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Are Property Prices about to Crash by 50%?
Woah – deja vu!
Every 12 months or so, the media spotlight picks up on a property market doomsayer predicting the end of the world for property investors in Australia, in spite of the fact that these predictions have been proven wrong time and time again…
Most recently it’s US author Harry Dent, on a tour of Australia to promote his latest book that predicts a coming global crisis worse than the GFC or even the Great Depression. Mr Dent was quoted in the media last month with his prediction for Australian real estate:
“Your problem is you’ve got the second highest real estate costs compared to income in the world… I think this time your real estate will come back 20, 30, 40, 50 per cent.“
Sounds scary! But it’s not the first time we’ve had this kind of apocalyptic prediction (and it won’t be the last)…
Back in February 2016 it was a 60 Minutes article in which US author and ‘macroeconomic researcher’ Jonathan Tepper predicted that Australian property prices would crash by 30% to 50%.
(Since then our largest property markets – Sydney and Melbourne – have boomed!)
In 2014 and 2015, Harry Dent was again on the scene forecasting housing prices to fall in Australia by at least 27%.
(Instead, according to REIA statistics, Sydney’s median house price has risen by around 40% since 2014, Melbourne’s has risen by around 26%, and Australia’s overall median house price has risen by around 22% over the same period!)
And back in 2010 it was Australian economist Steve Keen who lost a bet with Macquarie Bank analyst Rory Robertson that house prices would fall 40% in a year (and had to walk from the steps of parliament to Mount Kosciuszko wearing a t-shirt that read “I was hopelessly wrong on house prices – ask me how”).
There’s no doubt that fear sells, and a cynic might observe that these predictions seem to coincide with book promotions and seminar tours.
However, it’s unfortunate to see that many investors buy into this fear-mongering and make emotional, sometimes panicked decisions about their property portfolio as a result.
Sophisticated property investors keep their emotions in check, and invest not on extreme ‘Chicken Little’ predictions about the sky falling, but on an informed opinion about what is MOST LIKELY to occur in the market.
While no-one can predict the future with absolute certainty (and if you encounter someone who thinks they can, then my advice is to run away very quickly), here’s some of the reasoning behind why we think it’s highly UNLIKELY that the property market will crash.
Much of this I’ve covered before in other newsletters, but it bears repeating as an antidote to fear-mongering, ignorance and sensationalism:
5 reasons why a property market crash is extremely unlikely…
REASON #1: “Affordability”
Some so-called ‘experts’ (again usually from the US) keep telling us that housing in Australia had become so unaffordable that a property market crash is inevitable.
The problems with the affordability argument are many, but in particular they place reliance on an increase in a single measure of affordability, being the ratio of average incomes to median house prices in major cities.
This single measure ignores the facts that interest rates today are less than half what they were 25 years ago, and that most home buyers these days are dual-income households.
Furthermore, inner-city median prices are hardly representative of the true range of property prices to be found across suburbs and regions. For instance, while the Melbourne median house price is currently over $800K according to the REIA, localised median house prices across Melbourne’s suburbs span anywhere from a much more affordable $350K, right up to over $4M!
Market commentators frequently confuse housing “affordability” with the ability to afford a house in the most desirable and sought-after locations around a capital city. They’re not the same thing!
Just because someone can’t afford to buy a house in the suburb where they’d really prefer to live, doesn’t mean that housing in general is “unaffordable”. If you want a cheaper house, then be prepared to compromise about where you want to live, and expect to commute if you work in the city! Don’t expect the forces of supply and demand in the most tightly held areas to bow to your personal desires.
Measuring affordability is actually a very complicated subject, and I’m wary of over-simplifying. But it’s a fact that wages have generally increased over the past five years (albeit they’re rising at a slower rate presently), interest rates remain at historical lows, and rates are unlikely to trend upwards quickly.
The cost of borrowing is low, and there’s a strong argument that property prices in general are currently around where they ought to be based on the combination of historical wage growth, low interest rates, and the prevalence of dual income families when it comes to property ownership.
REASON #2: Employment
Before seeing mass foreclosures and people flooding the market attempting to offload heavily discounted properties, we’d need to see a significant jump in unemployment.
As long as people have jobs, they are more likely, rather than less likely to hang on to their house.
The most recent unemployment trend statistics published by the ABS sit at around 5.5 percent. This is quite low by historical standards, and far cry from countries like the US and parts of Europe that witnessed property market crashes off the back of unemployment levels in excess of 10 percent.
While some sectors of the Australian economy (particularly the resources and retail sectors) are undoubtedly doing it tougher than others, the number of people in jobs and the proportion of the population in work have both been trending upwards.
