How does the current downturn, compare to previous downturns?
- In aggregate, property values throughout Australia have been falling for about 20 months.
- Some markets are performing better than others, and there are of course many ‘markets within markets’, but the sharpest declines have been in Melbourne and Sydney.
- Over the past 40 years, national housing downturns have been fairly short lived, with none having lasted for longer than the current one. [1]
- Previous downturns were caused by weak economies (e.g. the ‘recession we had to have’), or economic shocks (the global financial crisis).
- Our current downturn has been manufactured through tighter lending – house prices aren’t being bid up because the banks have lowered what people can borrow, particularly foreign income earners and investors with existing debt – this is a critical factor which determines prices.
- However the economic fundamentals in Australia have remained relatively strong – economic growth has been reasonable, and unemployment has been trending down to around 5%.
- The concerns are more to do with wages growth and inflation, both of which have been stubborn, and so this prompted the Reserve Bank to lower interest rates at their last meeting – home loan borrowers are now seeing interest rates in the low to mid 3’s, which are record lows
- Previous property market recoveries have been fairly rapid, due to various stimuli such as lower interest rates, and stimuli like the first home buyers grant boost.
- We may have not reached the bottom of the market, however the latest figures from Core Logic suggest that the declines are starting to ease [2]
- There also appears to be a renewed sense of confidence, particularly among investors, given the federal election outcome, and recent signs that lending conditions may soon start to ease. (see here for more detail)
So how should home buyers and property investor respond?
Everyone’s circumstances are obviously different, however in the current market we are seeing opportunities for:
- First home buyers – who are being assisted with stamp duty concessions, and who are still facing less competition from investors.
- Upgraders – because even although they may have to sell their current home at a discount to what it was valued at 18 months ago, they are still often buying their new homes at an even larger discount (because higher value properties tend to have been more severely impacted by the current downturn), so they can potentially ‘win’ from this perspective.
Does the current downturn mean it’s a good time for property investors to buy opportunistically?
- The answer here depends on one’s investment strategy…
- If you’re going to be in and out of the market quickly (think buy/sell/flip), then timing the market is critical, because if you buy cheaply enough, then you’re more likely to make money when you sell – but only a small percentage of our investor clients at Long Property are interested in this strategy.
- The big real estate fortunes tend to have been made by holding good quality assets for long periods of time, and allowing compound growth to create substantial equity in one’s portfolio, over numerous property cycles.
- For this type of ‘long term’ investor, timing the market becomes less important…
Do you know someone (maybe a parent, or aunt/uncle) who bought a property in the early 1990’s for a couple of hundred thousand dollars, and it’s now worth something like $2,000,000 today?
If this property were to now increase in value by say 5% in a given year, that’s a $100,000 capital gain, or around half the value the property was originally purchased for!
Moreover, this property could probably rent for around $50,000 p.a., or around 25% of the original purchase price.
Do you think these figures would have been remotely fathomable to our parents or aunts/uncles 30 years ago?
Can you see that whether or not they timed the market perfectly, and whether they paid $180,000, or $200,000 or $220,000 for the property 30 years ago, is not really so important?
Holding the appreciating asset for the long term, and benefiting from ‘growth on growth’ (e.g. compounding) is key.
What are the key questions property investors should ask?
- Do you believe in the long term outlook for well located residential real estate in Australia? (see this article to learn more)
- What ability do you have to buy an ‘investment grade’ asset, one more likely to outperform the averages over the long term? and
- Do you have the stable income, and/or the cash buffers and correct finances structures in place, enabling you to hold your asset for the long term?
The challenge is to leverage ‘good debt’ (e.g. debt against appreciating assets), and then load up our personal balance sheets with income and/ or equity producing assets, which you rarely (or never) need to sell…
Only a small percentage of people are actually able to do this, which is why the majority of Australians never achieve financial independence.
Make of the current market what you will, but clearly it means different things for different people, so you really need a property and finance strategy which is tailored to your own individual circumstances.
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Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
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References:
[1] https://au.finance.yahoo.com/news/heres-long-aussie-property-downturn-will-last-004604831.html
[2] https://www.corelogic.com.au/news/australias-dwelling-values-fall-half-percent-april-rate-decline-continues-ease
