The notion of the "property bubble" may be a media ploy to sell press rather than reality, experts say.
Speculation as to whether or not Australia is in the midst of a housing bubble has left many polarised. We spoke to a panel of experts to get to the truth around the property bubble, and pick their brains to offer advice to Australian homeowners and investors in the event of a potential "bust".
Different markets move in different cycles.
Although some statistics point to a looming "national" property price crash, not everything should be taken at face value. In particular, there is no such thing as a "national" housing bubble. While property prices may dip in the future in some markets, the price change isn’t going to be dramatic. None of this 20-30% drop kinda talk. That’s GFC material.
With soaring property prices driven by a low-interest rate environment, many fear that Australia’s property market is headed for collapse. After all, the exponential upward trend may be unsustainable. So what do the experts have to say about whether or not Australia, or any of our capital city markets, are in the midst of a property bubble?
We spoke with Michael Yardney, CEO of Metropole Dr Hoon Han, senior lecturer from the UNSW Built Environment faculty; Chris Gray, host of Your Property Empire on Sky News Business Channel', Peter Gordon, founder of Investo Property, Christine Williams, principal property strategist from Smarter Property Investing;, and independent economist Saul Eslake. Our mission? To find out if Australia, or any Australian markets, are in a property bubble, and the ramifications (if any) that this may have.
The results may surprise you.
Skip ahead
What is a housing bubble?
What creates housing bubbles?
Recent property price growth overview
How has the housing bubble divided us?
Is there actually a bubble?
What role do interest rates play?
Debt and mortgage stress levels
How important is foreign investment in contributing to price growth?
How well is the market being regulated?
What could cause a price correction?
When could the property bubble burst and by how much?
Dr Hoon Han, Senior Lecturer from UNSW speaks about the property bubble myth
What is a housing bubble?
A housing bubble typically occurs when there is unsustainable price growth or rapid price increases in a given market. In theory, the bubble "bursts" when there is a downward shift in property price values, which is caused by an unforeseen event or an economic shock, such as high levels of unemployment or an oversupply of property.
The concept of a housing bubble is associated with the idea that Australian property is overvalued. As Yardney suggests, a housing bubble is generally characterised by rapid increases in valuations of property until they reach unsustainable levels relative to income and rents, and then eventually decline.
Demand has been fuelled by an attractive low interest rate environment, among other things, which has encouraged owner-occupier and investor growth in the real estate market. This demand can be potentially dampened by an economic event, such as an interest rate increase, which forces property prices down and causes the bubble to"‘pop."
Bubble characteristics
Eslake believes that a classic property bubble would have three main characteristics, as follows:
Prices increasing rapidly.
Factor driving upward price movement is rapid, with unsustainable growth in debt.
Widespread belief that prices will continue to rise.
“Now, there are grounds for saying that the first of those criteria is true particularly in Sydney, but I would hesitate to say that there’s a compelling case that either of the other two criteria have been met even in Sydney. It would be hard to argue that credit is growing at unsustainable rates now, especially in the aftermath of the measures that have been introduced by APRA over the course of this year”, he says.
Eslake suggests that another factor would could contribute to a property bubble would be where prices continue to increase at a rapid pace, even when supply increases.
“Australia is still characterised by housing markets in which underlying demand is in excess of supply, but that could change over the next three years as supply increases more significantly given the current level of building approvals and commencements, while underlying demand starts to slow because of the evidence slowing in the rate of immigration and population growth”, he says.
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What creates bubbles?
Many of the experts cited an oversupply of property, an economy that is reliant on just one industry, low interest rate settings and inappropriate fiscal policies as contributory factors to a property bubble.
Over-reliance on one industry
Gray emphasises that locations that are reliant on a sole industry may lead to a property bubble: “I think a classic bubble is like in a mining town where people are paying millions of dollars and they’re getting 20-30% rental return, and then suddenly the mining town shuts down and the million dollar property is worth virtually nothing. The areas that may be under a bubble would be those towns where there’s just one industry supporting it”, he says.
