The question on everyone’s mind at the moment is:
When is the property market going to recover?
Before we try to answer the above question we need to take a Delorean back in time and see what got us to this point.
I’d like to go back as far as 2007 the year before the Global Financial Crisis hit and you’ll understand why shortly.
The real estate market had a great year in 2007 and reached what we now know was the top of market in that cycle, it was much like what we experienced last year in 2017 and being in the industry 16 years I saw the same things happen again like de-ja-vu.
The year prior in 2006 everyone was calling the top of the market much like in 2016 however the market had one more run at a sharp increase left in it people weren’t expecting.
This sharp increase I’ve come to learn is called a parabolic rise (stock market investors term). It’s when at the top of the market the chart rockets up sharply which happens generally at the peak before capitulation.
After the peak in late 2007 in the early to middle stages of 2008 the markets started cooling with rapidly rising interest rates that slowing the market down. I remember at the peak of the rate rises then the banks were lending at 9.25% to customers, affordability went out the window and people were fixing in 3-5 year terms at rates in the 8%+ region to try and survive the next few years thinking they would go higher.
Then in late 2008, BANG! The global financial crisis hit and overnight there was virtually no buyers or money around. When this hit I had 17 vendors selling with me at the time, the market was already slow due to high interest rates but with the widespread panic of the stock market crash that hit overnight we couldn’t even get an enquiry on any of the listings.
I called emergency meetings with all 17 Vendors at the time and gave them the option of either reducing their asking price by at least 10% or to take their property off the market and stay put or rent it out. We did not know how bad things could get and every body at the time was calling it another great depression.
15 of the vendors dropped their price by at least an average of 10% and only 2 withdrew their property from sale to ride out an unknown length of time storm.
Between the GFC hitting and the end of that same year after we made the price reductions I sold pretty much all bar one of the properties for as much as I could.
It was sad times back then as some of the vendors had only just retired and lost 40-50% of their superannuation in the stock market and now had to sell their home for much less than they anticipated. Some of the recently retired vendors had to go back to work.
What happened next was unbelievable, in Mid-2009 the market recovered quickly as big stimulus packages were put into play by the governments across the world to prop things back up and keep things afloat.
The Australian government started funding big building projects, gave away batts in the roof for free that ended up being a disaster in its own right and I even received a cheque in the mail for $900- at the time like 17 million other Australians. Interest rates also crashed in half and you could borrow from the banks at around the 4% odd region. The government also came out and offered ridiculous First home buyers grants that were double to triple the norm to help stimulate the property market.
With all that ammunition behind it the market recovered what it had lost and went up way higher for another 18 months after Mid-2009 and anyone who sold directly after the GFC unfortunately lost out big time as by late 2010 prices were at all time highs.
What followed after this quick 18 month recovery and boom? In early 2011 the stimulus was starting to run out with first home owner grants at ridiculous levels being reduced due to the market recovering, along with interest rates rising again to slow down the market because it was hyper inflating and this was the start of another bust which lasted for 2 long years.
The miners during this same time were still making a lot of money due to China’s growth but the Labour Government at the time saw this as an opportunity and imposed a super tax which eventually killed the mining boom in WA.
There was trouble around the world as stimulus was wearing out and in 2013 America almost fell off a fiscal cliff but not before President Obama decided to print more money again with another round on QE “Quantitive easing” to simulate things again. At the same time we had a change of government from Labour to Liberal which at the time was a breath of fresh air as sentiment for Labour at the time under Rudd and Gillard was very negative. (I’m not trying to be political here either just stating facts.)
By Mid-2013 after the change of government interest rates had started to come down again and people were starting to feel positive again and this was the beginning of the last incredible run we had which lasted for just under 5 years. With lots of printed money in the system, relaxed lending, low interest rates, foreign migration/buying, rising employment opportunities and population growth, times were indeed great.
The last run we have experienced was incredible, prices rose by around 50-75% in under 5 years depending on the property type and location you purchased in of course. In 2015 at almost the mid point of this last boom housing affordability started to become an issue and APRA started to impose restrictions on interest only loans to investors and also made the banks impose a higher interest rate for investor loans to purchase a property. From this point onwards we started to see the government also make further changes to foreign ownership with higher taxes and tighter restrictions to purchase, not to mention they made changes to stamp duty savings for off the plan purchases for the average Australian.
The market for a while was surprisingly able to absorb all these changes and Sydney and Melbourne went on to have prices of 13x and 10x price to income ratios respectively which is absolute madness. The average Australian was in way too much debt now and we had a household debt crisis.
The property market was in a bubble, housing affordability was out the window and the government needed to do something and in 2018 enter the royal commission into banks and lending which has led to the game being over, for now.
The banks are the ones to blame for this current bust but in fairness nobody was complaining when prices were soaring upwards. The challenge is now for Australia as a country is mining and property have now busted and can we survive this and prosper? I think we can!
When did the bubble burst?
It depends on who you ask and where they work. I remember speaking to another agent friend of mine who works in the eastern suburbs earlier in the year around easter time. He advised me that he had his worst quarter in years and he asked how I was travelling? I was in shock at how he was going knowing how hard he works but advised I had a record quarter.
I decided to check back in with him at the end of financial year (3 months later) and he advised he had improved but only because he was reducing prices heavily but the conditions were GFC like. He asked how I’ve been going? I advised another great quarter and an excellent financial year as a whole so It was hard to fathom how somebody 20km away wasn’t fairing to well.