In fact, the Australian Bureau of Statistics noted last month that “Over the past year, trend employment increased by 394,900 persons (3.3%), which is above the average annual growth rate over the past 20 years of 1.9%.”
Something very dramatic and unforeseen would have to happen for unemployment to soar to the kind of level that would trigger a property market crash.
REASON #3: Robust Lending Standards
Australian banks weathered the GFC extremely well, and continue to be regarded as some of the most robust and stable financial institutions in the world.
Australia implemented strict responsible lending regulations following the GFC, and our finance environment is a far cry from the lax and irresponsible pre-GFC lending practices of the US that led to the collapse of property values in many parts of that country ten years ago.
Furthermore, as any active investor would know, lending standards have become even tighter in the last couple of years, with higher servicing tests and greater scrutiny of borrower’s existing financial commitments and living expenses.
It’s worth noting that recent estimates by CoreLogic RP Data put the value of the Australian housing market at around $7.5 trillion – with the value of mortgages only around a quarter of that at a ‘mere’ $1.71 trillion. It can be argued therefore that Australian households are not highly leveraged as a whole.
REASON #4: Natural Resistance
What tends to happen when the property market softens is that, unless they really need to sell, vendors who are unable to get the price they want for their property eventually just take their property off the market and sit tight, rather than taking a bath on price. As such, prices tend to drift rather than collapse.
As long as a property owner can afford to keep holding their property (which really comes back to points #1 and #2 above), then there’ll be a ‘natural resistance’ to dropping the price too far. Instead, many vendors will simply remove their property from the market, or not list it at all.
Fewer properties get listed as time goes by, and eventually the available ‘stock’ on the market comes back into balance with the number of buyers, and prices stabilise. Once buyers outnumber sellers, then we can expect competition to start driving up prices again.
There’s also a culture of desiring home ownership in this part of the world (‘The Great Australian Dream’) and a psychological and social stigma associated with the idea of losing your home that should not be discounted. Aussies tend to sacrifice other things before their mortgages and houses, and as such this creates another form of ‘natural resistance’ towards just taking any price in order to sell a house when the budget gets tight or the market slows down.
History demonstrates that even in past economic dark days such as the Great Depression and – more recently – the GFC, house prices in Australia eased only modestly. And (importantly) in some areas they even continued to climb!
REASON #5: Economics 101
Most property market ‘doomsayers’ demonstrates a fundamental misunderstanding about how the forces of supply and demand drive price behaviour.
As any student of high school economics would have had drummed into them, prices of goods and services move up and down in response to the balance of supply and demand. And it’s no different for property.
For example, when prices collapsed in many mining towns a few years ago, this was due to a sudden absence of demand combined with an oversupply of property.
The absence of demand was the result of mining companies and supporting industries requiring fewer people in the towns, and therefore needing less accommodation. In other words, the population requiring housing in these towns dropped.
The oversupply resulted from over-development of new housing in these towns, in addition to some mining companies deciding to build their own houses or ‘fly-in-fly-out’ camps to provide cheaper accommodation than what it cost them to rent established housing. Towns like Moranbah were left with a significant oversupply of housing as the mining investment boom ended.
It doesn’t take an honours degree in economics to see that the dynamics are very different in our capital cities.
Yes, there are risky pockets of oversupply (most notably some CBD apartment markets and over-developed outer-suburban ‘greenfield’ housing estates), but in most inner and middle-ring suburbs the problem is more of a lack of housing supply, rather than massive oversupply.
Australia’s population is still growing (now approaching the 25 million mark according to the ABS) so there are plenty of people who need a roof over their heads in most parts of the country.
I’d love to see prices fall 50%… but I’m not holding my breath!
Just in case you think I’m trying to ‘talk up’ the property market, personally I’d be ecstatic if we we’re to see an across-the-board 50% fall in property prices. At current rents, this would mean we’d have positive cash flow rental properties within 10km of the CBD in major cities – a great opportunity for cashed-up investors!
But unfortunately I don’t think that’s very likely… do you?
Until next time,
Invest wisely!
– Simon
A Property Investor’s Worst Enemy!
pro·cras·ti·nate [verb]
to defer action; put off doing something; postpone or delay needlessly
– e.g. to procrastinate until an opportunity is lost.
Property investors can be a funny breed.
When the market is off the boil and property prices are slipping (as they did around much of the country in 2018-2019), many investors are too afraid to get into the market, fearing that prices might fall further. Or they wait on the sidelines, hoping that properties might get even cheaper.