Similarly, Williams suggests that locations that are heavily reliant on an independent industry, such as the Gold Coast, may represent a bubble environment: “An example of a property bubble would be the Gold Coast, which is probably where we’ve learnt a lot of lessons in Australia...the area in the Gold Coast that has the biggest bubble in Australia is the 3 or 5 square miles that are actually the Surfers’ Paradise Gold Coast tourist buffer.
“I have seen 60% increases up there and then all of a sudden, a tidal wave will hit and that will be when the banks put on their brakes and the market will go back 10,20,30,40%. Having said that, when the market goes back 30%, it’s already had a 20% increase so people only look at the negative, they don’t look at the actual history of it”, she says.
Oversupply of property
In contrast, Gordon believes that it’s mainly down to supply and demand. That is, an oversupply of property and a subsequent lack of demand can create a property bubble in certain districts: “A property bubble would be when there is too much stock on the market that would force down prices, but there’s not too much stock on the market, there’s an oversupply in some areas and an undersupply in others. The only way we’re going to get a future bubble where property prices would drop dramatically is if there was too much stock to be sold and not enough people out there to purchase it”, he says.
Gray supports this view and claims that an oversupply of property can mean that markets are vulnerable to economic shocks and may contribute to a bubble: “There’s a lot of talk about Brisbane having a massive oversupply of brand new units coming on the market... I think by definition, these are very volatile markets going into CBD, brand-new massive apartments blocks on the Gold Coast because they’re generally bought by speculators and so one change in the economy or a foreign investment review could dramatically affect those markets”, he says.
Low interest rates and poor fiscal policy
In terms of what creates bubbles, Eslake suggests that continued low interest rates and inappropriate fiscal settings can form a property bubble.
“An essential ingredient would be an extended period of inappropriately low interest rates”, he says. However, he points out that while interest rates are currently low in Australia, they haven’t been low for very long, so this may not be applicable in the Australian context.
Eslake also comments that distorting fiscal policy tax settings may stimulate a property bubble: “I’ve argued that the tax system and some aspects of government policy contribute to unnecessarily inflating demand for housing in destabilising ways. I hope governments act on those inclinations that seem to be emerging even if that does weaken the demand for housing, and remove one of the supports that these distortions have provided to the demand for housing in the past”, he says.
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Recent property price growth overview
According to data from CoreLogic, Australia’s capital city residential property values have been on the rise over the past 38 month period, following a 7.4% drop over the previous 18 months.
Sydney and Melbourne have consistently showcased the strongest capital growth conditions of all capital cities over the past two growth cycles. The rise in residential property values has been driven by a higher number of property transactions and new dwelling approvals.
In the 12 months leading to July 2015, combined Australian capital cities residential values experienced 11.1% growth.
The overall growth for capital cities has been fuelled by Sydney (18.4%) and Melbourne (11.5%) which have recorded higher growth rates compared its counterparts. Interestingly, Perth and Darwin recorded a drop in residential property values over the past 12 months with -0.3% and -5.3% growth respectively. This suggests that while some isolated markets have experienced rapid price growth, this is not the case for the macroeconomic environment- or Australia as a whole. At the end of July 2015, combined capital 0.6 city residential property values were 19.9% higher compared to their previous peak. However, residential property values in Brisbane, Adelaide, Hobart and Darwin sit below their previous peak levels.
Capital city summary
Sydney
Residential property values in Sydney have appreciated at the most rapid rate of all Australian capital cities over the past 12 months. Despite strong value growth (19.8% for 12 month value change for houses), rental growth has been moderate.
Melbourne
Not far behind Sydney, Melbourne’s residential property values have risen at the second most rapid rate of all Australian capital cities (12.3% for 12 month value change for houses) over the past year. Similarly, slow rental growth has seen Melbourne witness the lowest rental yields of all capital cities.
Brisbane
Residential property values in Brisbane have seen the third largest increase in the year leading to July 2015, with 4.6% value change for houses, although this increase is minimal compared to Sydney and Melbourne. However, the rental yield for Brisbane is considerably strong relative to Sydney and Melbourne.
