Property prices do fall but history shows what happens next
Property downturns are inevitable, but 56 years of historical data shows that past corrections have been relatively short-lived.
This time it’s going to be different. How many times have you heard this lately? I’ve heard this many times over the past 20 years and, put simply, it’s never been true.
History might not repeat, but it does tend to rhyme.
Historically, this tells us that property markets do fall periodically. But historically, significant declines have been relatively rare, usually short-lived, and ultimately been followed by periods of sustained growth.
Why? Because so long as the population grows faster than the rate you can build new housing, values and rents increase. It’s not any more complicated than that. Eventually people see the rationality of this fundamental law of supply and demand.
The war in Iran and the tax changes don’t affect the amount of people coming to Australia each month, or the number of houses being built.
It’s why the best bet you can make in Australia is on the value of housing rising over time. But that doesn’t mean that markets sometimes behave irrationally and cause prices to fall.
Property cycles don’t last forever
I’ve seen two market corrections in the past 20 years.
In 2011, median house prices in Sydney and Melbourne fell by 8 per cent as a delayed impact of the global financial crisis. Then in 2018, they fell by 10 per cent because of the Hayne Royal Commission into home lending in Australia.
On both occasions, the dip in values lasted 12 months and house prices grew by more than 50 per cent in the following five years,
Each downturn had different causes. But the common thread was that the falls were temporary, not permanent. That’s an important distinction for long-term investors.
The lesson isn’t that property prices never fall, it’s to see that drop as an opportunity and make the most of it because, sure as day will follow night, there will be an inevitable bounce to prices on the other side.
Australia isn’t one property market
Perhaps just as importantly, not every market rises or falls at the same time. Conditions can vary significantly between states, cities and suburbs.
While some higher-value markets may be experiencing softness, particularly at the top end, other areas continue to perform strongly, driven by population growth, infrastructure, employment and a shortage of housing.
That’s why asking whether the property market is going up or down can be the wrong question.
The better question is: Which markets have the fundamentals to perform over the long term? In other words, where is the most significant undersupply going to exist?
Australia continues to experience population growth while housing supply remains constrained in many areas. That imbalance creates ongoing demand for homes and, in turn, supports rental demand across many markets.
It’s also why investment strategy should remain focused on where we buy, rather than trying to predict every short-term movement in the market.
Build new. Buy below the median house price. Focus on markets with strong underlying fundamentals.
Long-term investors need to look further ahead than today’s news headlines.
