How Far Can Prices Fall?

The newspapers, our TV screens and airwaves have been full of stories of property disaster of late and the big question everybody is asking is: what's really going to happen in 2019?

How Far Can Prices Fall?
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The newspapers, our TV screens and airwaves have been full of stories of property disaster of late and the big question everybody is asking is: what’s really going to happen in 2019?

The doom and gloom media reports are extremely unhelpful because they simply peddle fear and don’t seek to understand the nuances of the market. We started recording The Elephant in the Room property podcast in April 2018 and we’ve interviewed a wide range of well respected real estate professionals, property experts and market commentators. We’ve learnt so much from our guests and they’ve all helped us to understand the dynamics of the market and buyer behaviour on a deeper level. This 4-part article highlights what various experts think will happen to property prices, interest rates, etc in 2019.

Prices plummeting by 40%?

Various stories hit the TV airwaves from September, with the most sensational claiming we are in for catastrophic price falls. Two experts featured in a 60 Minutes story posted on social media immediately after the episode aired and declared that their most dire predictions had been taken out of context.

Economist Stephen Koukoulas “The Kouk” had a lot to say about this too when we interviewed him in episode 43. Interestingly enough, he calls himself a pessimist on property prices, and he draws on his own international experience when making predictions.

“The housing market decline is happening. It's got further to run but for a 35 or a 40% fall in house prices, you're talking some of the horrible situations that we saw during the global crisis in Ireland, Spain, parts of the UK and the US, and we don't have those fundamentals here. We're not that bad.

“What we're having to see is a price correction, I suppose, where we do see prices drop, we do see this tightening in credit having an impact, but a 40% fall? Not really. More likely seven to 10.”

What’s really missing from all the doom and gloom talk is an understanding that all locations and all properties don’t operate in the same way.

Prices are more volatile in areas where investors made up the majority of buyers and that risk starts kicking in when the proportion of investors rises above 30% of the total market.

When we’re talking about price falls, one of the big issues is that unsophisticated investors flocked to brand new and off the plan properties. So you have a situation where a lot of people bought into the same building or subdivision at the same time, their interest free periods will expire at the same time and those who cannot afford to hold the property will all list them at the same time. Of course, there will be significant price falls in these circumstances.

Australia is more than just Sydney and Melbourne

There is no such thing as an Australian property market. While the boom was going strong, it was really only Sydney and Melbourne that had soaring property prices. Now the reverse is happening - Sydney and Melbourne have overshot the mark and so now that’s all anybody is talking about, however it’s not the same story everywhere. In fact, Brisbane and Adelaide are shaping up to be the next winners and Peter Koulizos told us to expect this in episode 33.

“I'd be looking at areas that haven't, and my two picks would be Adelaide or Brisbane, because for the last 10 years they haven't done much, and there will be a time when there is so much underlying demand, there'll be a tipping point where property prices will march on.”

That said, we need to draw a distinction between houses and apartments in Brisbane and also point out the need to be much closer to the CBD in these cities due to their smaller populations. Peter also discussed gentrification at length and how his research has shown this to be one of the strongest factors underpinning price growth.

Researcher, financial advisor and buyers agent Pete Wargent gave plenty of specific advice for buyers looking at Brisbane in episode 24.

“But the thing in Brisbane is the scarce commodity is the land, the land that's close to the city where people want to live. So if you're going to do it, I wouldn't be looking at high-rise apartments or just generally anything that's marketed to investors, so house and land packages. You really want to buy stuff where there's an owner-occupier market.”

Hobart deserves a mention here because it’s been the star performer of 2018, however every expert we discussed this with urged caution. The consensus has been that any gains that were to be had have already been made by those who got in early. For investors to maximise those gains, they needed to have a clear exit strategy and should not waste time in activating it once there are signs that market is about to peak.

What we draw from these interviews and the many other experts that we have spoken to throughout the year is that Sydney and Melbourne are suffering the worst because they had much higher price growth than anywhere else in the country. Yet that doesn’t mean those markets are dead in the water. More on that in Part 2. Part 3 will look into the potential impact of Labor’s negative gearing policy and in Part 4 I’ll cover lending and interest rates.

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