A ticking time bomb: Is 60 Minutes right to say house prices will fall 40% in the next year?
Friday, September 21, 2018/
Are property prices in Melbourne and Sydney really going to fall by 40%?
Well, if you believe what was said on Channel Nine’s 60 Minutes last weekend we’re really in for trouble.
Here’s how reporter Tom Steinfort opened the segment:
“It’s no secret that Australia is experiencing a downturn in the property market. But for Aussies who own their own home or have a mortgage, there’s worse news. Many believe calling it a downturn is foolishly optimistic — the slump we are in is more like falling off a cliff.
“Real estate and finance experts you’re about to meet predict the value of your house could slide by as much as 40% in the next year. Yes, two-fifths of your home’s worth wiped out in the next 12 months.”
Now that’s scary stuff
It triggered a flurry of emails, Facebook posts and tweets to me — as well as a desperate phone call from my sister who has just purchased a house and was in a panic, fearful that she had made a terrible mistake.
My response to one concerned tweeter was I found it curious how Channel 9 ran two fantasy shows one after the other, pretending they were reality shows: The Block followed by 60 Minutes.
It’s Groundhog Day
Every few months, the media finds someone who’s willing to stick their necks out and offer a property market doomsday scenario, predicting the end of the world for property owners in Australia.
This happens in spite of the fact such predictions have been proven wrong time and time again.
It’s the property version of women’s magazines telling us Jennifer Anniston is pregnant again or Prince Harry and Megan are having a baby. It’s amazing the clickbait they get and how many magazines they sell using the same headlines over and over.
It’s not the first time we’ve had apocalyptic property market predictions in the media, and it won’t be the last.
Earlier this year I interviewed US author Harry Dent. He was on a tour of Australia once again to promote his latest book, predicting a looming global crisis worse than the Global Financial Crisis or even the Great Depression.
In my interview with him, he said: “I think this time your real estate will come back 20, 30, 40, 50%.”
Of course, he was wrong, just like he was when he came to Australia and made similar predictions in 2014, and the time before that. And interestingly the time before that too!
And there have been others that 60 Minutes has given too much airtime to:
- In 2016, they featured previously unknown US “macroeconomic researcher” Johnathan Tepper who predicted Australian property prices would crash by 30% to 50%. But after that dire prediction our largest housing markets — Sydney and Melbourne — actually boomed.
- In 2010, Australian controversial economist Steve Keen told anyone who was prepared to listen that house prices would fall 40% in a year. In fact, based on his concerns, he sold his house in Sydney only to see the market boom and values double. At the time Keen lost a public bet he made with Rory Robertson, a Macquarie Bank analyst, and had to walk 15 km from Parliament House in Canberra to Mount Kosciuszko wearing a t-shirt that read ‘I was hopelessly wrong on house prices — ask me how’.
But is the sky really going to fall this time?
The simple answer is no.
Sure, we’re in the slow down phase of the property cycle, but that’s how property markets work. Booms don’t last forever.
They’re just one stage of the property cycle and eventually lead to the next stage the downturn phase.
But prices are not about to crash, we are experiencing a soft landing.
I’ll explain why in a moment, but first …
It’s worth mentioning two of the commentators featured in the 60 Minutes program publicly defended themselves afterwards saying that significant portions of their arguments had been omitted from the show.
Louis Christopher from SQM Research tweeted the program did not cover his comments about “the safety valves that are still present in the market. For example, strong local economies, strong population growth, banks very unlikely to fail, etc. The program covered my comments on the risks and the overvaluation only …”
Similarly, Martin North of Digital Finance Analytics explained the segment did not discuss his central (most likely) scenario, and only portrayed a scenario that he rated as a 20% chance.
I also spoke with another prominent property commentator who had been interviewed for the program, but his more conservative ideas were not aired. I found this interesting considering the good long-term track record of his forecasts.
Here’s why I think it’s highly unlikely our property market will crash
For a property market to crash (and that’s different to price growth slowing or the normal cyclically correction) you need desperate sellers willing to give away their properties at fire-sale prices and no one willing to buy them.