Adelaide
Adelaide's residential property values have recorded a minimal 3.4% growth for houses over the past 12 months, and the city has recorded the second lowest level of growth value.
Perth
Residential property values in Perth recorded a 0.1% decrease for houses over the past 12 months coupled with a fall in transactions and rental rates, and a higher average time on market.
Hobart
In Hobart, property values are increasingly at a slow pace and the city has recorded the weakest growth performance of all capital cities over the past decade.
Darwin
In the current growth phase, Darwin’s value growth rate has slowed over the past 12 months with property values and rental rates plummeting (-5.7% for 12 month value change for houses).
Canberra
In Canberra, residential housing prices slowed in the past 12 months, recording 1.4% value change for houses. Both property values and rental rates have witnessed some growth, but overall residential property growth remains sluggish.
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How has the housing bubble divided us?
Consensus remains divided about whether or not Australia is currently experiencing a housing bubble. While some believe that the Australian property market is in a significant bubble, others argue that Australia is not, and that house prices will continue to rise in accordance with income growth.
Yardney suggests that if property prices continue to rise as they have in the Sydney and Melbourne markets, then there may be a price correction, but not a crash.
“There are two notable sides of the fence that people seem to sit on when it comes to this contentious topic. On the one side sit the ‘bubble blowers’ who use statistical data to demonstrate that collectively, we have the highest level of mortgage related debt per household of all developed countries in the world. They argue that local property prices are over-inflated and set to come tumbling down, and this could be by as much as 50 per cent according to US Global Economics forecaster Harry Dent.
“On the other side of the debate are those who believe an Australian property bubble in 2015 is just a good story to sell papers, with no signs of a significant housing market correction on the horizon”, he says. From our conversations with the experts, it seems that the latter is the most widely-held view.
The bubble enthusiasts say...
As median rents continues to rise in both Sydney and Melbourne, some economists believe there’s evidence of a housing bubble. Since median housing prices in Sydney are now estimated between $900,000 to $1 million, economists don’t think that property prices can continue to grow or remain stable, particularly on the heated East coast of Australia.
Treasury secretary John Fraser went as far to say that Sydney and pockets of Melbourne are “unequivocally” in a housing bubble.
Others beg to differ...
However, median rent and house rent both rose by 2% in the June quarter this year which indicates that Sydney’s bubble may not be nearing a bust. Not only is demand high, but there’s a shortage of supply which suggests that Sydney’s market is headed in a positive direction.
Although Australian property prices increased significantly in the early 2000s and again since 2012, and property values have risen strongly relative to income and rents, Yardney says that this doesn’t mean that the markets are in a bubble: “While Sydney and Melbourne look pricey, that doesn’t make a bubble, and Australian property prices are not in danger of crashing despite record-low interest rates spurring substantial price growth in the Sydney and Melbourne property markets.”
“Currently we are experiencing the normal machinations of the property cycle. What happens is that property values rise then they slump for a while, then they retrace and finally go into the next expansionary phase”, he says.
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The expert panel: Is there or isn’t there?
When asked the simple question; is there a bubble? This is what the experts had to say.
Different markets and media hype
As Gray points out, people need to understand that different markets are characterised by different factors and that the affordability of property is relative to price growth changes:
“There’s so many different markets around Australia, which are all different by price and geography, so it’s hard to understand one market, let alone multiple. But I would generally say that no, I don’t think there is [a housing bubble].. I think a lot of the time it’s driven by media because everyone’s after a new story, and it’s also driven by the companies and the economists that are linked to shares or equity because they actually have vested interest.
“In the media, it’s very easy for all of us to say right, this property dropped 50%, but you could always find another property that went up 50% so you’ve got to look at the averages over time to see if things have really changed.
Similarly, Gordon supports the idea that different markets move in different growth phases and this is what we’re currently seeing. He also points out that the media has somewhat sensationalised the issue.
“No, I don’t think that any Australian markets are currently experiencing a property bubble. I think our cities are working at different cycles at different times, some are going through a growth phase and others are levelling out and stabilising.
