Are We There Yet?
You know how it goes… a short way into a long family road trip and one of the kids, already bored, says “are we there yet?”
Many investors might be thinking the same thing – wondering whether we’ve arrived at the bottom of the decline in real estate prices. The answer is a predictable “No. Not yet.”
The latest house price index data put out by CoreLogic indicated that, for the month of May, though the rate of property price falls slowed in some capitals, a decline was still underway – except in Adelaide where there is a very weak growth pulse.
Delving into the data, the highlights I saw (for the year to the end of May) were:
- Poor Perth – down 1% for the month and down 8.8% for the year, with units performing even worse than houses. This is unusual because, unlike the eastern seaboard, there wasn’t a glut of units built during the last WA housing boom. I wonder whether this means that in a material downturn, when the difference between houses and units contracts, units fall more in percentage value as people prefer to live in a house?
- Sydney officially sucks – with the annual fall in dwelling values now 10.7%, Sydney is officially the worst performer of any capital city.
- Melbourne meltdown – not that Melbournians have much to rejoice about. Like their weather, dwelling values are in the freezer – down a sick and sorry 9.9%, an awful outcome that is worse than Perth and Darwin.
- Hobart Hoopla – long trumpeted as the shining light of the property market, and up 3.4% for the year, Hobart house prices were only slightly up for the month, while unit prices were down an eye-catching 2.7% – the most of any capital city in May. Could this be the start of a Tassie takedown?
- Adelaide Alive – only Adelaide recorded a growth in dwelling values, up 0.2% for the month, but still only an underwhelming 0.4% for the year to May. Still, up is up.
- Canberra – good news for houses (up 3.4%), but not units (beware the glut!) down 1.1%.
- Elsewhere, Brisbane (down 2,3%) failed to live up to hopes and expectations, while Darwin (down 8.6%) remained in the dungeon.
You can check out the results for yourself here:
CoreLogic Hedonic Home Value Index, May 2019 Results
Have you ever driven at 100km per hour for a while, and then had to slow to 60km as you pass through a country town? Doesn’t it feel slow? Yet driving in normal city traffic, 60km an hour seems fine. How can that be?
Because speed is relative.
Sydney, Melbourne and Hobart were cruising along in a 100km speed zone for quite some time. Now though, they’ve hit a 40km/h construction zone, or even stuck waiting for a government work crew to repair the ‘property road’ so that higher speeds can be reattained (i.e. stimulus packages to get people active again).
In these markets, things feel slow, and they are. And they feel even slower than they otherwise might be because they had been roaring along at such a great pace not that long ago.
Elsewhere, like in Perth and Darwin, declining prices is actually the new normal, and it would be front page news if prices could simply stop going down, let alone actually go up. A great lesson other cities can learn from the cellar-dwellers is how a property price decline feeds into a broader economic malaise, which in turn creates a negative financial feedback loop, putting more downward pressure on real estate values. This could easily happen in Sydney and Melbourne, which is why the government, and the RBA, are now attempting real estate CPR.
Purse Strings for Lending Remain Tight
Conditions are unlikely to turn around quickly.
APRA might have dropped their more stringent serviceability benchmark, and the RBA might have dropped interest rates, but financiers are still stubbornly holding the lending purse strings tightly because they got smashed by the Royal Commission for dodgy lending practices that are not related to either APRA or the RBA.
We’ll Be There When…
So, if we’re not there yet (i.e. the bottom), when will we be there (i.e. prices on the up and up)?
The quickest answer is to sell the family silverware and welcome back the foreign buyers, in droves. That will suck up the stale listings that are gumming up the system, and also get some more action happening on auction day.
I can’t see that happening just yet. Indeed the Victorian government just made it less appealing for foreigners to purchase, with an increase in stamp duty for offshore buyers. To me, the more realistic driver of higher prices will be when jobs and wages materially improve, and at the same time, lenders, (er, how do you say this politely…) start looking the other way, or else look less rigorously, at what people can afford to borrow. There’s recent form here because that’s what the Federal government is promoting, isn’t it, by deciding to underwrite the debt of some homebuyers borrowing 95% of their house price? Madness! Sheer madness!
