bull when it comes to the housing market. He’s maintained all year that house prices are set to boom over the next decade.
If you’re an investor worried about property bubbles, Phil’s words will provide you with comfort. We don’t always agree on where house prices are heading at the Markets and Money, but it’s worth getting both sides of the story.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.
He was right on both accounts.
In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.