Are We There Yet?

You know how it goes… a short way into a long family road trip and one of the kids, already bored, says “are we there yet?”

Many investors might be thinking the same thing – wondering whether we’ve arrived at the bottom of the decline in real estate prices. The answer is a predictable “No. Not yet.”

The latest house price index data put out by CoreLogic indicated that, for the month of May, though the rate of property price falls slowed in some capitals, a decline was still underway – except in Adelaide where there is a very weak growth pulse.

Delving into the data, the highlights I saw (for the year to the end of May) were:

• Poor Perth – down 1% for the month and down 8.8% for the year, with units performing even worse than houses. This is unusual because, unlike the eastern seaboard, there wasn’t a glut of units built during the last WA housing boom. I wonder whether this means that in a material downturn, when the difference between houses and units contracts, units fall more in percentage value as people prefer to live in a house?
  
  
• Sydney officially sucks – with the annual fall in dwelling values now 10.7%, Sydney is officially the worst performer of any capital city.
  
  
• Melbourne meltdown – not that Melbournians have much to rejoice about. Like their weather, dwelling values are in the freezer – down a sick and sorry 9.9%, an awful outcome that is worse than Perth and Darwin.
  
  
• Hobart Hoopla – long trumpeted as the shining light of the property market, and up 3.4% for the year, Hobart house prices were only slightly up for the month, while unit prices were down an eye-catching 2.7% – the most of any capital city in May. Could this be the start of a Tassie takedown?
  
  
• Adelaide Alive – only Adelaide recorded a growth in dwelling values, up 0.2% for the month, but still only an underwhelming 0.4% for the year to May. Still, up is up.
  
  
• Canberra – good news for houses (up 3.4%), but not units (beware the glut!) down 1.1%.
  
  
• Elsewhere, Brisbane (down 2,3%) failed to live up to hopes and expectations, while Darwin (down 8.6%) remained in the dungeon.

You can check out the results for yourself here:

CoreLogic Hedonic Home Value Index, May 2019 Results

Interpretation

Have you ever driven at 100km per hour for a while, and then had to slow to 60km as you pass through a country town? Doesn’t it feel slow? Yet driving in normal city traffic, 60km an hour seems fine. How can that be? 

Because speed is relative.

Sydney, Melbourne and Hobart were cruising along in a 100km speed zone for quite some time. Now though, they’ve hit a 40km/h construction zone, or even stuck waiting for a government work crew to repair the ‘property road’ so that higher speeds can be reattained (i.e. stimulus packages to get people active again).

In these markets, things feel slow, and they are. And they feel even slower than they otherwise might be because they had been roaring along at such a great pace not that long ago.

Elsewhere, like in Perth and Darwin, declining prices is actually the new normal, and it would be front page news if prices could simply stop going down, let alone actually go up. A great lesson other cities can learn from the cellar-dwellers is how a property price decline feeds into a broader economic malaise, which in turn creates a negative financial feedback loop, putting more downward pressure on real estate values. This could easily happen in Sydney and Melbourne, which is why the government, and the RBA, are now attempting real estate CPR.

Purse Strings for Lending Remain Tight

Conditions are unlikely to turn around quickly.

APRA might have dropped their more stringent serviceability benchmark, and the RBA might have dropped interest rates, but financiers are still stubbornly holding the lending purse strings tightly because they got smashed by the Royal Commission for dodgy lending practices that are not related to either APRA or the RBA.

We’ll Be There When…

Image courtesy of realestate.com.au

So, if we’re not there yet (i.e. the bottom), when will we be there (i.e. prices on the up and up)?

The quickest answer is to sell the family silverware and welcome back the foreign buyers, in droves. That will suck up the stale listings that are gumming up the system, and also get some more action happening on auction day.

I can’t see that happening just yet.   Indeed the Victorian government just made it less appealing for foreigners to purchase, with an increase in stamp duty for offshore buyers.  To me, the more realistic driver of higher prices will be when jobs and wages materially improve, and at the same time, lenders, (er, how do you say this politely…) start looking the other way, or else look less rigorously, at what people can afford to borrow. There’s recent form here because that’s what the Federal government is promoting, isn’t it, by deciding to underwrite the debt of some homebuyers borrowing 95% of their house price? Madness! Sheer madness!

Friends, what we are facing is the “financial hangover we had to have” (thank you, Mr. Keating) from a property party that went on for longer, and harder, than anyone imagined. We’re simply sobering up from a dangerous debt binge (which APRA flagged a while back, but is now somewhat confusingly overlooking).    The idea of tapping another keg of beer and getting drunk again might delay the hangover, but it will just make it all the worse when it eventually does come.

Here’s what I say – don’t see a price decline as a bad thing. See it as the best way to make housing affordable, and, at the same time, as an opportunity for savvy investors who can play a long game.

As sure as I’m bald, we will get there (i.e. with prices rising again) …..  eventually.

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.