Property market: rock bottom or deeper still to go?

What is a real estate “bubble?”

A property bubble is initially fueled by demand which outstrips a limited supply. It’s the increasing price of housing and commercial properties leading to an unsustainable level. If that demand and the speculation and exuberance behind it quickly fall away—say for example by an increase in interest rates, a tightening of lending regulations or a loss of confidence in other financial markets—the bubble can quickly burst.

Some experts—albeit seemingly only those quoted in newspapers—will tell you that the bubble in Australia has already popped or that housing prices could fall as much as 85 percent within the next year. One hedge fund manager even claimed that there was “no conceivable reason why some don’t go to $1” when discussing the plunging prices of Sydney’s outer suburbs.

While these sensational claims will no doubt sell a paper, what do the real estate experts think? Has the bubble well and truly burst? Will prices continue to tumble or have we hit rock bottom with home values set to rebound in the next year or so?

Why is everyone worried about real estate bubbles?

Historically, when a housing bubble bursts, a severe recession will follow, so it makes sense that everyone watches for the signs of a severe downturn in the property market.

You only have to look as far as the previous decade to see the pain caused in the US when the housing market collapsed seemingly overnight, in some areas. When the value of properties plunged below the level of debt against them, people scrambled to sell, driving prices down further. Where properties couldn’t be sold or the remaining debt was too high, owners simply had to walk away, losing everything. Fuelled by a variety of different factors, this was an example of an epic ‘pop’.

While it was widely acknowledged the housing bubble burst in the US in 2007, newspaper headlines would have people believe Australia will go the same way in 2019.

However, experts in Australia are a little more optimistic.

Is there a housing bubble in Australia?

Latest figures suggest there has been a definite downturn in housing prices in Australia but conditions are not uniform across all states.

Nerida Conisbee, chief economist at realestate.com.au, told InfoChoice that:

“Perth and Darwin are five years into a downturn, while in Sydney it has been shorter and faster, with prices down almost 10 per cent in only 18 months.

“Melbourne is half of this. In other cities, the results are far more mixed. Adelaide, Hobart and Canberra are really seeing quite different conditions.”

So let’s break this question down ….

Is there a housing bubble in Melbourne?

This is the $660,000 question if you go by the Melbourne’s median house price this year. ( Down less than one percent this quarter).

Experts like Nerida Conisbee, chief economist at realestate.com.au, say Melbourne’s job growth and its comparative affordability are supporting the market.

Nerida stops short of referring to any sort of housing bubble, preferring to call current trends “a market correct or a downturn.”

The difference is a bubble is a sudden collapse in the market while a downturn is much slower.

Is there a property bubble in Sydney?

Albert Sasson is the principal at Belle Property in Double Bay in Sydney’s Eastern Suburbs, where the downturn has hit hard particularly over the past 18 months.

“We’ve seen a drop off in stock available to buy and our open home numbers have been lower,” said Albert Sasson.

“Because of the difficulty in borrowing funds and the lack of stock, people have not been out shopping because there’s not really anything to buy.”

While Albert Sasson has watched the downturn in Sydney, particularly in the apartment market and the lower end of the house market, he hasn’t experienced quite the same reported falls at the high end.

“People are buying for the long term, not the short term.

“It’s been harder for people to borrow money from the banks, but where they can, they’re still willing to pay for the right property.”

Is there a property bubble in Brisbane?

Amanda Becke works across Brisbane’s inner-east suburbs, a market which has remained pretty stable.

“Towards the end of 2018,  we’ve saw a bit of a downturn in the market,” Ms Becke told InfoChoice.

“Properties are taking longer to sell, there’s fewer buyers and we’re having to really, really, really work to have the buyers meet the seller’s expectations.

“We found in most cases, that seller’s had to come down in price, the market was just not willing to pay what their initial expectation was.”

And Gunther Behrendt, a real estate agent from Stone’s Corner in Brisbane agreed.

“I think we’re at the bottom of the property cycle now,” Gunther told InfoChoice.

“We’ve undergone a retraction and the market has been going through a correction. The property market, as a portion of household debt against GDP is very high in Australia. This would suggest there is a potential risk of a so-called ‘bubble’.”

What the future looks like

Nerida says, “Moving forward, the outlook for the market is getting clearer. At the beginning of the year, we had the uncertainty of the Financial Services Royal Commission final report, which, in the end, said pretty much nothing about housing finance (although mortgage broking did get hit hard).

“The biggest impact of the Royal Commission was actually when it was announced, with banks immediately beginning to focus more on responsible lending.”

At the end of May, The Australian Prudential Regulation Authority (APRA) suggested that banks relax their lending criteria. Instead of assessing borrowers’ lending capacity at seven percent, from now on, banks should assess serviceability—that is a borrower’s ability to pay back a loan —at 2.5 percent above the actual home loan rate. This more realistic means of measuring serviceability should lead to greater borrowing power.

Coupled with these measures, the Reserve Bank of Australia (RBA) has signalled that a cut in interest rates seems likely, perhaps even dropping as low as 1 per cent by the end of 2019.

And with the election now behind us, all of the experts agreed that the future looked bright.

“There is definitely more consumer confidence today than a week ago. We’ve seen a flurry of activity. All these factors point towards an increasing demand and a good future.” said Gunther.

Although they are based in different parts of the country, Amanda and Albert agreed they’ve both experienced a huge spike in potential buyers just recently.

“I’m definitely optimistic in things changing.” said Albert.

“Now that the election is over, banks are reducing their assessment rate and there’s a bit of stimulus that will be getting to the buyers. There will definitely be a change in the market.”

Amanda explained, “What I’ve found even through a downturn, if you’ve got the right property, it will still sell at a good price.”

“We might not be seeing record-breaking prices on every house but Australians will always buy and sell houses. I’m really optimistic.

“Consumer confidence is coming back and I think there’s a new energy out there. I don’t believe the market will go down this year.”

Gunther has seen a lot of recent enquiries from new home buyers too.

“First home buyers have been out of the game for a while. Investors have certainly retracted and have opened up the opportunity for first home buyers to step into the market.

“With relaxation in lending criteria, first home buyers haven’t had it so good in about 10 years.” says Gunther.

So while some experts still believe that housing prices could plunge, particularly in outer suburbs of the bigger cities, most others are optimistic that we’ve seen the worst and are looking up.

Whether you sensationally call it a ‘housing bubble’ or use the more low-key term of ‘market correction’, it seems that although there is a risk in Australia, the sky is staying up for now.

Obviously if you live in a city which is experiencing one of the downturns, it is going to feel worse, but that overall, signs of a recovery are very positive.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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