Please, no more violins for falling property prices

Oh, please spare us the violins and the flood of adjectives that are accompanying the current “historic” property price “plunge”.

The only thing worse than the whining that accompanies the property price falls was the fawning words of adulation that accompanied the seemingly never-ending, double-digit boom in housing prices that preceded it.

It is almost as if several Property Commandments have been broken at the same time, leading to tough times at the Property Temple, which in recent years has been a place that has attracted huge audiences – many of them also addicted to home reno and flip television programs.

Prices never go down – yeah, right!

One of those commandments to be broken is the old line peddled by every real estate agent since Adam – property prices never go down.

On average, over the long term and applied across several major Australian markets that commandment still holds water but at this specific moment it is absolutely wrong.

Another broken commandment is the old “you’ll never lose money on property”.

Well, at all points of the cycle many people do just that and at the moment their number could be rising a little.

If they don’t lose money on the actual property, many owners lose it big time on the loan, given the sheer quantity of money required to buy a property now and what effect even a small interest rate rise can have.

The boom is forgotten, the apocalypse is nigh

However, just to add some perspective to this property apocalypse, compared to the boom that preceded it, this session of falling prices hardly even qualifies as a correction.

Just look at the latest numbers – CoreLogic’s home value index fell 1.6% in August, which we are breathlessly told is the “biggest national monthly decline since 1983.’’

Still, when you compare it to the 3.9% weekly fall that has just happened on the Australian share market, such falls are nothing to get too worked up about.

The rival property index by PropTrack had property prices falling by a smaller 0.4% last month.

However, both measures concurred that prices have fallen across nearly all cities and regions across Australia, with the exception of Darwin.

As you would expect, the biggest drops have been in the most populous capitals of Sydney and Melbourne, down 7.4% and 4.6% respectively from their COVID peaks.

What these numbers ignore, of course, is the dramatic run up in prices that preceded these falls which reduce the current falls to losing some froth off the top rather than the sort of falls that would stimulate wailing and gnashing of teeth.

Falls to be expected when interest rates rise

Furthermore, the falls are the absolutely expected result when you have had a rise in interest rates from historically low levels.

What the falls don’t really leave much of a dent in is the poor levels of house affordability, with anything lost on the price generally taken up – and then some – in the form of higher interest rates.

Indeed, with rates rising, affordability is arguably going down even as prices go down as well, given that most property buyers will have a loan.

That will be even more the case this week when interest rates rise again.

To really have an impact on affordability, prices would need to come down by the same sort of serious double-digit percentages that that some of the banking shock jocks are predicting.

With rental yields on the rise, these cataclysmic predictions are less likely, due to the fact that property investment returns are on the rise.

Another factor set to limit price falls is the increasing cost of building, which will literally build a floor under replacement prices for buildings.

Even with massive falls from here – which I think are less likely than the most alarmist projections – the broad metrics of housing affordability still won’t change too much.

There was a time in the 1990s that you could buy a property for four times the median or middle income but that number has climbed to seven times the median income, or perhaps eight if you live in Sydney.

Those numbers might hold or fall slightly but they are unlikely to retrace all of the way back to the 1990s measure, not to mention the grand old boomer days when properties were relatively affordable compared to income – albeit at eye-watering interest rates.

Air of unreality surrounds property prices

The most annoying thing about the property price mania – other than the vagaries of the imprecise statistics available – is the air of unreality that still surrounds current price levels.

To the casual observer, property seems like a one way bet to success, with the only blips on the horizon the current “shock horror” falls, which have upset the “natural order”.

This sort of fantasy comes about through a concentration on capital value, with of course no allowance ever made for transaction costs, interest, rates, insurance, management fees and land tax.

This is not to doubt the genuine performance of property over time, which in Australia in particular has been stellar.

Australian real estate has produced amazing results

The 2018 Russell Investments/ASX Long Term Investing Report found that over the 20 years to the end of 2017, property produced slightly better returns on a gross of fees and tax basis with a 10.2% a year return compared to shares at 8.8% a year.

The results narrowed in after tax returns and varied depending on the investor’s tax bracket but such results are not to be sneezed at.

Property also has some natural investment advantages – it is an easy asset to borrow against to a very high level and it is one of the few assets that an astute buyer can add value to through alterations and renovations.

However, it is not perfect and it can and indeed does produce losses at times.

When it does, that is a great time to celebrate the rarity of such volatile reversals rather than start to wail and complain that the natural order of the universe has somehow been disturbed.