Are You Prepared For The Next Phase?

There’s little doubt that in the past 12 months, the Australian property market has started to cool off. Currently, we are seeing lower auction clearance rates and falling prices, particularly in Sydney and Melbourne.

In reality, prices move up and down over time and falling prices are a natural part of the property cycle. What is interesting, however, is that as soon as prices start to ease off, the media pundits and so-called ‘experts’, quickly come out with their dire predictions for the Australian property market. I’ve seen predictions calling for housing to crash by up to 40% from their highs, with the words ‘boom’ and ‘crash’, showing up in the media on near a daily basis.

In reality, the vast majority of those commenting on the state of Australian real estate, haven’t been involved in real estate investment for long enough to truly understand the property cycle and how it works.

I’ve personally been investing in property for the past 12 years and while I’ve experienced my fair share of hardships through that time by losing thousands of dollars, I’ve also lost valuable time by investing at the wrong stage of the market cycle. I also realise that we’ve just experienced one of the biggest property booms in 30-50 years in Melbourne and Sydney. To see prices ease to some degree is to be expected, particularly given the current tightening around lending.

With that in mind, I feel that to truly understand the property cycle, we should listen to those who have lived and survived through various property cycles.

My partner and mentor, Paul Flynn is a property veteran with more than 30 years of experience. He’s seen just about everything in Australian property and has bought and sold thousands of homes. He’s personally witnessed four full property cycles and the GFC, so he is more than qualified to give advice on how best to manage the next phase of the property cycle.

During the height of the GFC, when credit conditions become extremely tight, Paul’s bank at the time came knocking and gave him 90 days notice (this is a genuine letter) to come up with a near eight-figure sum. So when I asked Paul about how to survive in this type of housing and credit market, I knew he was well placed to understand the current market conditions.

He survived because he had purchased quality assets well under market value, which were easy to dispose of quickly. At the same time, his balance sheet was clean and strong which meant refinancing with other banks wasn’t a problem. While he still lost millions, he managed to survive because he was prepared.

One of the major turning points for the property market has been APRA clamping down on lending. This has led to banks tightening access to credit. A recent headline in the AFR, suggesting Westpac was about to dump property investors, might make not make for good reading for real estate investors, but there is plenty to take away from it. It’s something that Paul and I have discussed at length with our clients. Although we still haven’t seen an actual copy of the letter from Westpac, if it is, in fact, true, it is a real concern.

If other banks follow Westpac’s lead – which is likely – we will have new lending criteria, similar to that of 20-30 years ago.

In Paul’s mind, the key to this type of market is to be prepared. As lending gets tougher and finance harder to obtain, those investors with multiple properties stand to be the ones impacted the most.

Paul believes that if prices drop further, many investors have the potential to find themselves in a situation where they have negative equity. Where their outstanding loans are more than the value of their investment.

As rates rise, as they are tipped to do in 2019 or out of cycle movements by the banks which we are already witnessing, these investors could well find themselves as a ‘mortgage slave’, unable to service their loans while being trapped with only negative equity. This is a situation that many new investors have never faced. Many have likely never even considered the fact that house prices could, in fact, fall. Particularly those in Sydney and Melbourne.

This is something Paul has seen firsthand during the last property correction and it’s why we need to look to the history books and listen to those more experienced than ourselves, to fully understand and be prepared for any eventuality.

In fairness, the current easing of house prices is something that we should really have been expecting. Paul and I have been speaking to our clients about the potential for lower prices since 2016 and getting them prepared by selling down assets and ensuring they maintain an LVR of below 80%.

In many cases, Paul suggests that it is now advisable to get that below 70%, to give yourself room for any further price movements. This is particularly important for investors with more than three properties, in areas that are heavily investor focused with no real end user. Some of those areas of concern to us in Queensland are the lower socio-economic areas of Logan City, Ipswich city, Moreton Bay and units in Brisbane and the Gold Coast.

For Sydney and Melbourne, my biggest concern at the moment remains the state of the jobs market. With prices already on the decline, if we see weak growth in jobs in the next few months and poor sales during the festive period, then that will very likely weigh on housing even further.

Ensuring you are prepared to withstand the new tighter credit requirements and any subsequent price falls, will leave you well positioned until the tide begins to turn.

Make sure you have realistic expectations of the current property market and don’t be afraid to sell assets. The once bulletproof strategy of buying and holding property forever isn’t as safe and secure as it was 30 years ago.

Ultimately, markets will rise and fall and no one can truly ever know to what extent. The most important takeaway, however, is really how prepared are you? Make sure you are ready for anything that might lie ahead and be sure to listen to those who have many years of experience and have lived through the ups and downs of a full property cycle. Not just the good times.

Santosh Nune shares 6 secrets to successfully owning 10 properties in 5 to 10 years.  Download your FREE Ebook here, now.