After that phone call I went to Japan for 2 weeks in early July for a well earned break, It was a great holiday other than the fact it was very hot due to it being their summer. When I go back to Japan again I’ll go back any other time of the year other than their summer because there is a lot of running around cities and subways and in 35 degree conditions it isn’t very pleasant. All in all though a beautiful place to visit and I highly recommend to go if you’ve never been.
When I got back from the trip Mid-July I had found out pretty quickly that the market had well and truly burst it’s bubble in my area. From Mid-July to late August I got slaughtered, I had my worst July ever although in fairness I was only around for 2 weeks and a very ordinary August for sales.
At that point I had to adjust quickly to try and beat the market and I went around and met with all my clients quickly and advised them all start lowering their prices and expectations as the market was heading into a downturn. This turned out to be great advice as the prices achieved by clients that listened and sold in September are unachievable now and I ended up having a phenomenal month in September of course selling the properties.
I was now confident that I had adjusted with the market’s new pricing and things were back on track after a great month in September until, CRUNCH! The market went down again in October feeling like it was in free fall this time and after having another average month I had to go and see all the vendors again and ask for reduced expectations and prices.
In September I was already valuing properties more cautiously but I had to value them even more cautiously again when the second wave hit in October.
How much has the market fallen by you may ask? There has been a 10-25% correction in my area depending on the property type and suburb. (The biggest correction has been on the land value properties as builders and developers have been unable to finance deals due to the tightening of credit from essentially being able to borrow anything a year ago).
In November I had a great month again after re-pricing the properties and I’m currently having an “OK” December considering it’s a short month taking out Christmas to New years although every few years I seem to do a deal in between.
Unfortunately though I wasn’t able to get all my vendors to lower their prices and expectations enough to meet the market and sell prior to Christmas although I’m aiming to have them well positioned for early 2019 to get them sold and I’m currently negotiating on two deals as I write this.
What will things be like in 2019?
I’m expecting things to be much of the same for the first half of 2019, I saw a recent chart showing that Melbourne is already down to 8x price to income from 10x (This is halfway to what is considered normal at 6x).
I believe we will still have some further fall out from the royal commission, along with credit card reform which comes in next year not to mention the federal election in May and this may have some further impact on prices.
At some point though I believe the sellers who need to sell will have sold and once that selling is done then the stock levels will start to diminish and the supply and demand will start to re-balance again making it a more even market albeit at the new lower prices course.
It will then come down to who wins the election and what policies they bring in that will either help or hinder the market, other factors that could impact the market will be interest rates and any more changes to lending policies.
As I’m writing this blog APRA have just lifted the cap on interest only loans to investors which is pulling a string in favour of trying to assist the market although things like this can take time to kick in, like when strings were pulled to slow the market they took time to kick in.
I do believe the next 12 months will present a very good buying opportunity to get back in the market at the bottom ready for the next leg up. It’s just a matter of when the next run up will start as we could base at the bottom and be stagnant for a couple of years for all we know. (Nobody knows).
Warren Buffett once said though “Be fearful when others are greedy and greedy when others are fearful” and there is certainly a bit of fear out there at the moment so it’s probably the time to get out there and atleast start looking for opportunities.
Overtime the market is generally up more than it is down and that’s why prices trend up over time.
The current drop has been hard and fast and although there might be further downside we are already closing in on acceptable price to income ratios, APRA is already pulling levers to fix things and I’m sure if things got really bad the government will step in to try and intervene if it got to a crisis stage and plowed Australia into a recession.
Fundamentally now though things look pretty good when you consider that house prices are lower, interest rates are still low, the population is still growing and unemployment numbers are low.
My stockbroker tells me that “Credit controls house prices and wages control rents” and I believe with the current slump he has been proven to be right with that statement. Looking at the fundamentals and should they not change if credit is made available or loosened up again the market will go up.
Not being political but personally other than the tightened credit, I only have concerns moving forward for some of Bill Shorten’s changes to negative gearing and the capital gains discount benefits if he gets in. If he makes good on his promises and passes these changes then this may pull more investors out of the market although people may actually start buying in the short term though before these changes come in to get in under the old rules which will be grandfathered before the bill is passed.
Just to quickly recap the last 10 or so years of the markets up’s and down’s;
2007 UP (PARABOLIC)
2010 UP (PARABOLIC)
2017 UP (PARABOLIC)
In conclusion, if you were lucky enough to have not purchased at the top of the bubble in the last couple of years you now have the opportunity to buy in at lower prices and it’s certainly a lot better buying opportunity so don’t wait too long.
If you did buy at the top of the market and you’re currently down on your investment you have a couple of options, you can either ride it out long term and the market will generally take care of itself or if the loss is small you could consider selling out and moving on. (Obviously consult your accountant and or financial adviser on any financial decisions).
Remember you can also buy and sell in the same market, although generally in these times my advice to clients is to sell first before buying that way you know what you have to play with and then can go and buy with confidence.
As you can see though through the markets cycle of up’s and downs it still goes up over the long term. Remember though you actually don’t get very long periods of time in the downturn so when this opportunity presents itself, it’s good to try and catch it by locking in a good deal and setting yourself up for the next run up.
If you’re in the market to either buy or sell a property soon please feel free to contact me.
Merry Christmas, happy new year and I wish you a prosperous 2019!