Friends, what we are facing is the “financial hangover we had to have” (thank you, Mr. Keating) from a property party that went on for longer, and harder, than anyone imagined. We’re simply sobering up from a dangerous debt binge (which APRA flagged a while back, but is now somewhat confusingly overlooking). The idea of tapping another keg of beer and getting drunk again might delay the hangover, but it will just make it all the worse when it eventually does come.
Here’s what I say – don’t see a price decline as a bad thing. See it as the best way to make housing affordable, and, at the same time, as an opportunity for savvy investors who can play a long game.
As sure as I’m bald, we will get there (i.e. with prices rising again) ….. eventually.
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Your comment -> “that’s what the Federal government is promoting, isn’t it, by deciding to underwrite the debt of some homebuyers borrowing 95% of their house price? Madness!”
Hmm, thinking back, wasn’t that one of the early drivers of what turned into the GFC? The USA Govt was allowing anyone who could draw breath to take out loans at “stupid % interest – like, zero” – enabled by their FreddieMac and FannieMay loan groups? The crunch then came when the holiday period ended, and these housebuyers (who couldn’t afford them in hte first place) faced a rate increase to 3% Interest or similar. They handed in the keys and left the Banks with a host of unwanted homes (no recourse loans there, right?) and the values of houses sank through the floor.
I think your one final word summed up well our Govt’s recent stated intention (it is not policy yet, is it?) – “Madness” !
Hi Steve, Brisbane and Gold Coast have been in the doldrums well before the Melb and Sydney correction haven’t they? Gold Coast especially from 2009 on seems to have been nothing but decline and would have thought should be one of the first on the upward path, when it does pick up?
We will be there when no one asks the question “are we there yet?”. LOL
I think people would be silly (perhaps that is the Govt) to think that the recent drop, and likely continued drop in interest rates would mean the property market would magically turn a corner (quickly) and go back on a similar rising curve as before. I feel the downturn and flattening of housing has some years to go before things really pick back up again, especially when the banks are not going to necessarily make it super easy to obtain finance as before. They copped alot of stick and rightly so, so don’t think they will be all open arms and lower standards again. The risks to jumping into the boiling pot are definitely higher, since falling interest rates are not a sign of good times ahead but bad times. Inflation is one thing, but increase in unemployment is where the sting in the tail will really be felt.
I’ve spoken to real estate agents in the end of 2017 and early 2018, and they couldn’t believe their eyes at the prices they were achieving. That speaks volumes to have stir crazy things got. I’ve easily seen prices in my area in Sydney that have fallen 20% in just over 12 months time.
Great article Steve, as always. I always love reading your opinions. Entertaining and educational. 😍 Thank you!
Here in WA it has been over 12 years since the party ended and it doesn’t look like restarting any time soon. Personally I am holding property that is down over 40% so it is a long way back and rents are down too. Don’t think it can’t happen in Victoria or NSW, gloom is contagious.
I believe the structural shift in the nature of employment is a large contributor to this. So many folk that I come into contact with are in part time, casual or contract work and will therefore not be taking out large loans for real estate purchases. This too looks to be an established trend.
Bottom line is it could be a very long journey until “we are there.”
Property price down!! A well known Melbourne Property & Financial analyst said: Property price will hold – at lease equal to interest rate mortgage payment % plus inflation rate % This is the mini holding cost. Not many people is willing to hold on a property with diminishing value for long. Hope the price fall is only transitional. Steve, what is your view of his theory? Thanks. (Good to read your article above ‘ are we there yet’.
If a property is a good buy in a good market that produces a good cashflow, which is what this web site is mostly about, then should it matter so much what is happening on the macro scale.
Assets can make money in any market if you know where to look and proper due diligence is carried out. Is this not the McKnight philosophy?
Exactly H Man! But for investors speculating on growth (and no or negative income), it’s a dangerous time to be investing.