They convince themselves that it’s not the ‘right‘ time to invest, but that they’ll buy in when the market hits bottom.
Oddly they often end up never buying anything at all!
When the market turns back up, those same investors hesitate again – unsure whether the market is really trending up or if what they’re seeing is just a “dead cat bounce” (with apologies to all feline lovers out there).
By the time they’re convinced that the market really is rising again, they feel they’re too late.
And once again they do… NOTHING!
I see this in every property ‘cycle’… Although there’s actually no such thing as a property market ‘cycle’ – the market doesn’t operate on any kind of regular clock.
Excuses, Excuses…
With the property market showing increasing signs of life across most capital cities lately, once again I’m meeting investors who think they might have missed the boat.
I ‘ve lost count of the number of people who’ve told me in the last couple of months that they think property has gotten too expensive (again)!
Every time the property market shifts up or down a gear, I hear excuses from investors all over the country ‘justifying’ why it’s the wrong time for them to invest.
Frankly, if you think this way then it will never be the ‘right’ time to invest.
Here’s a newsflash: There is no perfect time to invest.
There’s only ever RIGHT NOW.
“But…”
Even with the best property deals there are always 100 reasons not to do the deal.
For most people these reasons provide the easy excuses or justifications for a failure to take action.
(Which eventually turns into regret and unproductive self-recrimination about the “road not travelled”.)
Let’s be clear… Investing in anything is NEVER without risk.
Property, as a form of investment, is no different.
Smart investors know that they’ll have to accept a level of risk if they want to outperform and build real wealth.
They’re educated enough to know how to assess the numbers in a deal, how to perform due diligence to identify the risks, and will think of ways to minimise (not eliminate) those risks.
How to keep risk in perspective
Accepting that some risk is unavoidable does not mean ignoring the risks.
Always QUANTIFY your worst case scenario…
What would be the financial impact to you if the deal went wrong?
Could you wear that impact, pick yourself back up, and move on?
Or would the worst case scenario be your undoing?
If the latter, then maybe you shouldn’t do the deal.
But if you could survive the worst case scenario, recover, and move forward again, then the only real question is whether the anticipated return from the deal is conservative, realistic, and sufficient to outweigh the risk of that worst case scenario.
Beating procrastination (with a very large stick!)
When the numbers stack up and the due diligence pans out, our job as sophisticated property investors is to find the one reason to do the deal.
Put aside the paralysing excuses – and take the ACTION necessary to secure the opportunity.
An investor’s worst enemy is PROCRASTINATION. It leads to missed opportunities and to regrets.
And I’m no fan of living with regrets.
Putting it bluntly…
Frankly, your property investing success (or otherwise) begins with a simple choice.
You can choose to stay at home, spending time watching TV, playing on your phone, and living vicariously through others on social media…
…Or you can CHOOSE to take control of your financial destiny.
CHOOSE to get off the couch and TAKE ACTION:
Take action to get your finances in order.
Take action to get educated on the property market.
Take action to learn effective investing strategies.
Take action to get into the market.
Take action to get ahead with your property investing.
Take action to CREATE A BETTER LIFE for yourself and your children.
No excuses!
What will you choose this year?
– Simon Buckingham
How “2020 Investor of the Year” Sam built a $5M portfolio + $70K positive cashflow!
Your Investment Property magazine has just published their “Investor of the Year” awards, and I’m excited to announce that Results Mentoring Program member Sam Gordon has been crowned “2020 Strategic Investor of the Year”!
Sam joined the Results Mentoring Program in November 2018. It has been my pleasure to personally mentor Sam over the past 15 months as he has massively accelerated his property investing and taken his portfolio to new heights.
Although he now has 15 properties in his portfolio, valued in excess of $5 million, Sam came from modest beginnings and is a great example of what you can achieve in a relatively short time-frame with a willingness to take action combined with the right education and support.
From modest beginnings…
Sam began his property investing journey as a low-income earner, and had to save hard to get the original capital for his initial property purchases.
His first property (bought in November 2009) was a negatively-geared unit in Wollongong NSW, which Sam renovated to increase both its value and rental income.
However the negative cashflow from the Wollongong property meant Sam struggled to save towards his next investment. It took a while (and working multiple jobs) to get the deposit together for investment property number two, but he finally purchased his second property in 2012 for $350K.
That property has since more than doubled in value.
Over the next 5 years, Sam diversified geographically, making two interstate purchases in SA, and another two in Queensland.
“Learning experiences”
Sam’s investing journey wasn’t without several “speed bumps” however.