“The property bubble is the hype of the media. The media is there to sell press and advertising to get people to read or purchase their papers or magazines. We’ve gone through different times over the past 20-30 years, we've gone through recessions, we’ve had the GFC, everyone thought property prices were going to drop after the Olympic Games, we’ve had floods, cyclones... and people survive. In 2000, in Sydney a house was about $300,000 now it’s about $1 million, but not every suburb is $1 million, which is where the press get it wrong”, he says.
Eslake suggests that while Sydney and Melbourne are ‘overvalued’ by reference to a range of metrics or models, this doesn’t mean that prices are about to fall sharply to an undervalued position.
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What role do interest rates play?
The Reserve Bank of Australia slashed the official cost of borrowing to 2.0% in May this year and it has remained at this percentage through to the September Board meeting. Historically, the cash rate is at a record low and as a result mortgage rates have shifted to significantly low levels.
According to CoreLogic, in September 2015, the average standard variable mortgage rate was 5.45% and the average discounted variable rate was 4.65%.
These low rates are driving growth in home values and higher levels of investor activity, and the ASX predicts that there will be another cash rate cut in December this year which will could potentially put further upward pressure on residential property values.
Although interest rates have contributed to property price growth in Sydney and Melbourne, other capital cities who have enjoyed these same rates, have not recorded the same price growth trends. It’s therefore important to realise that local markets are characterised by the strength of the economy which impacts consumer confidence, unemployment as well as supply and demand.
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What could happen to debt and mortgage stress levels if rates rise?
Many Australians are concerned about what will happen to homeowners and investors when interest rates rise because if borrowers taken on additional debt in a record-low interest rate environment.
Gray believes that future interest rate hikes will affect Australians, and that borrowers need to be responsible with their borrowing:
“Interest rates will rise at some point in time and the guarantee is that this will cause some mortgage stress. If you’re paying back at 4% now and it rises to 6-8%, you’ve got double the repayments, so anyone that’s taken a mortgage out that doesn’t believe that interest rates will rise is living in a dream world.
“This is why the APRA has come in to try and make these changes to try and say look you’re paying it back at 4% but we’re going to assess you at 7-8% principal interest, so we can make sure that you can afford those repayments”, he says.
Interest rate ($400k loan)
Repayments per month
4%
$1,909
8%
$2,935
Similarly, Gordon believes that Australians may be vulnerable to higher mortgage stress levels if they don’t plan ahead for rate rises.
“People could be susceptible to mortgage stress levels in terms of their cash flow and what their repayments will be If rates increase by 1-2%. But I don’t think their going to increase too dramatically too quickly in the current market, but people should always consider what their repayments are going to be tomorrow”, he says.
Williams forecasts that interest rate hikes may be on the horizon, and that this could hurt lower socio-economic belts in different markets: “It is my expectation that interest rates are going to rise by a couple of percent over the next 2-3 years and then if they stay around the 5-6% mark, it will make the market stabilise. There will be retraction in the market but the market will start to stabilise...and will adjust naturally itself”, she says.
“Owner occupiers can buy up to 95% and investors can borrow up to 90%. So even if interest rates increase, there will be people in the market that will just have to sell because they didn’t prepare for an increase, or they didn’t allow for the increase within their own strategy and so there will be people that will have to sell. But will there be a panic in the market? No, there won’t be a panic in the market. The media will hype that up though”, she says.
To the contrary, while Eslake acknowledges that interest rates play a significant role in affecting price growth because of the impact they have on the price of borrowed funds, he believes that Australians may have already built up buffers to avoid mortgage stress.
“People with existing mortgages have built up buffers during the period in which interest rates are declining. As the IMF noted in its survey this past week, Australian mortgage holders have built up a significant insulation against rate rises”, he says.
Similarly, Yardney points out that many Australian households have built a mortgage buffer and may be ahead of mortgage repayments at the current level of low interest rates. Data from the Australian Bureau of Statistics (ABS) indicates that just 4.3% of Sydney homeowners are vulnerable to an interest rate rise which suggests that only a small percentage of Australians are susceptible to increased mortgage stress levels.
