Australian property market crash is no certainty

Is Australia’s property market about to fall off a cliff, taking our big four banks with it?

It is certainly a red hot topic of conversation and it seems that every investment analyst is trying to outdo the next one with the amount of doom and gloom they can pack into their forecasts.

UBS Group is the latest with their worst case scenario encompassing a 30 per cent plunge in property prices coinciding with rising unemployment, stalling economic growth, official interest rates being cut to zero and a terrible outlook for the big banks.

Of course, UBS are not alone in their predictions of doom and gloom for the Australian property market – predicting looming disaster has almost become an international economic sport.

Putting a dent in the argument

So much so that famed US doomster, Harry Dent, has been predicting an imminent Australian property Armageddon since at least 2011.

Of course, his frustration at being spectacularly wrong for all of that time as property prices kept on rising fast has only served to encourage him to get more rash with his idea that property values will fall in half.

Dent attributes his poor prediction record in Australia to our high level of immigration but thinks that those strong demographic trends will only hold the market up for so long.

“I predicted almost every major bubble and major turn of events in the world except for this one,” Dent said on a Channel Nine interview earlier this year.

“But a bubble can only go so far, you are way more overvalued now than you were back then, more than twice what the US is and most European countries and this global crisis, so it may just be 20 per cent, I say 50 per cent max, that’s the range.”

Dent will have been “encouraged” by the fact that the Sydney market is now seeing prices contract by about eight per cent a year and Melbourne is not too far behind.

Those sorts of falls will need to keep running for about five years for his prediction to come true or prices will need to drop even faster than the current rate.

So what are some of the reasons why Dent and his ilk could be right and why they could – once again – turn out to be wrong?

Bearish trends for property prices

Many of the negative trends pushing property prices down are fairly well know, given the plethora of bearish reports out there.

Most of the reports centre around regulatory changes in banking with more to come after the Hayne Royal Commission, which taken together are making it more difficult for property buyers to get a large enough loan to support rising property prices.

Interest only loans disappearing

Interest only loans, long the staple for property investors, are much more difficult to get, forcing investors into higher repayments through principal and interest loans.

That same change is hitting existing property investors, who are suffering a cash flow squeeze as they are being forced to roll over interest only loans into principal and interest loans with significantly higher repayments.

A natural consequence of these banking changes is that investors can’t buy as many properties as they could during the boom, as well as feeling the pain of falling sale prices which are crimping and in some cases or short term purchases even eradicating profits.

All of this naturally discourages potential new property investors and reduces the purchasing power of existing investors.

Owner occupiers finding it hard as well

Owner occupier home buyers are also having to fight harder to get finance, with banks forcing them to produce more comprehensive data to verify their spending and show that their budget can handle loan repayments.

Another issue is Australia’s already high level of household debt, which restricts the ability of households to deal with external shocks such as interest rate rises or unemployment.

One further issue is that Opposition Leader Bill Shorten will go to the next election not only as a strong favourite to be the next Prime Minister but with a policy of winding back negative gearing and capital gains tax concessions for property investors, potentially steepening any decline in the property market.

Supporting trends for property prices

Interestingly it was Harry Dent that pointed out one of the greatest supporting trends for the property market is immigration.

Australia is one of the few first world countries with a solid immigration intake and that stimulus remains.

Even though the number of permanent immigrants to Australia has fallen from 183,608 in 2016-17 to 162,417 people in 2017-18, that is still a large number of people to house.

Most of them will seek to live and work in the big cities – predominantly Melbourne and Sydney – which underwrites a significant amount of building activity each year.

Urbanisation overlooked

One of the factors that many property pundits fail to understand about Australia is that it is heavily urbanised, with 80 per cent of new immigrants flocking to the big cities and more than two thirds of Australia’s population living in the major urban centres.

People go where the jobs and services are and in Australia that is largely the big cities.

Strong employment

Employment is also very strong in Australia at the moment, with the latest figures showing a jobs surge in October which kept the unemployment rate steady at a six-year low despite an increase in labour market participation.

Full-time employment jumped by 42,300 in October, adding to the gains seen in September.

Strong employment and low unemployment levels work to stimulate the property market by keeping demand stronger and allowing for greater repayments.

Falling prices attract buyers

Another factor that could support the property market is that falling prices could attract back a lot of potential owner occupiers who were forced to the sidelines and the rental market during the price boom.

When prices were rising faster than people could save, that was a tough market to break into but now that prices are falling, those who missed out can dust off their plans to buy again.

While those thwarted buyers will likely wait on the sidelines for a while to ensure that prices don’t fall any further, they could return to the market en masse as soon as prices stabilise.

Such a scenario happened in Canada which has a very similar housing market and economy to Australia, with early price falls followed by a second buying spree which saw housing prices rise again.

Predictions are just that

The truth is that nobody knows for sure where any investment market is heading so claims of insider knowledge and rash predictions should always be treated with scepticism.

Amid the current avalanche of doomsday predictions for property prices, it is worth remembering that markets can “muddle through’’, with prices remaining static or falling slowly for quite some time before resuming their upward progress.

It would be unwise in the extreme to discount that possibility just because a swag of negative predictions are swamping the headlines.