One expensive lesson came from trusting an unscrupulous buyers agent in 2016, where Sam burned $10,000 on their fees for no real outcome – at a time when he “certainly didn’t have the money to lose”.
To Sam’s credit, rather than being put off property or bemoaning the lost $10K, he used that experience as inspiration to work harder towards his next acquisition… returning to NSW in 2017 to build his first duplex.
His first foray into small property development was a success, with the site purchased $100K below market value and the development resulting in a $270K uplift in his equity. Not to mention the creation of a $12K p.a. positive cashflow from the units, which Sam continues to hold.
Adding 8 more properties in just 1 year…
Having had many “learning experiences” along the way, and realising the importance of independent unbiased education, Sam enrolled in the Results Mentoring Program in November 2018 – where he could get direct access to personal 1-on-1 support from myself and our team of highly experienced and active property investing mentors, along with Australia’s most comprehensive property education.
Actions speak louder than words, and over the past year while I’ve been personally mentoring Sam, he has added 8 more properties to his portfolio through a combination of individual house purchases, up-scaling to unit blocks, and acquiring another development site.
Sam’s portfolio is now valued at an estimated $5.19M, with over $1.5M in equity – making Sam a genuine property millionaire!
A property millionaire with $70K+ positive cashflow…
In addition, the clever balance of growth and cashflow strategies implemented by Sam means that not only has he created substantial capital growth, but his portfolio also generates around $5,900 positive cashflow per month.
That’s a passive income of over $70K per year!
This achievement is a testament to Sam’s dedication to his investing goals, and demonstrates what is possible with the right attitude, focus and determination when combined with good research and effective investing strategies.
It also highlights how the right education and personal support can massively accelerate your investing and your ability to create significant wealth.
Sam is very deserving of the 2020 Your Investment Property “Strategic Investor of the Year” Award, and I’m sure you’ll join me and the Results Mentoring team in expressing our heartfelt congratulations!
Want 1-on-1 mentoring from an expert property investor? Register your interest here
Sam’s top 5 property success tips:
I caught up with Sam this week and asked if he would share some of his personal tips for property investing success. Here are his ‘top 5’…
Success tip #1:
“Research values and use effective negotiating tactics to always buy below market price.”
Success tip #2:
“Only invest in markets with a tight vacancy rate, to minimise risk and maximise rent potential.”
Success tip #3:
“Combine growth, adding value and cashflow strategies for a sustainable investing approach. I focus on:
– buying below market value in high growth locations with strong cashflow;
– high cashflow properties such as unit blocks to provide multiple streams of income (with reno or strata-subdivision potential for an equity boost);
– small developments to rapidly grow capital.”
Success tip #4:
“Try to keep your LVRs at or below 80% to help make ongoing access to finance easier.”
Success tip #5:
“Invest in yourself first. Good education and support from expert investors who are currently active in the market is absolutely priceless — especially if you have an experienced mentor who is doing the kinds of property deals you want to do.
I’ve taken my portfolio to new heights this year with Simon’s help by being a member of the Results Mentoring Program.”
– Sam Gordon, “Strategic Investor of the Year, 2020”
What’s next for Sam?
While Sam could sit on his laurels and take it easy, having now achieved (and exceeded) his original goal of creating a $50K passive income, instead he has set his sights higher and aims to build up to a substantial $250K income.
Sam recently re-enrolled in our Results Graduate Program and plans to take on a small subdivision in the next 12 months, then move up to larger developments, and potentially also make his first commercial investment.
I’m looking forward to working with Sam 1-on-1 over the coming months as he continues on his exciting property investment journey!
Warm regards,
– Simon Buckingham
Will property prices fall 5, 10, 15, 20… or even 40%?
According to Core Logic’s Home Value Index, Melbourne house values fell around 2.8% during the September quarter, and are down around 3.4% on this time last year.
Despite the panicked headlines in the media, this hardly constitutes property market Armageddon.
In fact, it’s not dissimilar to other times in recent memory when house prices declined following a peak in the market. For example, the Melbourne median house price dropped 9% in 2011 after peaking in 2010, before levelling out in 2012 and starting to climb again.
(Ah – but people have short memories, don’t they!)
Furthermore, it’s worth noting that the median Melbourne house price today is still around 33% higher than it was just 5 years ago according to statistics from the Real Estate Institute of Australia.
“The correction we had to have?”
When property values go up by that amount, it’s inevitable that there will be a subsequent dip or “correction” at some point – as no property boom lasts forever.
We see this behaviour in the stock market all the time where it just happens faster, so share investors expect it… whereas property investors become complacent and somehow get surprised when property values pull back after a period of strong growth.