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Does foreign investment come into the picture?
As summarised by Yardney, some believe that foreign investment is contributing to property price growth in certain markets, notably Sydney and Melbourne, as investment groups are buying large development sites to build high rise towers to sell to offshore Asian investors. These developers have allegedly paid prices significantly greater than the local market value, in some instances as much as 25% higher, which invariably pushes up property prices.
One piece of evidence for this argument: Foreign Investment Review Board (FIRB) approved property transactions by offshore investors has increased two-fold in the last financial year. However, it's less clear whether Chinese investors have contributed to rising property prices.
Eslake says that foreign purchases have represented a small proportion of the total amount of property market transactions in Australia in recent years, and that foreign purchases have been concentrated in more affluent areas rather than in areas where foreign investors have been competing with, for example, Australian first home buyers.
“While I don’t understate the significance of foreign investors in some areas, particularly in Sydney and Melbourne, I don’t think they’ve been the principal force affecting the Australian housing market. It’s also worth noting that foreign investors are now making a much more significant contribution that what they have in the past, through increasing the supply of housing because that’s where, despite the headlines and what’s reported in the media, most foreign investment is directed towards the purchase of new dwellings and the supply of housing than they do for the demand of it”, he says.
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How well is the market being regulated?
APRA has expressed concerns about the mortgage lending environment. This was evident when it issued its latest warning for deposit-taking institutions, asking them to to curb the rate of investing lending to below 10%.
However, the cooling in investment lending has not had an impact on the overall volume of mortgages, which means more owner-occupiers are getting into the market over their investor counterparts.
Gray says he doesn’t think the Australian Prudential Regulation Authority (APRA)’s intervention is necessary for the financial education of Australians: “I think you’ve got to have APRA in there to a certain extent to protect those who aren’t financially educated, but ultimately it is everyone’s responsibility to make their own financial decisions”, he says.
In light of this view, Williams points out that APRA’s policies are helping the first time investor avoid potential issues down the track that may be associated with a lack of knowledge: “ I believe that APRA, for a first time or second time investor, is probably doing them a favour, because they’re making sure that they’re covering risk and they’re making sure that they’re not going to overcommit themselves”, she says.
Eslake believes that APRA’s intervention has had a positive impact on the economy in terms of regulating demand for property, and that tax reforms under new leadership could help soften the property market: “There are now some signs, both in the lending data and amongst the anecdotal evidence, that says that demand for property from investors is cooling, and I think that’s a very good thing.
“I would also think it were a good thing if some of the distortions in the tax system had inflated the demand for housing from investors that were to be removed from part of the tax reform process that the government under Malcolm Turnbull seems more committed to than what Tony Abbott was”, he says.
Contrastingly, Gordon believes that the Australian market is currently being over regulated by APRA, describing it as a blanket policy: “I think what they’ve considered is to change banking policy so investors need to have a 20% deposit minimum and I think that’s affected a lot of people because there’s a lot of people out there that are first time investors or want to buy an investment property and can’t afford to buy their own home where they choose to live so they’re choosing to invest so they can start building an asset foundation for themselves. So if you’re looking at a $500,000 purchase, investors now need $125,000 in cash and for somebody that’s saving, it’s just made it a lot harder”, he says.
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Global learning curves: Apples to oranges
Nobel prize winning economist, Professor Vernon Smith, warns that Sydney and Melbourne are showing property bubble signs. As a result, he believes that Australia can learn from the mortgage bubble that occurred in the United States which ultimately lead to the global financial crisis (GFC). While Sydney’s housing bubble wouldn’t affect house prices across other cities to the extent that it did in the US, as Australian regulators have firmer control over the market than our US counterparts, some believe that we should still take note from our international counterparts.
While some believe that we can draw comparisons from the US and Chinese markets, others condemn this ‘blanket’ approach, claiming that you cannot compare two different global markets.
