2021 was a year like no other - prices boomed creating new records and as the value of Australia’s housing market skyrocketed, the collective wealth of homeowners jumped by over $2trillion despite the pandemic.
And sure, it’s clear that we've moved into the next phase of the property cycle - the adjustment phase - and won’t see the same level of overall price growth in 2022.
In fact the value of some properties will fall and certain sectors of the housing market will suffer, while other submarkets in certain States will do well.
Sure interest rates are going to keep rising for some time yet and this will cause hardship for some homeowners and property investors.
But a housing market crash? I don’t think so.
You see… Interest rates are only one of the many factors that affect home prices.
For a property market to "crash" there must be forced sellers and nobody on the other side of the transaction to purchase their properties meaning they have to give away their properties at very significant discounts.
Remember home sellers are also homebuyers – they have to leave somewhere and the only reason that would be forced to sell and give up their home would be if they were not able to keep up their mortgage payments.
This happens when:
1) unemployed levels are high - today anybody who wants a job can get a job
2)mortgage costs (interest rates) zoom up - despite rising interest rates, I only like you to get to where they were a couple of years ago before the pandemic borrowers could cope then.
“Property prices will fall 30%”
That was a recent headline in the Australian financial review by a respected columnist, and here he was not talking about a specific segment of the market, but about "the Australian property market."
Fact is.... a fall of this magnitude has never happened before.
Not during a recession of the 1990s, during the global financial crisis, not during the period of credit for use in 2017- 18.
And considering the current state of the economy, our financial health and property markets there's no credible reason to suggest a fall of this magnitude should happen now.
So here are 10 reasons why I can't see a property market crash.
1. The average Australian is wealthier than ever
CBA economists estimate that during lockdowns households have socked away some $230 billion in excess savings, leading to a massive war chest of cash and deposits.
Not only does the average Australian have significant savings, surging property prices means many homeowners have 30% more equity in their homes than they had 2 years ago.
Combine these 2 things with a strongly performing superannuation and shares portfolio (sure share prices have slumped a little lately) and the average Australian is now wealthier than ever.
At the same time, Australia’s total residential property market is worth close to $10 billion, but with only $2 billion worth of loans owing against all residential real estate.
So even if some homeowners do begin to struggle to make mortgage repayments or even default, the risk for Australia’s entire residential property market is still very low.
And we know from the recent Covid experience that the banks don't want to take over your home in mortgage holders default.
They will do whatever they can to help, including extending mortgage terms or giving mortgage repayment holidays.
2. No sign of mortgage stress for the majority of borrowers
There has been a lot of talk about the risk of mortgage stress, but there is little evidence of this.
There are very few loan defaults.
Banks Non Performing Assets DomesticSure some first home owners have overextended themselves and some investors have borrowed too much on the wrong properties but, in general, the percentage of borrowers in "real trouble" is low.
In reality, half of all homeowners have no mortgage at all.
And those who do have a mortgage are well ahead in their mortgage repayments - it is estimated that a total of $1.37 billion is sitting in offset or redraw accounts
3. Interest rates are still low
Lower mortgage rates have been a significant driver of the property increase in prices seen over the past couple of years.
And sure Reserve Bank (RBA) governor, Philip Lowe, has warned Aussies that more interest rate hikes are on the way, pledging not to repeat the costly mistakes of the 1970s stagflationary period, and to “do what is necessary” to squash inflation before it becomes entrenched in the national psyche.
The RBA is expected to lift rates by a further 0.5% or even 0.75% when the board next meets on July 5, after delivering back-to-back rate hikes in May and June which took the key policy rate from a record low 0.1 per cent to 0.85 per cent.
Lowe said inflationary pressures - ie the rising cost of living - were growing at a much faster pace than expected and the board had to act.
“High inflation damages the economy, reduces the purchasing power of people's incomes and devalues people's savings.
“It is also regressive, hurting most those who are least well equipped to protect themselves.
“So, it is important that we chart our way back to an inflation rate in the 2-3 per cent target range.
We do not need to, nor can we, get there immediately.”.
But if you think about it, even when rates do rise to "neutral" (no stimulatory) levels it will only bring them back to where they were 3 years ago, and there was minimal mortgage stress then.
4. Banks are conservative with stress testing loans
When you borrow money, the bank or lender has a responsibility to ensure you have the financial capacity to service the mortgage repayments now and in the future.
Each bank and lender has its own stress test assessment based on the bank’s own appetite for risk, which is why your borrowing capacity can vary significantly from one lender to another.
On top of the assessment rate, the bank will also apply certain other factors and will load your existing (other) loans by a buffer, they account for all your incomes including wages and rental income(s), and they also include the limits on all of your credit cards.
The lender will also account for the number of financial dependants you have in your household, and apply a cost of living, which is the living amount used by the bank and may or may not be the same as what you and your household actually spend.
And if you’ve tried to borrow the money you’d know that the banks are incredibly conservative with stress testing loan applications.
That means that most mortgage owners who borrowed over the last couple of years will be able to handle the interest-rate increase of 2.5 or even 3%, and those who borrowed prior to these stricter requirements would have considerable equity in their properties.
5. Rising interest rates didn’t make the market fall in the past
The thing is… this isn’t the first time we’re experiencing a period of rising interest rates.
Rates have risen before and it didn’t make the property market crash then, so why would it now?
Interest rates rose strongly for a 6-year period from 2004 to 2008 and then again from 2010 to 11 after the Global Financial Crisis.
In most of those years that interest rates rose, property values also increased.
Economist Stephen Koukoulos wrote an insightful piece in Yahoo Finance explaining it's actually quite rare for rate-hiking cycles to coincide with falling house prices.