And while it’s easy to get fooled into thinking that the property market in all of Australia follows what happens in Sydney and Melbourne, the reality is quite a mixed bag around the rest of the country.
The “mixed bag”…
Sydney house values are down around 7% over the past year, Perth is down 2%, but Brisbane and Adelaide are up slightly, Darwin is up 2%, Canberra is up 3%, and Hobart values are up 9% over this time last year.
Overall, Australian house values are down just 2.7%. To quote Core Logic’s head of research, Tim Lawless, in his commentary on the latest market statistics this month:
“Since the national index peaked twelve months ago, dwelling values have fallen by 2.7%; hardly a crash, and a slower rate of decline relative to the previous housing market downturn (Jun 2010 to Feb 2012)”
Where will property prices go now?
It seems like the analysts, banks, and media pundits can’t agree about what’s going to happen to property prices over the next couple of years.
Some see a “soft landing” with prices retreating a little and then levelling out.
The ANZ forecasts “nationwide housing prices to decline by 4% in 2018, and a further 2% in 2019”, with Sydney and Melbourne coming off a bit more by around 10% in total over the next 2 years.
Doesn’t sound too drastic, and would be quite “moderate” by historical standards.
Investment bank Morgan Stanley is a little more pessimistic, forecasting a 10%-15% fall before prices level out.
AMP had previously predicted price falls of 15% in Sydney and Melbourne, spread out over 3 years to 2020 – or about 5% per year – but got some media attention this month when they revised their forecast to a total 20% fall over 3 years.
Then there’s the now infamous 60 Minutes feature from last month that boldly claimed that house prices could fall by 40% in the next 12 months!
(I should note that every market analyst interviewed for that feature has since distanced themselves from those claims, stating they do not believe that the market will “crash” as suggested by 60 Minutes.)
And American economic doomsday author Harry Dent is back in town on the seminar circuit, claiming that “Australia’s debt crisis or ‘debt bomb’ as it’s been called, will see Australian house values plummet in value by up to 40%.”
Yikes!
Predictions of The Property Market Apocalypse make for great “click bait” to sell advertising or seminars, but really just highlight the promoter’s (deliberate?) ignorance of how the property market actually operates.
So who’s right?
The only certainty is that they can’t all be right.
In fact, the history of attempts by banks, economists and the media (and yes, Harry Dent too) to predict the Australian property market would suggest that, to a greater or lesser extent, they’re all likely to be wrong.
The reason they’ll all be wrong to some degree is that every one of these analysts and commentators treats housing in this country as if it is one big single market where prices everywhere move the same way.
While there’s no question that reported “Melbourne” house values are softening at the moment, we also need to understand that “Melbourne” is not a single housing market.
Rather, it’s a collection of 321 discrete suburbs, each of which performs differently.
Right now, the inner city and eastern suburbs have seen some of the greater falls over the last year, while values in many northern, southern and western suburbs are still higher than they were this time last year, and some are still rising.
Different price brackets within the market perform differently too…
More affordable housing is experiencing strong demand from first home buyers, currently driving up prices in suburbs with lower priced properties. Properties in mid-range and upper-range price brackets are the ones seeing more of a reduction in values at present.
And the forecasts for price movement at the individual suburb level are quite mixed too.
(If you’d like to see how the market is actually trending in Melbourne and the rest of the country, based on factual research rather than hype and conjecture, then book here for our upcoming free workshop for serious property investors.)
The Power to See the Future
Wouldn’t it be powerful to know which suburbs were likely to trend up over the next year, and which ones are headed in the other direction?
More importantly, wouldn’t you want to know whether YOUR suburb (or any suburb where you currently hold property – anywhere in the country) was likely to head up, down or sideways?
If you knew this, then you could take pre-emptive action to protect any gains you’ve already made (by getting out quickly if the outlook was dire), or have greater peace of mind knowing that your property was likely to perform well over the year ahead.
You’d be able to ignore media hype about booms or busts, and make more informed, more confident investing decisions. (Not to mention sleeping easier rather than worrying about your property investments.)
Learn to read the market like a professional – for free…
I want to teach you exactly how to tell whether any suburb in Australia, including your own, is most likely to go up, down or sideways in value over the next year.
It’s a simple technique that can be done in under 5 minutes and with no need for expensive software or other gimmicks.
It’s so simple in fact that you’ll be amazed more people don’t know about it. Yet 99% of property investors and almost all so-called property educators and market analysts don’t know how it’s done (which is why they keep getting their predictions wrong).
And the media definitely doesn’t get it.
See you there,
– Simon