The Facts: Australian Housing Bubble, will there be a housing crash?

australian property crash

The question of an Australian property crash is often raised by people because of what they have heard or read or seen on TV.  The media love to raise the possibility of a housing crash because they can sell more papers and improve their ratings. Remember, the News is not about providing the latest information, it’s about attracting viewers so they can sell advertising space. That’s why newspapers are so full of ads. The news content is secondary to the newspapers main business of making money. The scarier they can make the headlines the more newspapers people will buy.

Have a look at these ones for example;

June 22 2015 Sydney Morning Herald

Australian housing market facing ‘bloodbath’ collapse: economists

The Australian real estate market is in the grip of the biggest housing bubble in the nation’s history and Melbourne will be at the epicentre of an historic “bloodbath” when it bursts, according to two housing economists Lindsay David and Philip Soos

WRONG

Housing Market Predictions

Kris Sayce 25/11/2011

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If you’re a long-time reader of Money Morning you’ll know we made some housing market predictions about the Australian housing market crash. Did we get it right?

WRONG AGAIN

Doomsday theorists’ morbid obsession with Australian property

Jennifer Duke Feb 25, 2016 Domain.com.au

Jonathan Tepper Who: Macroeconomic researcher

Prediction: In February 2016, predicted a 50 per cent drop in house prices.

VERY WRONG

Let’s give you our take on things being said about a possible Australian housing crash.

The market is massively overvalued – Really?  The obvious flaw in this statement is that there is no such thing as one property market. It’s made up of many separate unconnected markets such as house and land, apartments, units, commercial, OTP, rural, metro. Each market operates on its own, independent of the other. Commercial can be in great demand while Units are subdued. There is no connection. All markets though depend on the strength of the Australian economy.

For simplicity, median prices for each State and Capital city are used in the media.

But what market are they actually talking about? I’ve read that the case for properties being overvalued comes from comparing price vs wages. I can understand that measurement but given wages have been stagnant for some time perhaps it’s the wages that are undervalued rather than the other way around. Then again, “Slow wages growth responsible for high prices” doesn’t cut it for a headline does it?

You can only determine value by comparing like for like. Granted, Sydney and Melbourne prices are going up faster than any other cities in Australia but that can be put down to demand. Supply and Demand are the main drivers in the market anyway and they are instrumental in determining price.

Policies designed to bring more property onto the market would stabilize prices but they would have to be the type of properties that the majority of people want, NOT what the developers want to sell. By the way, that’s house and land rather than tiny apartments in case you didn’t know.

Outside of the two biggest cities, is there any evidence that other suburbs, either rural or metropolitan are overvalued? Are they suffering from the same thing? None of the available data supports this premise at all. Can you have an Australia wide housing crash when the majority of the country is not suffering from high prices?

Let’s face it, market value is determined by people buying property. If they aren’t happy with the asking price, guess what happens? That’s right, they wouldn’t buy it.  It’s that simple.

Nobody is forced to buy a house they don’t want to so the market is driven by people who see the value in buying a property at today’s prices. Sure, most people expect their home to go up over time, why shouldn’t they? Please, don’t think for one minute that property prices will not go up. They will always go up as long as we have lots of people who want to live in the same areas. That’s purely supply and demand at work.

An increase in interest rates will trigger a house price crash. – I like this one a lot. It sounds so logical but unfortunately makes no sense. Obviously, Interest rates will increase as sure as night follows day, then at some point, they will decrease again. The only unknown is the timeframe. Will they go up overnight or will they gradually increase over the next decade? Can you see the difference?

The size of any increases will clearly be an issue as well as how quickly they are applied to the market. Simply saying that an increase will cause a crash is ludicrous. How big does the increase have to be and how quick it needs to be to cause problems are the key questions.  Again, using wide ranging statements without providing any sound reasoning or detail is pure scare mongering and it’s unhelpful by any measure.

Mortgage stress – there will always be people who suffer mortgage stress, in every market, during every market cycle. It’s not new. But one thing is always overlooked. Mortgage Loans are stress tested during the assessment phase before they are approved. If a borrower cannot show they can afford the proposed loan then it won’t be approved. Simple.  So, at the time the loan was funded, the borrowers had a surplus of income.  Stress tests usually include a buffer of 2 – 3% on top of normal repayments. That’s sound lending practice. The cause of mortgage stress is not the mortgage but the change in circumstances AFTER the loan has been provided. People finance new cars, increase credit cards, finance household purchases like TV’s and furniture, change jobs or even lose their job.

Unfortunately as a headline “personal circumstances causes mortgage stress” just won’t cut it with the media.  Besides, it’s far more fashionable to blame someone else than to take responsibility for a change in personal circumstances and deal with it.

Investors will suffer the most– this is designed to scare investors and perhaps placate those that think investors are causing the overvaluing of Australian property. They may be vulnerable only because they have taken a risk to improve their financial position by leveraging their homes.  Investors could suffer from a change in the markets but on the other hand, investors are also wise about their money. They know about budgeting, allocating income and controlling expenses. They have taken responsibility for their future welfare, that’s why they are investors. More than likely they will also have cash buffers or reserves in place to see their portfolios through the rough times. That’s the real advantage of using the services of a Financial Planner.

Increases to interest rates will force people to sell. – This type of comment is typical scare mongering. It’s not an increase in itself that’s the problem but the SIZE of the increase and how many people will be affected by that increase? Let’s be pragmatic about it. If an increase of any size made people realise they couldn’t afford their Mortgage they would sell, voluntarily. Yes, if interest rates increase dramatically SOME people might have to decide to sell. Will EVERYBODY have to sell? Absolutely not. Remember, this type of comment is designed to be inflammatory and cause anxiety amongst Australian home owners. Think it through.

These sorts of increases usually happen gradually. On the rare occasion when it occurred in the past the warning signs appeared very early on. The GFC was a global event that manifested quickly but it was not an internal event for Australia. It occurred elsewhere and we suffered the fallout- just like everywhere else in the world. Incidentally, serious investors learned from the experience and have taken measures to protect themselves by building reserves funds into their portfolios.

Australian property values were not to blame for the GFC but reading some opinions about today’s situation and you could be forgiven for thinking that our house prices are going to be the cause of the next Depression. It isn’t going to happen people! Our house prices will not be the cause of an outside event.

Would we suffer from an outside event like the GFC if it happened again? Yes, of course. But that would be because we are part of a global economy rather than our property being overvalued. As I’ve said in the past, separate logical statements added together do not always make common sense.

House prices will crash 20% – Sounds pretty scary doesn’t it? Think about this though. The value of a house is only important in two circumstances. The first is if you choose to sell while the second is if you are forced to sell. The good news is that most people understand this basic principle so when things are tough, they choose to hang on until it gets better. That’s another point often overlooked. Things always get better!

If you don’t sell and you keep making your regular repayments, there is no problem with houses being devalued by 20% for example.

Way back in the late ’80s when interest rates skyrocketed to 18%, people were struggling, really struggling. But guess what? When the interest rates fell dramatically those same people took advantage of the lower rates to pay off their loans faster by keeping the repayments at the same levels. Why did they do that? Motivation is a powerful thing and when you can see your loan reducing quickly there is more reason to keep going. If you keep that in mind, it’s obvious that not everybody would have to sell if house prices crashed. Some would yes, but undoubtedly the vast majority of people would not.

Sadly, the scare mongering and the outrageous headlines will continue. Hopefully, we’ve given you some comfort with our take on the market. Sometimes you have to look behind the headlines to see the real story.

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