He explained that not counting the current interest rate cycle, there have been four instances in the past 30 years where the RBA has implemented an interest-rate-hiking cycle:
August 1994 to December 1994 - Cash rate up 275 basis points.
November 1999 to August 2000 - Cash rate up 250 basis points.
May 2002 to March 2008 - Cash rate up 300 basis points.
October 2009 to November 2010 - Cash rate up 175 basis points.
In each one of these four cycles, house prices were flat or higher - both one and two years after the first rate hike.
Five years after the first rate hike in each cycle, house prices were on average around 40 per cent higher.
Looking at house prices five years after the last hike in the cycle, they were always higher, with the average gain around 30 per cent.
It is also noteworthy that house prices recovered after the flat patch in the wake of the 2009-2010 cycle, to be 26.1 per cent higher five years after the last hike in that cycle.
May be an image of text that says "Rate hiking cycle House price change* House price change House price change* 1 year after last hike 2 years after last hike 5 years after last hike Oct 2009 Nov 2010 -4.1% -1.2% 26.1% f May 2002 Mar 2008 -4.6% 12.7% 13.5% Nov 1999 Aug 2000 14.0% 33.7% 64.3% Aug 1994 Dec 1994 0.3% 2.0% 26.0% Per cent change from time of first interest rate hike of the cycle. Using quarterly ABS data, slicing the new series to the old methodology at the September quarter, 2003"
You see… how a particular property performs depends on a combination of factors - of which interest rates are just one.
Sure, many first home buyers have extended themselves and they will be the most vulnerable, but they’d rather eat Maggi Noodles and sell the entire contents of their property than sell up their homes.
6. Dire supply shortage ahead
According to the latest National Housing and Finance Investment Corporation (NHFIC) state of the nation report, Australia could be in for a dire dwelling shortage ahead.
Data shows that while the housing supply may appear healthy in the short term, there is in fact a major supply crunch on the horizon.
This is particularly the case as net overseas migration recovers thanks to a newly opened border, the demand for new households will outstrip supply.
And such a supply shortage will act to put a floor under house price falls and only lead to increased prices going forward, with no property crash in sight.
7. Overseas migration is going to pick up
On the 21st of February 2022, the Australian Government opened Australia’s borders and welcomed double-vaccinated tourists and visa holders from around the world.
Eligible visa holders can come to Australia without a travel exemption or quarantining, and concessions are being granted to skilled visa holders in order to incentivise them to stay in the country for longer.
The latest overseas arrival data from the ABS shows total arrivals to Australia is starting to rise sharply as international students, permanent residents, and Australian citizens are welcomed back.
And those migration numbers are only expected to continue climbing.
As a result, we’re already seeing a pickup in demand in the rental market, once-abandoned central-city properties, and also the unit market.
8. ‘Experts’ routinely get it wrong
It’s worth remembering that the same “experts” who are currently predicting that property markets will crash in 2023 are the same ones who have made multiple incorrect “Doomsday” predictions over the last couple of years.
Remember the Debt Bomb?
House and time bomb
It didn’t explode.
Remember the fiscal cliff we were supposed to fall off?
That didn’t happen.
Unfortunately, these commentators have a track record of getting their property market predictions wrong, underestimating the strength and resilience of our housing markets.
9. Australia’s economy is strong
Economic activity in Australia contracted sharply in late 2021 due to the lockdowns associated with outbreaks of Covid-19’s Delta variant.
This setback delayed but not derailed the economic recovery that was underway in the first half of the year.
In fact, part of the reason we are experiencing inflation, and therefore rising interest rates, is because you're economy is performing particularly well, and even though it will slow down over the next year, it will be supported by exports of fuel and food that will make a significant downturn unlikely.
As a country Australia’s income will improve thanks to renewed tourist spending and also the Ukraine conflict.
That’s because the Ukraine conflict, thanks to the disruption and threats to the supply of energy, industrial and agricultural commodities, and increased demand for metal-intensive defence goods, is providing a further boost to commodity prices.
This is particularly good news for commodity producers like Australia and further evidence of a strongly performing economy.
10. Australia is on the verge of a rental crisis
While the pace of house price growth has been slowing, rental growth has strengthened with vacancy rates around the country at the lowest they’ve been for a long, long time.
In fact, the nation is facing a chronic shortage of homes available for rent.
Similarly, a shortage of rental apartments is also developing, and will only get worse over the coming year.
Opening the international borders also has put additional strain on an already tight rental market.
An influx of migrants will likely affect Sydney and Melbourne in particular as these are the most popular tourist destinations.
Domain’s data shows that the national vacancy rate continued its downward trend, now at 1.1%, which is the lowest seen since Domain records began in 2017.
But these new figures are evidence yet again that we’re unlikely to see the property market crash.
While rental demand is surging and supply remains scarce, prices will only continue rising further, bringing more investors back into the market.
The bottom line.
So there’s really no need to lose sleep or worry about the value of your home or investment property in the long term.
And if you're not selling for refinancing in the short-term doesn't really matter if the value of your property drops 5% or so, does it?
Especially if it is appreciated 25 to 30% over the last couple of years.
Don’t get me wrong… I’m not suggesting the value of properties always goes up – far from it.
We're in the correction phase of the property cycle at present and there is no property crash in sight.
Whether it's property, shares, or bitcoins — booms just don't last forever, and neither do downturns.
So, think long-term and don’t seek quick wins.
And don’t listen to all those negative messages in the media.
It really doesn’t matter what the markets do in the short-term as long as you have sufficient financial buffers to ride out the storm.
And don't let emotions drive your investment decisions, because it’s likely it will take a while for inflation to come under control and then the Reserve Bank will again start lowering interest rate because they always seem to overshoot the mark.
Are you wondering how you should invest in this interesting phase of the property cycle?
Make the right decision for you and your future.
Contact us today to speak to a professional.
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