Relax, house prices are not likely to crash

The property doomsayers are at it again. Recently economist Harry Dent warned that the Australian market is looking much the same way the Japanese market did before its crash in the 1980s, when values fell by as much as 60%.

Of course, he’s not the only one who is predicting a significant correction in our property prices. Others are suggesting years, maybe even a decade of flat property values.

Of course there is nothing new about this. For all the years I’ve been involved in property, and that’s fast getting close to 40 years quicker than I would like, there have been groups of people who were “sure” that our property markets would collapse. And they would often give what sounded like sound arguments to back up their forecasts.

But those pesky house prices refused to behave!

Sure they’d stall for a while, occasionally for a few years in a row. Sometimes they’d drop a little – especially in volatile holiday locations or regional and mining towns. But when you took the overall median price of Australian residential property it has never really collapsed (other than after the Second World War, but then it recovered quickly.)

What’s really happening?

According to RPData-Rismark’s Hedonic Index, Australian median house price fell 0.9% or $4,7000 in the last quarter and dropped just 2% or $10,600 over the last 12 months.

This effectively means no real change in value, which is remarkable given the general lack of market confidence, the negative media our property market has received and the persistent warnings of the property doomsayers. Of course the Australian share market frequently falls more than this in a single day.

Yes, housing is expensive…

Now I’m not denying that housing is fairly expensive in Australia, but there are some good reasons for this:

• Australia has the largest dwellings in the world, and they are of high quality. This may be extravagant, but it’s the way we choose to live.
• More of us want to live in houses on large blocks of land and close to the CBD where there is a shortage of supply, while in other mature cities a larger proportion of the population live in apartments.
• We tend to live in six or so coastal cities – around the world coastal cities have always attracted a premium in property values.
• We like to live in the suburbs close to the CBD and the water because they’re better serviced by amenities, facilities and public transport than the outer suburbs.
• There is a lack of affordable land at the fringes of our major cities due in part to significant development and infrastructure costs.

The fact is that the high cost of housing is one of the prices we have to pay for living in the best country in the world.

Importantly, despite relatively high levels of household debt in Australia, the households that hold this debt can still service mortgages. Less than 1% of mortgages are in arrears in Australia, which is internationally low.

And it is comforting to know that 75% of all household debt in Australia is held by the top two-fifths of income earners – those who can most afford it.

In a recent blog economist Christopher Joye explains that, contrary to popular belief, Australian housing has not really become less affordable over the years.

What about what happened overseas?

When the commentators make comparisons with the US markets, it’s the old story of comparing apples with oranges.

• The US economy is in recession. The state of the Australian economy is the envy of most of the developed world.
• The US housing crash was brought on by poor lending practices that allowed people to borrow more than they could afford to repay. Our banking system is sound here, as are our lending practices.
• Americans built too many houses, leaving them with a huge oversupply. That’s not the same here, other than in a few selected areas such as the Gold Coast. But watch out… an oversupply is looming in the Melbourne and Brisbane CBDs.
• There is huge unemployment in the US, yet here everyone who wants a job here can get one and our wages are rising.

What could cause our property markets to collapse?

The factors that could cause an Australian property market crash are:

1. A recession – but I don’t know anyone who suggests we’ll be going into recession in the foreseeable future.
2. Massive unemployment meaning that people can’t afford to pay their mortgages – again this is unlikely in the near term.
3. A significant oversupply of properties – other than on the Gold Coast and in a number of our CBDs with a rash of off high rise projects being completed, we don’t have an oversupply of properties.
4. High interest rates – the prospect of this has now been averted by the world’s financial turmoil. 

Putting all this together, it is unlikely that a property crash is on the cards. 

While I have great confidence in the medium and long-term strength of our property markets, I recognise that despite sound fundamentals, market sentiment will cap property prices for some time to come. 

I can’t see a major change in market sentiment until a number of factors play out. We’ve lost confidence in our government, we’re concerned about the carbon tax and we’re unsure about the overseas economic turmoil. These issues won’t go away overnight. 

My recommendations: 

1. Don’t panic with all that’s happening in the world.
2. Learn from history – every share market crash has been followed by a property boom in Australia
3. Review your current property portfolio and your financial plans in light of what is going on around you.
4. Refinance your property portfolio now if you can to top up your financial buffers. This will put more money in your kitty for any speed bumps that may come your way.
5. Take appropriate action
   1. This may be to sell assets that will underperform in the new financial era, or it may be to buy more assets.
   2. Set yourself and your family up to take advantage of the inflationary times ahead by owning properties that will grow in value at above average rates of capital growth.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.