This means for a collapse of 40% or so, we need one or more of the following things to occur:
- A major depression (not just a recession), but neither the RBA nor any credible economist is suggesting this will occur in Australia;
- Massive unemployment with people not able to keep paying their mortgages — but instead, we’re creating more jobs than ever;
- Exceedingly high-interest rates so that homeowners won’t be able to keep up their mortgage payments — again, this isn’t on the horizon; or
- An excessive oversupply of properties and no one wanting to buy them — but other than in a few spots this is not occurring in Australia.
The positive factors underpinning our property markets include:
- We have a sound economy in a developed nation; and
- Our strong population growth underpins our economy and housing markets.
Interestingly, most of these new Australians want to live in our four big capital cities, and in many cases in many of the same suburbs.
And this won’t change in the near future. Australia has a ‘business plan’ to grow to 40 million residents in the next three decades.
This means we will be adding the equivalent of a city the size of Canberra each year for the next 30 years.
I took over 200 years to reach 25 million people, but now it will take only three decades to reach our 40-million milestone.
We’re creating more jobs than we have in a long time, underpinned by our many new infrastructure projects. The Australian Bureau of Statistics recently noted: “Over the past year, trend employment increased by about 300,000 persons or 2.5%, which was above the average year-on-year growth over the past 20 years (2.0%)”.
And, our banking system is sound, lending standards are tough and mortgage arrears are low.
Yes, some investors took on too much debt and became speculators, taking out interest-only loans with very small deposits, hoping (speculating) that capital growth would occur.
This worked out well for some who bought the right properties, but others who overpaid for off-the-plan apartments or who bought properties in regional or mining towns learnt properties values don’t only go up as today’s hot spot can quickly become tomorrow’s not spot.
But, in general, over the last few years, lending to investors has been more responsible.
Anyone who borrowed in the last few years was ‘stress tested’ — they could only borrow if they would be able to pay rising interest rates and if they paid principal and interest.
- Our household wealth is the highest it ever has been, and most household budgets are in good shape.
- Inflation is contained, interest rates are low and likely to remain so for a while.
- Other than in a few specific markets (such as Brisbane’s high-rise apartments) we do not have an oversupply of property.
But aren’t we drowning in household debt?
If you follow the mainstream media you would think we should be worried about the rising level of Australian household debt.
They keep reminding us household debt in Australia has risen substantially relative to income over the past few decades and is now at a high level relative to other countries.
Then they ask what’s going to happen to all those property investors who took out interest-only loans and may now have to convert to principle and interest?
Sure, all these raise potential vulnerabilities, but a recent speech by Michele Bullock, assistant governor of the RBA , suggested while these issues are worth watching the situation is not as dire as some commentators would have us believe.
In particular, much of Australia’s household debt is in the hands of those who can afford it. Our wealthiest household sector, strong employment prospects and a relatively steady ratio of repayments to income have meant arrears rates on housing loans remain very low.
The facts are, although debt has risen with houses prices, the proportion of household income required to service higher debt has fallen over recent years, despite low incomes growth and low real wages
What is likely to happen to property values this year?
Firstly, it is important to note there is not one property market in Australia, and each state is at its own stage of its own property cycle.
What will happen moving forwards will depend a lot on local factors such as economic growth, jobs growth, consumer confidence and supply and demand.
Overall, the Sydney and Melbourne property markets are likely to fall another 3& to 5% over the next 12 months, but digging into the latest figures from Corelogic, there are some locations where property values are holding up and a number of suburbs where property prices are increasing.
And remember, you are not buying the market.
You’ll be buying an individual property within that market, at a price you couldn’t have purchased the property for a year ago, and one that you’ll be happy you paid today when you look back in five years’ time.
One more thing…
For as long as I’ve been investing in property, and that’s over 40 years now, there have been doomsayers and ‘Chicken Little’s’ warning Australians the sky is falling.
And the media has lapped up their stories.
In the meantime, while smart investors and homebuyers were out buying the right type of property, others who were more cautious were sitting on the sidelines waiting to see how things panned out.
While this may seem safe to them, they are likely to miss out on some great opportunities.
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