5 Factors That Can Lead to a Market Crash
Date: 13/04/2017
The RBA is concerned that property investors are taking on too much risk. In this brief video from an exclusive, invitation-only Property Apprenticeship webinar, Steve McKnight shares five economic shifts that could cause home prices to fall dramatically.
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We have talked about over price, affordability and crash for years, but the market continue goes up. As long as the hot money from China continue flows to Australia and the world, the property market will never crash. Rich chinese people have enough money to buy the whole world. Because no one can understand how much money the chinese people have and what they will do.
Thanks for your comment David.
Can we agree that ‘rich Chinese people’ is a generalisation and reword it to just ‘foreign purchasers’? I say this because the link below confirms that two countries that have the largest investment in Australian ‘stock’ are the US and UK (source: http://dfat.gov.au/trade/topics/investment/Pages/which-countries-invest-in-australia.aspx).
Now, the question to ask is “Why would a foreign investor want to purchase Australian residential property?”
There may be personal reasons, such as a place to house family members, or it may be seen as an attractive investment. But with yields at 3% or less, why is it attractive? Well, it could be pure speculation on price growth, but another possibility is that it is being used as a capital preservation vehicle. That is, if you want to get your money out of the country for fear the government will take some or all of it, then purchasing Australian real estate and accepting even a 0%, or negative slightly return, is better than the risk of losing 25%, 50% or 100% because the government says so.
So, while there is a flight of capital to a safe haven like Australia, and while interest rates are low, then there is fuel to lift prices of those assets deemed safe. Just remember that what goes up will usually, sooner or later, come down. Thinking that there are new rules that supersede generational price cycles is exactly the mania that causes booms and busts.
Tulips anyone…?
– Steve
Would be great to hear what to do and where to buy not always concentrating on what could go wrong. A balance would be good, for me anyway
Hi Fiona,
Thanks for leaving a comment.
I recommend you look through the articles here at PropertyInvesting.com as there are lots of great tips for what to do to improve your investing. Also, Jason Staggers does a free monthly webinar series that I highly recommend joining (live only – no recordings, unfortunately).
Also, if you have a specific question you can post it on the forums and there are many fellow members ready and willing to help.
Best regards,
– Steve McKnight
I agree!
It seems contradictory.
In the one hand the commentator is saying – and I quote – “Thinking that there are new rules that supersede generational price cycles is exactly the mania that causes booms and busts”, so, if there are NOT new Rules, (due to foreign investment, the threat of world war, whatever), then, logically the old 10 years cycle will kick in, in 2018, prices will drop (on past experience 5-20% (perhaps more for commercial property), for a year, then stabilise with NO growth, then take off again.
Again, historically, after the inevitable “correction/slump/crash/bust” (call it whatever you like), when growth kicks back in, it starts at 3% p.a. and rises at about an extra 2% per year thereafter (i.e. 5%, then 7%, then 9%, up to an unsustainable 20%+ growth in a single year – on the traditional model it should be 2027), and then it goes pear shaped again for a year or two.
BUT!!! Happy Days – the Growth over 8 years ALWAYS exceeds the price drops and/or stagnation of the 1-2 years, so just have balls, and HOLD.
Supply and demand, fuelled by natural population growth and immigration (and if you think Australia is just about “immigrated out” for numbers, look around the rest of the world), will ALWAYS look after a WELL CHOSEN investment on a long term hold.
If all of this were not true, we would still have circa 1900 Prices!
Paul Garson
Stonnington Conveyancing
Melbourne Buyers Advocates
Hi Paul,
Thanks for adding to the discussion.
I agree that *if* you can hold through a downturn, then history reveals that property prices inflate over the long term. The problem (or risk) is that owners may not be able hold during periods of high unemployment, high interest rates, etc. and thus become motivated sellers in a soft market (i.e. more sellers than buyers).
Let’s take Ft Myers in the US for example (where I am at the moment). In 2005 duplexes ( 2 x 2 Bed 1 Ba) in the Pine Manor community were selling for around $120k, perhaps a little more. When I came over in 2009 I was buying them for $15k – $30k (the cheaper ones required $10k to $20k rehabs). Those properties today are selling for $100k, or a little more.
So, you are right, if you bought in 2005 (previous market peak) and held for 12 years (not 1-2 years as you indicated, but this is one regional market in the whole of the US, and certainly not capital city in AUS) you would have preserved your capital, but you would have had management, ownership, usage, financial and accounting costs to fund. If the property was positive cash flow then great… if not then you would need to find the money to fund the shortfall from other sources (e.g. salary, asset sales, etc).
12 years with no (net) generic growth is a long time between drinks.
Unfortunately though, the reason why prices fell from $120k to $20k was because there were so many highly motivated sellers; nearly every investor who had finance. There were not many buyers in the downturn because banks were not lending, so it had to be an all-cash purchase. Given most investors were licking their wounds after selling, few were buying.
What do we take away from this discussion… those who are heavily leveraged in good times get to party on. Those who are leveraged in bad times risk drowning in their debt. Let’s hope the good times roll on… The purpose of the video was to alert or educate those interested in keeping an eye out for warning signs that market conditions are deteriorating .
All the best,
– Steve
Great info, thanks Steve!