The property sky is not falling in just yet

Property prices Australia Sydney Melbourne peak 2018
Property prices peaked for Sydney in July 2017 and Melbourne in November 2017.

Yet again the property “Chicken Little’s” are running around in circles and crowing that the sky is falling in.

If you were to believe the headlines, property prices have fallen “Off a cliff” and are “alarmingly close to record-hitting territory’’.

The reason for such inflammatory headlines is now becoming familiar as with every month’s figures the strident calls of “we’re all ruined’’ get ever louder.

Price peak is behind us

What we now know with a fair bit of certainty is that Sydney’s property prices peaked in July 2017, followed by Melbourne which peaked in November 2017.

Since then – shock horror – it has been all downhill with Sydney prices falling 9.5 per cent and Melbourne 5.8 per cent.

Of course, even that measure is not absolutely certain, due to the fact that we don’t sell the same houses every weekend so there is considerable variation within regions and cities and even overall.

Prices go down as well as up

However, if we overlook that rather large statistical detail it is clear that property prices in the big markets of Melbourne and Sydney have been falling – forever shattering that always stupid real estate saying that “property prices never go down’’.

They can and do go down at fairly regular intervals, the most recent sustained time being after the GFC in 2008.

As for the cliff that these price have allegedly fallen from, that is actually an amazing testament to the strength of the post-GFC property price boom rather than a measure of the fairly tepid fall that has followed it.

Froth blown off the top of a beer

Indeed, a drinker looking at the graph of property prices and comparing it to a glass of beer, would quite rightly see the current falls as blowing a small amount of froth off the top of a drink that has literally and quite quickly filled all the way to the top of the glass.

A couple of figures from those CoreLogic numbers that so many people are getting excited about make the point quite eloquently.

The “median’’ or “middle’’ buyer picking up a house in Melbourne in early 1980 would have paid out $38,500 while a Sydney property buyer would have paid the princely sum of $54,000.

Those same buyers at the peak of the ensuing boom would have paid $880,000 in Sydney and $680,000 in Melbourne.

Since those peak prices, the Sydney median has fallen to $815,000 and the Melbourne median to $665,000.

Property would make a great share

Now if you can put on a share buyer’s hat for a moment and treat Melbourne and Sydney house prices as a company that you had invested in way back in 1980, what would your answer be to two questions – are you happy with your investment and are you thinking of selling now?

I don’t know about you but my answers would be yes and no to those questions.

I would be delighted with the performance of my “property’’ stock which may not yield quite as much as some of my other stocks but which nonetheless has performed exceptionally well over a very long period of time.

Falls a reason to be alert but not alarmed

Certainly, I would be monitoring the stock closely due to the current falls but my experience with it in the past is that the value can go downwards and sideways for a time but it usually resumes an upwards trajectory fairly quickly – usually within a couple of years.

With some exceptional capital gains – often tax free ones for owner occupiers – now baked into the “share’’ price I would be quite reluctant to sell.

Indeed, if the price were to fall as much as 20 per cent from the peak – which is what the most bearish of the “Chicken Little’s’’ are now predicting with breathless and squawking enthusiasm – I would be more tempted to buy rather than sell.

Flip or flop?

Of course, it is a very different story if you had bought at the 2017 peak using entirely borrowed money, which would have produced a nasty capital loss, particularly after high front ended costs such as stamp duty are taken into account.

It is these highly geared, short term “flipping’’ buyers that are really in a bind because they can only sell at a loss, they potentially owe more than they own and only have low rental yields to rely on to service the loan.

That is a nasty scenario but far from a universal one, with most property buyers, be they owner occupiers or investors, hanging on for the long term.

Long term picture still appealing

In this context, it is a good idea to block out the noisy and insistent voices of the “property prices always go up” crowd.

They might think it is an unnatural state of affairs for property prices to fall but that is more an expression of ignorance rather than reality.

Even if property prices generally fell by 20 per cent, that still must be seen in the context of a near doubling of house prices in Sydney and Melbourne since the GFC.

If prices are falling off a cliff – which they are not – it is a very impressive cliff of their own making.

Long term investors should be cautious but should not lose focus on the wealth building nature of the cliff rather than the potential to fall off it.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.