Has the property market now finally recovered?
Before we try to answer the above question we will need to take a Delorean back in time to some excerpts from my 2019 Property Market Predictions blog post I wrote in December 2018.
What will things be like in 2019 revisited?
The market started going down in July 2018 in my core area Melbourne’s north and in December when I wrote the blog post predicting what would happen in 2019 I wrote: “I’m expecting things to be much of the same for the first half of 2019” (Genius), 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. (Right again)
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. (Right again)
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. (Right again)
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. (Right again, finance although tight has been loosened a little)
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. (Right again and we now know the buying opportunity was in the first half of 2019 although the election result and lower interest rates etc. rebounded the market quickly)
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 at least start looking for opportunities. (Warren Buffett was right again as when the market was going down it was a good buying opportunity)
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. (Government and RBA are working hard to avoid this. Stimulus coming for first home buyers *deposit scheme and interest rates are at lowest levels ever and look like potentially going down further.)
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. (Very good advice at the time)
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. (We now know credit was loosened by APRA by way of the cap on investor loans and the loan interest rate serviceability level. Genius!)
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. (We now know that Bill lost so regardless the election result went the right way for property bulls.)
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)
2019 DOWN/UP (50/50 year Down first half up second half)
2020 ???? I’m predicting up for the first half.
So what will the property market do in 2020?
I expect 2020 to start similar to where 2019 ended with low stock levels and quality well priced properties achieving good results.
The first home buyers deposit scheme should also give some further support to the lower end of the market to help under pin things.
The fundamentals still continue to point to a market that will grow;
These includes a low supply of listings, lower prices and interest rates than market peak, growing population base, relatively low unemployment numbers.
I’m personally experiencing though that buyers are still cherry picking the best priced & quality listings so not everything is selling as fast and furious like it did in the 2017 peak. This could be attributed to a number of things including tighter lending, lower interest rates could be making buyers more selective that can afford to borrow more or general confidence could be still growing and we are not at mania or euphoric levels yet.
What are the risks?
Here’s the bad news, the general economy is very patchy especially in the retail sector which could amount to further downsizing and closures of businesses with people losing their jobs. Technology efficiencies, outsourcing and offshoring to save money are having businesses close divisions and in the process are also making people redundant.
Stock market indexes in particular the Dow Jones are at all time high’s with PE ratios of some of the world’s biggest companies at astronomical levels. The bull market has been running for a long time now and we are potentially overdue for a bear market. Things like the Coronavirus, Potential war with Iran, The 2020 US election, underfunded Pension funds could all be triggers for the next crash which would hurt confidence globally.
A black swan event could shock at anytime and lead to more volumes of property for sale (creating oversupply) then followed by forced selling with a decline in demand as fear sets in could easily reverse the market in the other direction again.
With low interest rates and a country committed to keeping the property market running and strong you would think at least for the foreseeable 6 months of the year things should remain strong. After that is anyones guess as the can continues to be kicked down the road.
I personally believe real estate is like gold and is a hedge against inflation although Governments and banks have manipulated it in the last couple of decades with mass migration, incentive schemes, lower interest rates and easy money hyper inflating the values. That being said they (Government and Banks) will always try to keep property healthy for the greater good of the economy. I would always rely on yourself though and make sensible decisions when buying any investment with proper advice.
Disclaimer: This is not by any means financial advice and you should always consult your own accountant/financial advisor to help make good financial decisions within your means.
Remember if you’re looking to buy, buy what you can comfortably afford and if you’re looking to upgrade you can also buy and sell in the same market to mitigate risk. Generally if you’re upgrading my advice to clients is to sell first before buying that way you know what you have to play with and then you can go out and buy with confidence.
If you’re in the market to either buy or sell a property soon please feel free to contact me and i’d be glad to help.