Dec 20 2021 50 mins 47
According to Core Logic, over the last 12 months, their home value index has risen by 30% in Sydney, 26% for Brisbane, and almost 20% for Melbourne. There is no doubt that these levels of property price growth are unsustainable in the long term, so are we in a property bubble? Are our property markets going to crash? And if so when will this happen? That’s what I’m going to discuss in today’s podcast with independent financial advisor Stuart Wemyss, as we go back in history to see how much property values have fallen in the past – I think some of the stats that Stuart will share will surprise you. Are Our Property Markets Going to Crash? If So, When? The average household in a raft of suburbs around Australia will be pushed into mortgage stress if interest rates climb just 1%. Well…That was a headline doing the rounds not that long ago. At much the same time modelling by one of Australia’s most publicized property pessimist suggested that a minimum mortgage rate hike combined with a higher buffer rate as required by the recent APRA edicts to the banks would send thousands of residential landlords into financial stress and could fuel house price falls by the end of next year. So, will higher inflation lead to higher interest rates that will tip the scales and spell the end of the current property boom? And more importantly, will it create a property market crash like a number of commentators are predicting? The problem is that some people know just enough to think they are right and not enough to realize they are wrong The reality is that property has always seemed relatively expensive. What is mortgage stress? There are various definitions of what mortgage stress is, but it’s most commonly defined as a household spending more than 30% of their pre-tax income on their home loan repayments. Yet looking at mortgage defaults or mortgage arrears with our banks would suggest that very few Australian households are currently suffering mortgage stress, and many are well ahead in the mortgage payments. Let’s look at what could cause a housing market crash There is no doubt that at some time in the future we will experience a cyclical property market correction, but there is no need to worry about a house price “collapse” like some property pessimists are suggesting. House prices “collapse” when people are forced to sell their homes and there is no one willing to buy them. A true collapse in house prices would require a significant external shock such as: Unemployment is high enough to trigger a waiver forced home sales, and that’s not going to happen. Interest rates rise so high that they would cause a raft of homeowners to default on the mortgage. The Reserve Bank wants this about as much as it wants another strain of coronavirus. A credit squeeze – APRA is currently making it a little bit more difficult to borrow money, but they don’t want to crash our property market either. A severe recession that would increase unemployment and cause homeowners to default – that’s not on the cards. A severe oversupply of property – currently we have an undersupply of the right type of properties that most homeowners want. So, while a crash is not on the cards, a correction will occur one day and at that time some properties will hold the value better than others. Obviously, that’s the type of property you should own. Australian property price bubble? According to Core Logic, the home value index has risen by 30% in Sydney over the 12 months to October 2021, 26% for Brisbane, and almost 20% for Melbourne. Whilst recent property price growth has been unsustainably high, it’s more important to consider medium-term growth, especially considering negative returns in 2017-2019. Over the 5 years to June 2021, the median house price in Brisbane, Sydney, and Melbourne appreciated by between 4.7% p.a. and 6.9% p.a. (according to REIA), which is below the long-term average. Whilst some commentators have recently [...]
