A ticking time bomb: Is 60 Minutes right to say house prices will fall 40% in the next year?

house prices real estate

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 DentHe 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:

  1. We have a sound economy in a developed nation; and
  2. 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.

Why?

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.

  1. Our household wealth is the highest it ever has been, and most household budgets are in good shape.
  2. Inflation is contained, interest rates are low and likely to remain so for a while.
  3. 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.

NOW READ: “Should I buy now or wait?”: A property Q&A for first-home buyers and investors

NOW READ: That was no property boom, these were property booms

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Tim
Tim
2 years ago

How about you put some skin in the game Michael? If you’re so confident do a “Steve Keen” – if housing drops by 40% in the next 5 years how about you walk up Kosciuszko? Or are you too comfortable in your office?

Michael M. Yardney
Michael M. Yardney
2 years ago
Reply to  Tim

Tim – I’m happy to do that – And I do have skin in the game – I’m currently getting ready for my next property purchase. I’ve always eaten my own cooking otherwise I wouldn’t be authentic would I?

DatPimp
DatPimp
2 years ago

Talk about denial! No mention of the gridlock the economy is in 10yrs after the gfc. No mention of the highest personal debt in the world (12x income). No mention that downturns begin when credit shrinks(talk to any real estate agent and they will tell you how many sales have fallen through due to credit being refused). No mention that our interest rates are being determined by the cost of wholesale funding coming from overseas economies recovering from the gfc. No mention of 27yrs without a recession that typically hits once a decade (a little overdue wouldn’t you say?) No mention of international agencies stating house prices in our cities are overvalued 40%+ compared to income. I challenge you to watch a program reviewing the postions of nations like the U.S, Ireland, Iceland prior to the gfc, and ALL without exception could be used verbatim to describe our current financial state. One million dollars for homes in suburbs where household incomes are well below 100k? Cost of living increasing significantly on top of flat wage growth. We are in uncharted territory. Interest rates must rise for the well being of the Australian dollar, yet it can’t because of the negative impact it will have on those huge mortgages and the banks that hold them. If rates go down it will only encourage more debt and increase the bubble.
If our economy is fine a government guarantee on bank deposits isn’t needed. Why then doesn’t the government withdraw the guarantee seeing we are 10yrs removed from the crisis? We know why…there would be a run on the banks and with the ridiculously low capital our institutions hold, there would be collapse. The truth is all is not well. Corporate and individual greed has run it’s course and we are now left standing in the middle of a minefield with the world as our audience!

Troy
Troy
2 years ago
Reply to  DatPimp

Very well said!

E
E
2 years ago

That 60 minutes show might have been sensationalist and 40% price plunge in 12 months is a bit of a far call, but soft landing? No. Wish. Hope even. But no. My guess is we will see 30%+ overall in the 2 main capital cities in about 18 months, pockets can be over 50%, others less than 20% but if the mining bust in moderately large regional cities like Mackay, Townsville or Darwin is any indication (it is) Sydney and Melbourne will still have a rather nasty hangover very soon. Michael, I believe you see a different scenario based on the data you have at hand, and you base your soft landing prediction as part of a normal property cycle on 2 main drivers, strong population growth, and even stronger economy with rampant job creation. However, I believe that exactly these 2 factors will lead to a collapse in Sydney and Melbourne, maybe not in 12 months, but a collapse nonetheless.

No doubt you, as many other economists take foreigners flooding into Australia as a constant and unchanged fact in your analysis, after all the ABS has just released the fresh population stats showing that population growth in our 2 biggest cities still runs rampant, and extreme amounts of new temporary and permanent residents are pouring in, keeping this merry go round churning forever and ever. The tiny flaw with this, is that ABS data shows stats until March 2018 only, and population dynamics that happened after that date are not yet incorporated. The uncomfortable truth is that the elected powers that be have decided to take it upon themselves to ease congestion in Sydney and Melbourne, and clear out of those “unwanted” foreigners so we, the long suffering citizens can comfortably sit on the trains instead of being cramped like herrings in a box. The immigration department has introduced rather significant changes in March and July into the eligibility for temporary work, and ultimately permanent settlement visas making it almost impossible for those 6-7 odd hundred thousand of temporary visa holders currently in Australia to remain here permanently. No matter what the powers that be chooses to believe, the vast majority of these people has only one goal in mind, permanent residency, and now that dangling golden carrot has been removed, so was the only incentive to come to Australia, and stay if already here. Particularly in Sydney and Melbourne, as these 2 cities have been singled out as problem zones, somewhat rightly as they indeed are the primary destinations of new arrivals. So now, those powers that be are jumping for joy that the engineered decline will take the pressure off from the 2 main cities, and now everything will be shiny and happy again.

The only problem is that those aforementioned “powers-that-be” knows as much about economics as a cow about rocket science, and failed to contemplate what an exodus of temporary visa holders would mean to the economy, particularly the property market of these 2 cities. The projected departure resulting from those visa rule changes could reach tens of thousands, maybe even a 6 figure number in the next 1-2 years from just Sydney and Melbourne with no replacement arriving, which could have a devastating effect. You base your projections of an average of 1.5-2% population growth across Sydney and Melbourne right? This is the figure we have for so long, we have even forgotten that Howard cheered 15 years ago that more and more people want to come here and become Australian. Well, you might want to update your analysis and use at least 0.5% yearly population decline instead of a 1.5% growth, even if I believe its quite conservative, but make it only half a percent just for arguments sake.

