Are We Heading For A Property Crash?
We all know the Aussie property prices have been on the up and up across the country lately, but what’s the likelihood it’s all going to end in tears as values plummet?
A ‘price crash’ is definitely economically possible – just look at what happened in the US, UK and many places in Europe between 2007 and 2010. Why should Australia be any different?
We’re not, but we do have a couple of handy factors in our favour, and they include:
- Strong population growth (mainly through immigration);
- Supply constraints (large land releases are seldom);
- Strong incomes (that support big mortgages);
- Credit controls (onerous legislation on debt qualification);
- Limited fresh water (pushing density to urban centres); and
- Tax incentives (propping up house prices);
Of interest, RBA Governor Glenn Stevens recently made this comment about a possible Aussie property bubble:
“You can never be 100 per cent sure. But the price to income ratio has been around four times … for about 10 years, so a very long-running bubble, if it is a bubble. Most do not last that long.“
On the other side, a crash is closer than you think when:
A. When the average person can’t afford the average house; and
B. You read that it can’t happen
On the balance of probabilities, unless there is a large unprecedented economic shock event (e.g. country debt default, war, etc.), a price crash is highly unlikely. So too is a sustained boom in prices.
Instead, expect the middle road: a period of stagnant prices, possibly including times of mild price decline, and punctuated by period of mild price growth.
But one important point I’d definitely make is this… if you currently own one or more under-performing properties at a time when there is low interest rates and solid price growth, how much worse will those properties perform when (not if) the market comes off the boil.
To clarify, an under-performing property is simply one where you could get a better return, quicker, with less risk and lower aggravation.
If I owned such an asset I’d be considering selling it now while the market had a sympathetic ear rather than a critical eye. If you wait until the worm turns then you may not be able to sell the property for the price or within the timeframe you hope for.
Happy days!
– Steve
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Hey Steve nice post :)
I believe both the share market and property will correct it self shortly.
Some ares will remain steady and some will either go up or down.
Selling some any assets know is not a bad idea at all . I think investors you have allot of debt in terms of lvr should be looking at creating a better balance sheet
Thanks for the comment. Interesting today that unemployment has unexpectedly dropped. Will need to look into that some more as that’s generally a very strong indicator of future real estate performance. I think the particularly interesting side data will be which States recorded jobs growth. I heard on the news that Vic recorded same unemployment as last month.
– Steve
Hi Steve,
I have a question, and it relates to this comment from the RBA:-
Glenn Stevens refers to houses having a “price to earnings ratio of four times” for the last 10 years.
Now from what I recall, this ratio of “about 4” is a very long-term number. I recall numbers in the 70’s and even 60’s where this ratio bobbled around FOUR. Maybe up a bit, maybe down a bit.
One question that has me intrigued is this :-
Just what figure is used as “earnings”. We hear about AWOTE, which is “Ordinary Time Earnings” (i.e. it does not include any overtime, whether regular or not). Is THIS the figure the RBA use to determine earnings?
Or are they using some other figure (an average wage with ALL earnings included – overtime, bonuses, etc)? Can you tell me?
If indeed those “earnings” were using the same format to calculate them 50 years ago, that tells me we are not in any kind of “bubble” right now. What say you?
Benny
Hi benny
Yor right the average of 4years wages goes back to the 60/70s the main difference then of course was this was based on one wage earner, useuely 4 times the average male annual income.
As the medium prise of property in Perth is touching 500k you would have to be earning 125k a year.
I don’t know many first home buyers on this sort of income do you?
The RBA governor is using the 4 year rule without stating he means two full time very good wage earners to make the rule of 4 work.
In short this means first home buyers especially will struggle to get on the property ladder, which in due course could adversely effect the whole market.