As Gray points out, these international market comparisons aren’t always “apples with apples” as you are comparing two different foreign markets: “APRA and the banks need to keep an eye on everything internationally but again just because it happens in the US, doesn’t mean sure, it’s going to happen in Australia as well”, he says.
Many of the experts also cited Australia’s effective lending policy which plays an instrumental role in avoiding a potential ‘burst.’ For instance, when looking at our global counterparts, such as the US, Gordon points out that Australia has stringent lending criteria which helps to control property demand and price growth.
“I don’t believe that there’s going to be a price crash. If you look at the GFC, which was the worst financial crisis, 8-9 years ago now, what Australia has, unlike a lot of other countries, is we have great bank policies with regards to lending. The reins are pretty tight with regard to who we lend our money to and what position they’re in before we’ll let them borrow.
“They [the US] lent money to anybody, they lent money to people who weren’t even employed and then with their lending policy over there people can walk into their bank with their lending provider and drop the keys off”, he says.
In support of this, Williams maintains that many global housing bubbles have been driven by poor banking policies and she believes that Australia is a forerunner of being risk-adverse in this regard.
“Our housing market is probably one of the most stable in the world, and also our taxation rebates and our gearing, and the tax that we pay on investment stock.. we’re one of the best tax serviced areas in the world”, she says.
While Eslake suggests that while simple comparisons should not be made between international markets, he believes that there are some lessons to be learnt from our global counterparts, particularly the US, Ireland and Spain.
“An important lesson from those countries is that inappropriately low interest rates can be as damaging in their own way as inappropriately high interest rates, and that ought to serve as a warning to the Reserve Bank that while it may be justified to have interest rates at record lows for today and for the period immediately ahead, they shouldn’t keep them too low for too long”, he says.
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What could cause a price correction?
For a price collapse to happen, the experts collectively cite economic shocks, a rise in foreign investment and an oversupply of property that would create a large number of forced sellers.
A market collapse would be caused by a large external shock to the economy which could be caused by the following factors, among others:
High unemployment and an oversupply of stock
Gordon points to economic factors such as high unemployment, an oversupply of stock and changes to foreign investment that could spur a price collapse.
“Something that may contribute to prices decreasing would be if unemployment skyrocketed and people couldn’t afford mortgages they were currently carrying so they’d be forced to sell or if there’s an oversupply of stock and people are forced to sell, or they may decide to sell because they may be fearful”, he says.
Eslake takes this further and not only attributes an oversupply of property as a contributory factor, but also a number of forced sellers: “For a major price correction to occur, you need a combination of a large number of forced sellers and/or some significant interruption to the ability of buyers to purchase, and secondly you need a market in which supply exceeds underlying demand by a wide margin. Those are the characteristics that were readily apparent in the US, Ireland and Spain markets 6-7 years ago, but they’re not really evident in Australia”, he says.
“Australia’s housing market for the most part is characterised by the excess of underlying demand over supply and I don’t think that situation is going to change soon, however looking out beyond the next 12 months to say 2-3 years down the track, if immigration and population growth, which are the major drivers of underlying demand, continue to slow, and if new supply continues to increase because dwelling approvals, commencements and completions continue to run in excess of $200,000 a year, it could be that we’ve substantially eliminated the overall shortage of housing relative to underlying demand at the national level”, he says.
High cash rate
Despite ASX forecasting another cash rate in December this year, many economists believe that interest rates will start rising in early 2016. If this is the case, it would impact people’s ability to service their mortgage repayments which may squeeze people out of the market and put downward pressure on property prices.
Self-managed super funds (SMSF)
Australia’s SMSF sector could accelerate speculative demand for property, according to the RBA. While Yardney claims that he’s not particularly concerned about “mum and dad investors” engaging in risky SMSF investments, he is concerned about poor property choices which some SMSF trustees are making.
Changes to lending policy
Williams suggests that a contributing factor of a price correction would lie in any changes or relaxation of our lending policy.