On the other matter, strong economy in Syd and Mel, yes, today. Tomorrow? Not so sure. Why? The job bonanza is mostly running on building investment ramped up to a frenzy lately as all developers fast track their projects to get to settlement as long as they can. Used to joke with hubby that those tradies have the best jobs in the world as when driving by a a large building site, we always saw only a few workers milling around halfheartedly. Nowadays we sometimes stop at the kerb on Canterbury road or Gardeners road and watch in wonder that those projects come up like in those fast time laps movies, and a swarm of people are running around in each and every building site. At least we know where that increased job creation is going to. Busy bees indeed, never knew they can put up a high rise in 6 months, but fear is a strong motivation I guess. That raises the question, will they actually start new projects now, that banks don’t lend, investors are hesitant in a declining market with 3% net rental yields at best, (at least in Sydney) and when that temporary visa holder exodus becomes more evident and vacancy rates skyrocket, those developers can kiss the investors goodbye and there are only so much first home buyers for the tsunami of apartments already coming in. And if they don’t start new projects, where will all those building workers, architects, engineers, and lollipop people get their weekly 2-4K net salaries to pay the humongous mortgages for the fancy family home, even fancier cars, etc they have signed loan contracts on? How much can the building industry fall if there will be no economic case for new house and unit building for the excess stock still sitting vacant? And what exactly could be the unemployment rate coming off that decline, given that the employment share of the building and related industries in Sydney and Melbourne are all time high? Falling off a cliff? Well, ask anyone in Gladstone what does it look like when the music stops and workers leave for greener pastures. Just like the mining boom ran on mining investments, and when that were no longer financially viable and the mines have started to wind back development and lay off staff, the local property prices plunged to unseen depths on that fallout.

You have mentioned that for property prices to almost halve one or more of the 4 crisis scenarios has to occur. Well, massive oversupply is reasonably expected, not by overbuilding, but for population decline, just like it was in the mining exposed areas some 6-7 years ago. Unemployment spike is also quite likely fairly soon, just as the current projects are completed, as there’s no real economic case to start new ones. If this does not lead to a depression, or at least a nasty recession than nothing, and we no longer have bulging government coffers to just throw around helicopter money to keep the wheels turning, and to rub salt to the would, interest rates WILL rise, they MUST rise, as banks are not operating in an isolated environment in Australia, and if USA rates go up, our RMBS yields will become less attractive, so rates here must rise to keep liquidity of lending money. That makes 4 out 4.

Nevertheless, these conditions are almost exclusive to Sydney and Melbourne, other capital cities and regional areas are more shielded as no such an extreme house price/income disparity exists, and their economy is far less reliant on building, and the constant influx and presence of temporary/permanent migrants. I’m watching very closely how things unfold as if Sydney and Melbourne indeed collapses to half of their peak price this time next year, then the consequent depression could swallow the whole Australian economy. Not the most likely scenario, but not a negligible probability either. I too have skin in this game and I’m contemplating every day whether to liquidate my whole property portfolio, but as none of it is located in Sydney or Melbourne, and I always avoided interest only loans, I personally have a bit of room to move, a luxury not many investors can enjoy. I also understand that creating panic on whipped up info does no good to anyone, but there’s a difference between crying wolf for ulterior motives, and giving fair warning to those who are in the mistaken belief that all is still merry dance under the moonlight. The fact is that an economic storm is coming, and denying it, especially by those with decision making power up-top only deprive us the chance to shield ourselves from the fall. Just ask Alan Greenspan if he would have made different fiscal decisions if he bothered to at least listen to what the so called “doomsayers” had to say over ten years ago. As for your sister, if she bought a house anywhere but Sydney or Melbourne, she’ll be fine, but if not, well, there’s always trust in prayer…

Emma
Emma
2 years ago
Reply to  E

Wow extremely well said! You should have written the article as you’re right on the money! 😉

AABBs
AABBs
2 years ago

Sound like a realestate agent. Someone who’s job depends on selling property

Michael M. Yardney
Michael M. Yardney
2 years ago
Reply to  AABBs

Sorry – you’re wrong. I don’t sell property.
But I do have a vested interest I must declare…I do own a very significant investment property portfolio that I have built up over the last 40 years, through all the ups and downs. This gives me a level of perspective that many other commentators don’t share

Franck Louis
Franck Louis
2 years ago

When you own a lot of property its easy to want to keep your head in the sand. You need to wake up to reality at some point and realise that Australian property prices have gone way beyond all fundamentals, as painful as the implications to your portfolio may be.

BTS
BTS
2 years ago

Major basis for these blokes in their “no housing implosion” theory is Population growth. Population growth = higher labour supply = no upward movement of wages = no support for crazy multiples underlying current residential acquisitions. The only thing that made Syd/Melb property go silly was rampant fraud in loan applications AND that loans where almost free to get. back then you could get your mate from the pub to knock up a few payslips and be in the game. Banks would hand out money to dudes whose mine site was about to shut down.

Overall, there are far more downward pressures than upward pressures. Property should probably go sidewards overall for a whole generation (or until yields return to normal human levels), but not crash.

Juris
Juris
2 years ago

Say what you want about Donald Trump but look how good the American economy is doing, the current prime minster should learn from this guy.

Frank
Frank
2 years ago

I think Parliament House is a bit further than 15km to Mount Kosciuszko

Franck Louis
Franck Louis
2 years ago

Yes the sky really is going to fall this time, you better believe it. The 60 minutes report was not a fantasy show!
However it is safe to say that all recent Australian property buyers are in a fantasy bubble if they really believe prices can keep going up indefinitely.