Bad News Bears Losing Sight Of Reality When It Comes To Property Market
It’s been a tirade of emotional pain points for property investors who have been reading articles on the market in mainstream media lately.
Words like “avalanche”, “plunge” and “brutal” have been used to describe the falling trajectory of property prices and the related credit that banks have sought to strip from buyers at an alarming rate.
Fortunately, the media has suggested that households “avoid panicking”, which is like telling someone who is afraid of heights not to look down.
Some independent financial sources have even been quoted as saying that sales values are down one-third on a year ago and more than 50% lower than 18 months. Quotes like this are enough to set off talk-back radio like a bushfire on a hot dry day.
Of course, the ‘significant correction’ that they were referring to was the total average value of the real estate sales market as a whole – a figure that could easily be taken out of context by regular readers who haven’t understood the data.
Still, there has been some semblance of sanity coming from an actual research company.
Core Logic released two important articles last week.
The first shows the annual change in median values for 3 price groups – the top 10% (10th), the median, and the bottom 10% (1st).
This is an invaluable graph for investors as it shows a real story.
In the previous Sydney boom from 1998 to 2003, the cheapest properties (blue line) showed the greatest gains. Since then they’ve generally shown the lowest level of losses. Core Logic made mention that the surge in first home buyers through stamp duty concessions has seen a floor kept under housing demand at the cheaper end.
By many accounts, this graph would suggest that if you wanted to preserve your capital in the property markets, the cheaper end of town is actually the best place to be.
What’s equally interesting though is the top end of town (grey line) seems to be the most volatile – that is, when times are good they show the greatest growth, but when things are bad they are the worst performers.
While mainstream media is keen to slap headlines up recently that portray the property markets going to hell in a handbasket, buried in the actual articles are the fact that it’s really the $3 million to $5 million market that is suffering, and that can be seen in the data from Core Logic.
Reading these charts it’s clear that what is happening shouldn’t come as a surprise. The top end of town is suffering but they’ve also seen some of the greatest peaks – it’s par for the course.
The second lot of information that came from Core Logic is far more insightful for investors looking to keep an eye on the bigger picture.
Again, I’m going to use the example of Sydney to keep things consistent and because the Sydney market is so large it often drives a lot of the commentary.
The following chart spans 38 years and tracks the declines of the market from their previous peaks. In other words, it shows all the periods in which Sydney prices generally fell.
You can see one of worst periods in property was from 1988 to 1991, where the markets fell 11.6% over a single period (Australia’s last recession).
Looking at Sydney’s latest decline (black line), the market is showing a loss of 4.5%. This data is always 3 months old though and no one is seeing any turnaround in auction clearance rates at the moment so we would expect the data to reflect another one or two percentage point decline to bring it up to speed.
Why I love this chart though is because it shows the periods over the last 38 years of the market actually bottoming out before it starts to gain ground again.
Looking at where the market has historically started to recover once these periods finish provides us with a good gauge as to what to expect moving forward, and potentially where we will see prices starting to improve.
So rather than getting caught up in the emotional ups and downs that drive many of today’s headlines, let’s put things in perspective.
Yes, lending restrictions mean tougher credit conditions, and oversupply and affordability are influencing factors in key markets.
Household debt is also at record levels and wage growth is minimal.
But this is Australia’s 27th recession-free year.
Unemployment is around 5.5% but nowhere near the 10.7%, we tackled back in 1992.
Inflation has sat stubbornly under 2% but is certainly not out of control.
Interest rates are at record lows and for the last couple of years, borrowers have been assessed at rates nearing 7% to protect against eventual rate rises.
And finally, the last time property markets dropped more than 10% in a single period of time was nearly 30 years ago during a recession. Next to that, things have remained remarkably resilient.
There’s never been a perfect time to buy. There are always economic or market issues both here and overseas that could change things at any moment. Despite this though, savvy investors will continue to make money by keeping things in perspective and taking action when the opportunity presents itself.