What will be the tipping point for a crash in Australian House Property Prices?
Its been described as the world's worst economic downturn since the Great Depression. Unfortunately, somebody forgot to tell that to prospective home buyers in Australia.
For the last few months, auction clearance rates in Melbourne have been around the 80% mark, which is about as high as they have ever been. And prices have risen as much as 6% in the first half of 2009. So much for families under financial pressure.
Why if we are in a recession, do property prices keep rising? There are a number of factors at play. Combine high wages, high employment, low interest rates, first home owner grants, government handouts, market confidence and a lack of supply and you have your answer.
But what if some of those factors were taken out of the equation? You might just have your tipping point for a real price reduction. And that could happen sooner than you think.
I'm not saying that property wont rise before it falls - it has risen, and will probably continue in the short term. But the property market isn't always a one way street. Take property prices in the UK or U.S.A which have come off more than 20% in the last year or so. And they continue to fall.
Lets take these factors one by one, starting with what should remain the same and not have a significant affect on prices:
Wages are unlikely to fall significantly in Australia. We are fortunate that we are one of the higher paid countries in the western world.
Employment is weakening, but not by as much as many had originally predicted. Unemployment is tipped to hit around 7.5% by 2010, which compares to the already 9.5% in the U.S. A drop in employment will have some impact on house prices, but not significantly.
The Rudd Government is working with the banks to protect the unemployed from defaulting. In addition, a house is one of the last things a family will part with, doing everything they can to save it in times of economic hardship. Defaults are up, but we are still only talking about 3000 per year - a drop in the ocean.
Which leads us to supply which is unlikely to change in the short to medium term. Victoria has the strongest population growth in Australia and that is expected to continue. While the government has opened up vast tracts of land for development, much of it will take many years to have a real effect on supply.
They are also encouraging inner urban development but much of this has been reduced by council objections and a drying up of finance for construction. The same situation can be said for other states. So in terms of the economics, less supply and high demand leads to higher prices.
But there are other factors at play, which when combined are likely to be the tipping point for a property price crash in Australia.
Interest rates are at 50 year lows, creating much greater property market buying power. Yes, the Reserve Bank may cut interest rates again, although any further cuts are unlikely to be significant. And there is a good chance that any more rate cuts wont be passed on by the banks. So this is about as good as its going to get.
Which means that the only direction for interest rates to go is up. Given the amount of stimulus dollars pumped into the economy, the inflation genie could soon be visiting Australia again. And you wont get 3 wishes. What you will get is a very nervous and trigger happy RBA.
So while its good that you can borrow more now, that means a bigger debt and higher repayments in the not too distant future. Being able to borrow more doesn't get you a bigger and better property if you are competing with other borrowers in the same situation. It just gets you the same property with a larger debt.
A rise in interest rates should have two affects. Firstly, it will restrict the buying power in the market, leading to an almost automatic weakening in prices. Secondly, interest rate rises will lead to greater financial pressure on those who have borrowed beyond their means. And there could be a significant amount of them, encouraged by the low rates and first home owner grants, not to mention 100% finance. That will lead to higher defaults and greater supply.
Government Stimulus payments to families and individuals have finished. The Rudd Government wont be splashing the economy with more handouts, preferring instead to rely on infrastructure spending. While that will help to protect jobs, it wont put any more money in the consumer's pockets.
The First Home Buyer Grant Boost is coming to an end. The grant was boosted to encourage greater investment in the housing market which has led to more construction. But it is a false economy. When you are competing with other purchasers who come ready with the same grant from the government, all you do is force up the price. The best example of this is in the new housing construction sector.
Market confidence will be the final and perhaps most significant tipping point. It is said that much of the problem for the global financial meltdown is a crisis in confidence. That same crisis could yet hit our own property market.
Investors are still buying into property, expecting prices to rise even more. It is basically just speculation - it doesn't lead to any genuine economic benefit. The same thing happened in America, which is one of the main reasons the world is in such dire economic straits. Property just cant keep rising at such a level - it is unrealistic and unsustainable.
The first sign of market weakness will remove many investors from the equation. That leads to less demand which in turn leads to lower prices. In addition, those who were eager to buy a property to live in, may be more inclined to wait on the sidelines.
In saying that, a lack of confidence in the property market wont just happen. It will require higher interest rates, a drop in new home purchases, a threat of higher unemployment and extensive negative media reporting. All of those things are likely to occur.
Economic forecaster BIS Shrapnell recently announced that property prices in Australia were set to rise by as much as 20% in the next couple of years. Given some of the previous predictions by BIS, i'd have to say that it is cause for concern. There is one thing you should remember - never back a forecaster - they are almost always wrong.
I could also be wrong on my own predictions. But prices of property cant just keep rising - there is always a tipping point. While we in Australia may have weathered the storm of the global downturn, you cant beat the economics. If you have any doubt, ask some of the Americans who have seen the value of their home come off by 80% or more.
About Just Grumpy
4 comments
I agree totally with your prediction. I also find it heartening you mention there are people who actually buy properties TO LIVE IN. This is getting to the root cause of the unaffordability issue. If speculators and "investors" stayed out of the housing market, you and I might actually be able to afford a roof over our heads.
because its so hard to predict a tipping point, here is a very good video about housing for the home buyers thinking of getting into the market. 9 out of ten people want u to buy to prop up there investment positive media spin for peole who rely on poor newcomers to the property market to keep there investment solid. they say ur losing out if u dont buy in true! but if the poor suckers in a hole did not buy in then they really save maybe 200,000. think about the people who could not get into the USA market when it was at peaked now they are laughing.
my point is if people stoped buying they would accually save more buy paying less , see this video. http://www.youtube.com/watch?v=11sG3zgE9Hk&feature=related
The reality is anyone who hasnt brought a house right now will be renting for life. Median house price in Melbourne was reported today at $580,000, nearly 11 times the average wage. You could be a dribbling moron and still comprehend that this has the potential to crash and burn US style if one or two leveraging factors change e.g. Immigration, global growth and demand falling or scaling off. Until then it will be causing the great unseen low income poverty and the social unrest that comes with it
Group Hypnotherapy, my neighbour made money so let me do so. All that is required is 5% deposit. The property will triple in no time, what an easy way to make money, all based on immigration of 1000 of people who cant even afford to get a decent job ??
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