“What would contribute to a property bubble would be if the banks were free-wheeling credit. So if the banks were still lending at 120%, we would definitely be in a property bubble because the market will adjust itself, there would be a correction”, she says.
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When could the property bubble burst? And by how much?
For the "bubble enthusiasts", the question is; when will it burst?
Economists suggest that Australia’s property cycle has risen in accordance with historic economic growth of the past 15 years and as this period slows, property prices are likely to adjust at some point.
Some estimate that residential property prices will continue on an upward trajectory for the next 12 months, and at some point after that, they will begin to stabilise, and eventually decline.
While it’s difficult to pinpoint when prices may start falling, as there are too many national and local factors to consider, the experts suggest that there could be a price correction in the next 18 months in some markets.
Gordon suggests that while the market may retract, the price decline isn’t going to be substantial.
“With the Sydney market, I’d say the market is still going to continue to move north, not as quickly as it has over the past 12 months but within the next 12 months we’ll probably see a levelling out and a dip that will be partial. It’s not going to be dramatic but when that happens, there will be press saying that the market is about to pop because the median price is now $550,000 not $1 million”, he says.
Additionally, Williams forecasts that there could be a price correction over the next 18 months in Sydney and Melbourne: “I think Melbourne might come back maybe 3-5% and Sydney might come back 6-7% ,but it’s only going to be a retraction for a couple of years and then it’s going to go back to where it should be. Every market goes through a boom and every market goes through a bust. It’s just part of the growth cycle”, she says.
Would a price retract be such a bad thing?
Interestingly, Eslake suggests that even if property prices decline, it’s not something we should be concerned about.
“While nobody wants to see price declines on the scale as we’ve seen in the US, Ireland or Spain, because of the adverse consequences for both the financial system and the economy, I’m not sure that we should be afraid of modest price declines or a period of stability for house prices”, he says.
Eslake believes that the recent implosion of Australian residential property prices is not such a good thing as it may have caused social harm.
“I would also argue that the ongoing increase in property prices has done social harm by pricing out a growing proportion of younger generations from the same aspirations of home ownerships that today’s 50 and 60 year olds had when they were 20 or 30. An extended period of stagnation in property prices or a period of modest declines is something that actually might do more good or harm”, he says.
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How can I protect myself?
While regulations in Australia ensure that undisciplined borrowers cannot simply access the keys to a property without meeting rigid serviceability requirements, some property investors could suffer if the property ‘bubble’ bursts.
Whether you're an owner-occupier or an investor, you should view property as a long-term investment and prepare for market changes.
Contingency buffer
Make sure you have a buffer of funds to allow for contingencies and try to put yourself in a position where your mortgage repayments are affordable, and they’re not stretching your personal budget.
Consider property location
Some property investing experts advise that people avoid purchasing property in Sydney and Melbourne as if property growth rates continue, there could be a price correction which would mean that property depreciates in value.
Invest in good quality
Over the past 3 months to July 2015, the most affordable suburbs are up 2.5%, the middle market has increased by 3.8% and the most expensive suburbs have increased by 4.8%.
While many speculate that any slowing of the market will hit the high-end of the market the hardest, it’s important that you invest in good quality and well-priced property at the middle or bottom end of the market.
Data from CoreLogic found that in the 12 months leading to July 2015, the most affordable 25% of capital city suburbs recorded the lowest rate of value growth while the most expensive 25% recorded the fastest rate of value growth.
As Gray points out, any price correction will vary depending on price points for property: “At the median price in Sydney for instance, say around the $1 million mark, even after the GFC it didn’t really come off.. maybe 5-10%, but where it did come off was the very expensive houses where people have got holiday homes or in Mosman where it’s a $3-4 million home and this would affect people who are getting half a million dollar bonuses anyway.”
Minimise your risk
As an investor, it’s wise to minimise your risk by diversifying your portfolio and investing in multiple states and in different property types.
Consider selling now
Some experts believe that it may be a good time to sell now while the market is high, because you can’t predict when or if the market will fall.
Research
Any slowing of the market is likely to occur gradually which can be detected by buyers and sellers who undertake thorough research.
