Australian residential property prices seem to have peaked late last year with weaker prices now all round Australia, including Adelaide. Is this the end of the residential property boom? Probably. Investment property rents are near record lows, so property investors now heavily rely on capital gains to justify their investments. But that growth may not materialise for many years as house prices face many headwinds.
Australians have extremely high debt to income compared with the rest of the world and our interest rates should soon begin rising again. The government is discouraging foreign property investors and banking regulator, APRA is restricting investor lending and interest only loans in particular. So, in coming years a large number of ‘Interest Only’ loans will convert to Principal and Interest loans, further stressing already stretched household budgets.
The impetus behind years of high house price growth is starting to reverse. As Aussies are not strong savers, banks borrow much of what is lent from offshore savers, where interest rates are already rising. Against this backdrop, our incomes are not rising to match… and housing-related tax concessions are being questioned so as to restore the Federal Budget.
Both sides of politics want to assess more of a home’s value against Age Pension eligibility but are short of the courage to do so. In this context, the $300,000 ‘Downsizer’ super contribution available after 1st July 2018 may cause a slowing of sales till then… but a sales boost soon after. The Downsizer is a boon for wealthy homeowners as it does not even require a replacement home.
A further headwind is a likely Banking Royal Commission recommendation to tighten bank lending criteria back to previous more prudent levels, probably triggering a housing loan credit squeeze.
High migration levels have added to demand and the supply of residential property has also grown, particularly with east coast apartments. But house prices are determined more by the demand and supply of credit than the demand and supply of housing.
“Importantly, the natural growth limit for property is our ability to pay for it.”
So, any tighter home loan credit due to more prudent bank lending standards may add pressure to a reversal in house prices.
What about Jobs?
Our economy has been moving away from blue collar and manufacturing work towards a services sector that needs a more educated/skills-oriented workforce. While job growth is strong in some roles and regions, for others there is a high risk of being left behind. So it is crucial to facilitate improved skills and education for job seekers. Sadly, some former previous blue collar folk are ill-equipped to morph into the highly skilled, computer literate workers of the future.
Growing wealth gap
Home affordability is behind a growing wealth gap that tends to reflect one’s age. If the UK and US electoral experience is anything to go by, it’s an ‘age divide’ that may be inflamed by political positioning in the time ahead. Either way, dealing with the expanding wealth gap to create more affordable homes is likely to result in lower prices for existing owners.
When to sell?
Unfortunately, all these factors might point to the poorest house price outlook in many years. Because a generation of Australians thought house prices could never fall and took on huge debt accordingly, any implied housing slowdown may also have a domino effect elsewhere in our economy. As with stock prices, it is best for investors to sell an asset when potential buyers still perceive some value is left for them. This is usually better than waiting for unmistakeable signs that the market has turned.
“Investors are enthusiastically buying houses on rents as low as 2.5% hoping they will get a capital gain. But gains only come when a buyer is willing to accept even lower rental yields.”
So, how far could prices fall? Historical experience around the world suggests a fall either side of 35% is possible. We think this might occur via an initial drop of 10% or more, then prices may not rise for many years during a prolonged adjustment phase. Any such change should be more moderate for Adelaide, as we didn’t experience the extreme growth of eastern states.
But how long would it last? Again, history suggests 5-8 years. Property crashes tend to last much longer than stock market ones. Japan is an extreme case in the early 90s when home prices took 17 years to recover (note Japan lacked our high migration rate). Regardless, Australians under age 40 or so have never experienced a house price fall, so it would take some time for any actual fall to be digested with changed behaviour.
Better to focus on exports?
Of course, politicians won’t wish to preside over such a house price adjustment, making a gradual change more likely. Even so, such a change would affect us all, particularly those directly involved in housing activity (a large lobby group). Pollies may need to find a positive alternative while house prices return to sustainable levels. In seeking that, they could consider creating strong tax incentives for Aussies to invest in innovative export industries – thus improving Australia’s wealth while providing a constructive savings option.
So, what’s an investor to do?
It may not be too late. We think there are two logical steps every property investor should consider now.
- Review your property portfolio and consider your position if rates rise. Perhaps sell those of your properties with the least potential and only hold your highest quality properties through the cycle.
- Consider fixing your mortgage/loan rate. Fixed rates are still low and with rate rises in the wings, fixing seems compelling.
If this discussion raises questions for you or your circle of contacts that might benefit from our services, please ring us to discuss how we might help.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.