This Triple Whammy Could Cause Aussie Property Prices to Fall By 50%

Last night ABC news ran a segment on off-the-plan apartments.

Up until now, buying an apartment off plan had a lot of advantages. Buyers could use the time for construction to finish to save more money. The fact that property prices kept rising made getting finance even easier.

But, the last 12 months of property price falls has flipped this on its head.

As ABC reported, buyers that bought properties two years ago are now struggling to settle the sale.

With valuations dropping and credit tightening, they are having a hard time getting enough money from the banks.

As ABC reported:

It is a scenario mortgage broker Luke Camilleri is starting to see regularly.

“The most recent one that comes to mind is probably about six weeks ago in Western Sydney,” he said.

“They bought about three or four years ago and the valuation came in quite low.”

The young couple initially agreed to buy their two-bedroom apartment for $680,000.

But when the bank came to value the property upon completion, it did not value it that highly and so would not lend them as much as they needed.

They had to find an extra $54,000, on top of their deposit and stamp duty.

Mr Camilleri said, in the end, the buyers “had to get creative” to find the extra cash.[…]

Mr [Alex] Sapounas [conveyancer] said it was not just the value of property making it harder for buyers.

“It’s also the lending standards that have changed,” he said.

“Two or three years ago, when they went and saw their mortgage broker or banker based on their current scenario, [they were told], ‘This is how much we’re going to lend you’.

“Now, their actual scenario hasn’t changed, but the bank’s lending criteria has changed.”

The property market is getting hit by a triple whammy: lowering property prices, tightening credit and increasing rates.

So far, according to Corelogic, property prices have fallen 2.7% in the last 12 months. Sydney and Melbourne have seen some of the largest falls with 6.1% and 3.4% respectively.

Considering that since 2009 property prices have risen by 105% in Sydney and 93.5% in Melbourne, this isn’t too much of a drop.

But, are these drops temporary?

How much property prices can keep falling?

Can property prices fall 50%, like we have heard from editor Harry Dent?

Sadly, the short answer is yes.

Are you prepared for an Aussie housing collapse? Find out before it’s too late.

We have already seen huge falls in property prices in the last decade.

Back in 2008 we saw the US property market crash by 30%.

We saw Ireland apartments fall by over 52%.

And, as I have written frequently before, Spain saw property prices fall by 45%.

In fact, I see a lot of similarities between Australian property and the Spanish property bubble. Overbuilding during the frenzy meant that Spain was left with lots of empty developments after the prices collapsed.

The main lesson that the 2008 crisis taught us was that property prices don’t always go up.

The fact that property prices in Australia have risen that quickly in such a short time could mean that they have a lot longer to fall.

Data from the Australian Bureau of Statistics (ABS) show that building approvals have fallen by 9.4% in August seasonally adjusted, and 13.6% from 12 months before.

In Melbourne, as you can see below, unit approvals are tanking.

Victorian unit approvals

Source: Business Insider

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The most likely reasons for the sharp fall in building approvals is that developers are struggling to get finance, and to sell the units. Not only are investors out of the game, but it is not as easy for home buyers to get a mortgage anymore.

The problem is that residential construction falling could have a lot of impact in the economy, especially in the unemployment rate.

As I have written before, my suspicion is that there are a lot of properties sitting empty out there.

Recent ABS figures show that while credit is still tightening, household debt to income is still rising as debt gets more expensive. It is now at a whopping 190.5%.

As property owners get squeezed with higher interest rates and refinancing woes, we could see more properties come onto the market. This is coming at a time when there is a lot of supply about to hit the market.

More property price falls could mean we see a lot more properties for sale…or rent.

In fact, this is already happening.

As reported by SQM, Sydney’s vacancy rate is already hitting record highs.

Residetial Vacancy Rates in Sydney

Source: SQM

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We could be looking at an oversupply of property hitting the market in the next few years…as rental and selling prices continue to go much, much lower.

With rising interest rates and stagnating wages, the ones most affected will be the ones most leveraged.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Economist Warns: Overvalued Housing Market Set to Implode. Download the free report now.


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 ravaging 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 the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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