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NEWS: Property Investing and Real Estate In Australia

Rain & Real Estate Rainbows

Date: 04/07/2018

 

CoreLogic has released their June 2018 house price data, and the results are underwhelming. Here are the highlights:

  • Australian dwelling values fell for the ninth consecutive month
  • House prices fell in Sydney, Melbourne, Perth and Canberra
  • House prices rose in Brisbane, Adelaide, Hobart and Darwin
  • Sydney house prices have fallen 6.2% for the year to June – the biggest decline of any Australian capital city
  • Hobart house prices have risen 13.8% for the year to June – the biggest gain of any Australian capital city
  • The only capital city to experience an increase in unit values was, somewhat surprisingly, Brisbane.

Here’s what’s causing the downturn:

  1. It’s noticeably harder to qualify for a loan, meaning there are fewer buyers.
  2. Foreign buyers have been scared off by substantial fiscal disincentives, meaning there are fewer buyers.
  3. News headlines are forecasting turbulent times, so sentiment is weak meaning there are fewer buyers; and
  4. Supply has increased a little, meaning there are more sellers.

This is all well and good, but what does it mean and how should you act?

Highs & Lows

The seemingly never-ending real estate ‘high-pressure system’ that was camped over much of Australia for many years has finally moved on and we are now feeling the effects of a new ‘low-pressure system’ that first hit WA, and has finally made it to the east coast. This new weather system has resulted in ‘cooler temperatures’ (unless you are in Hobart where the market is surely overcooked), with even a little patchy drizzle here and there. There’s been no rain though, and certainly no hail or thunder.

Not yet, that is.

The topic of conversation now seems to be whether the weather is a short-term blip, the new norm for the foreseeable future, or a pre-cursor to a Game Of Thrones style real estate ‘winter’ that will put the freeze on property investors.

As I like to say, I know my head may be bald, but it’s not a crystal ball – so I don’t know for certain what’s going to happen, but what I do know is that you need rain to make a rainbow.

Real Estate Rain

The long boom in Australian real estate was not normal. Real estate used to be a yield (i.e. income) investment, but structural changes to taxation and various buyer incentives that began in the early 2000s changed it so that real estate became a growth (i.e. capital appreciation) investment.

Eventually though, the conditions that facilitate growth naturally dissipate, and, unless new conditions arise to fuel a new growth cycle, the market will experience a period of stability or decline until conditions arrive to kick-start the next period of growth.

However, rather than pause for breath, the Aussie property market experienced the equivalent of an extended Indian summer after an unprecedented run of growth-stimulating events: CGT discount, FHOG, rising populations, a commodities boom, historic low interest rates, foreign buyer boom, lax lending standards, and easy profits from speculating.

Today we have rising interest rates, fewer foreign buyers, more rigorous lending standards, and fewer speculators. It’s understandable, even expected, that prices are softening and they should continue to do so until new conditions emerge.

The Usual Umbrella

Theoretically, when growth subsides, an investment’s yield (i.e. income over expenses) usually makes it affordable to hold until the next cycle begins. That is, the positive income acts as an umbrella to shield the investor somewhat from the impact of declining values.

Aussie real estate is now so over-valued that the after-debt yield is negative so, in the absence of growth, investors are losing money (i.e. expenses greater than income) for the right to lose money (i.e. property values falling). Add in a few interest rate increases, and the number of sellers will increase while the number of buyers decrease, and prices will fall further. The drizzle will become rain. With no income umbrella, a thorough financial soaking is a distinct possibility.

Which brings us to the important point of this article -people think that real estate rain is bad. It’s really not. It’s completely necessary to balance out the previous cycle, to reset expectations, and to set us up for the next period of property sunshine.

In fact, when the sun eventually comes out again, the easing rain tends to result in a rainbow – a profit opportunity from values resetting, with a possible pot of gold to be found (and maybe a leprechaun or two) at its base.

Response

As mentioned, some people believe the present drizzly circumstances are a short interlude in a continuing property boom. That’s unrealistically optimistic. While others feel a few drops of rain is an omen to run for the Ark. That’s unrealistically pessimistic.

What is needed is a reassessment of your strategy to ensure it is suitable for the current climate, and to make appropriate adjustments so that you don’t get caught out in the rain.  Meanwhile, also ready yourself to act so that when the real estate rainbow eventually appears you’ll be able to jump on it.

If I’ve learned anything in the past 20 years of professional investing, it’s that one person’s rain is another person’s rainbow.

What do you think is going to happen to Aussie property prices going forward? Be sure to contribute your thoughts by leaving a comment below.

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. Mike Williams

    Some past comments of mine….’’we can’t all be rich, but we can all be poor” and “this is as good as it gets”
    Well here we go…. the professional observers serving up a collective of comment, fence sitting and opposite positions….which means there is room for us amateur observers to make a name for ourselves….!!
    This is going to disappoint you…. this is as good as it gets….!
    Volatility will enter the share market based on lower global outcomes, with opportunity for profits on a downwards cycle….be careful if you are left holding the ‘parcel’
    Korea Kim to renege and cause a global crisis….
    Trade and monetary war to increase non value added inflation.
    Iron ore price to tank.
    Now the domestic situation….
    Liberal government to preside over the greatest asset write downs since the the 1930’s depression.
    Wages to remain stagnant, critical job losses, firstly in the retail sector, then moving into manufacturing, some top 100 and well known companies to fall, I see no positive intervention by the government or the banks. The RBA supposedly in a hold position…substitute “hamstrung”
    Next RBA move will be down as the economy tanks, expect a 0.1 to 0.15 (I moved to this position 3 months ago)
    Commercial banks raise rates out of cycle adding to cost of living, domestic expenditure to move to defensive positions….households cut spending to essentials.
    Commercial property values and returns to drop significantly.
    A run on offloading of domestic assets, cars, boats, toys etc.
    Low investment cycle to postpone growth further out than government expectations, government tax revenues trend lower causing disruption to infrastructure development and services provision, KPI will be adjustments to the governments budget “due to lower than expected economic performance” critically these adjustments to break out of cycle, less than 12 months.
    Have I covered everything?…..of course the domestic housing market….no good news I’m afraid for a long time unless the government intervenes…..my next very favourite quote from the Castle…”tell them they’re dreaming” 😎

  2. Christine Macfadyen

    Given asic are loosening the reigns on the banks & the fact shares are very volatile at present, I think investors will return to property. Bricks & mortar just seem a safer haven & with our ever increasing population, rental properties will always be needed. I am optimistic that now Sydney & Melbourne is out of reach of the average investor, those smsf with money will get back into investing & in particular in South West Queensland of the gold coast where u have a lovely standard of living within close proximity to magnificent beaches! No rain on those investments over the next 4 years

  3. Sam

    Hi Steve, I like the analogy of the umbrella and also the weather metaphor, makes sense what you are saying about the drizzle rain leading to a heavy downpour, how long do you think this property downpour will last? When do you think the sun will poke it’s head out again to brighten up the market and lead to profit/re-gaining value?

  4. Jane

    Steve, I think the best thing about the way you teach (and write) is just how clearly you can lay out your thoughts. It’s so great to read and learn from. You can distill a concept into just its essence without lots of fluff. Thanks for the continuing education. Jane

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