Worst-case scenario planning
If you’re deciding when to sell a property, you should consider the worst-case scenario by estimating how much your property might fall by if there was a crash. You could take into consideration the demographics of your area, infrastructure plans and local market trends.
You need to evaluate the asset and consider how a crash could potentially affect your portfolio and your cash flow and consider if you can increase your contingency buffer to account for this.
Careful property selection
Try to invest in areas where owner occupiers have high and growing disposable incomes, which will generally by in inner and middle-ring suburbs. You should also invest in property types that are demanded by owner occupiers who can afford to push up surrounding properties and try to buy properties to which you can add value.
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Further advice from the panel
Chris Gray
With financial discipline and a conservative approach, Gray says that Australians can protect themselves from a potential price correction by knowing your numbers and thinking about location:
“Don’t overly concern yourself with the media hype and the stories. Concentrate on your numbers. Make sure you’re investing for the long term, so five or ten years plus. Make sure you’ve got enough cash buffer or reserves to take you through the short term where interest rates may rise, you may lose Centrelink, you may lose your job, so basically have a plan B.”
“Generally, if you stick to the main capital cities that aren’t reliant on one or two industries it’s more likely to be stable because unemployment is unlikely to dramatically change anything. If you then stick around the median price for buying and for rentals, again you’re bound to always have tenants and potential buyers if you need to sell or rent a property out. Go for the average type of property in that area so typically in Melbourne or Sydney, I’d be going for units or anywhere else in Australia, I’d be typically going for a house because that’s what the average person lives in.”
“Buy the best investment you can and making sure it’s in good condition, making sure that you hire good agents and professionals to manage it, ensuring that you’ve got cash buffers. If we’re talking Sydney, $700,000-800,000 might only get you a one-bedder and some people might think that’s more conservative than spending a million dollars, but a million dollars can get you a much better 2 bedroom unit in a much better suburb in a better street so sometimes spending the million is actually much more conservative than spending the $700,000-800,000.
“My overriding tip is to get an independent valuation, so whenever you buy, if you get an independent and full valuation which will probably cost you $400-$600, then it’s a good way of guaranteeing that you don’t overpay for a property or you don’t get something too speculative”,he says.
Peter Gordon
For Gordon, it’s about taking a long-term strategy, purchasing new properties for depreciation benefits, and understanding cash flow.
“Property isn’t a short term investment plan, it’s long term. Always make sure you’ve got cash buffers in reserve and think about what you’re cash flow might be. If you’re borrowing money, think about what you’re interest repayments are today and what they might be if interest rates increase by 1 or 2% down the track. If you’re uncertain about a market, you can consider looking at fixed rates for around 5 years around the 4.5% mark which gives people peace of of mind.
“For a lot of my clients, I give recommendations to buy brand new properties because they receive a larger tax deduction through depreciation and this reduces their holding costs, which reduces their cash flow or their costs to hold on to the investment property. Again, think long-term, property is an expensive asset to purchase into with regard to purchase costs and selling costs. If you can, think 10-15 years minimum.
“Always make sure there’s more than one industry in the area so don’t buy near a direct mining town. I like the middle-rings, inner-rings, but then you’ve got to think about what the price point is. Always check local markets to see what the current rents are, make sure you look at your numbers and what your cash flow is.
Saul Eslake
The main form of protection is not to be excessively geared. If you have conservative levels of gearing, then you can probably afford to ride out a period of price decline in the property market just as investors in the share market who are typically less geared than property investors have to do.
Christine Williams
Williams believes that the greatest way for Australians to protect themselves from a potential price correction is to know their figures and to prepare for a “rainy day”.
“I believe it’s about knowing your numbers and having a cash buffer in place. If interest rates do rise by 2-5%, or if there’s an oversupply of property in the market that would potentially reduce rental income, or any other unforeseen circumstance that may arise, the cash buffer will help”, she says.
Additionally, Williams emphasises that Australia’s lending policies protect many investors and homeowners from borrowing more than they can afford.
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