Let’s Address The Bubble Speculation

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John McGrath

Real Estate Expert

Have you noticed that the speculation has started? The property market is “grinding to a halt”. The boom is over. The banks have lent too much. The bubble is going to burst.

This sort of chatter happens at the end of every boom. I have seen it time and time again over 30 years and the ‘doom and gloom’ predictions simply haven’t eventuated. The moment we see even the slightest change in boom market conditions, the headlines begin. The end is called. The umpire blows his whistle. Yesterday we were in a boom, today we’re on a slippery slope.

real1Image supplied by McGrath

In reality, booms don’t end this way. It’s an extremely gradual process. Yes, we might be at the start of a slowdown in Sydney and Melbourne today. Or we might not be – no one knows. But there’s a few small signs that the market is slowing and that’s why we’re seeing these headlines and predictions of price falls. The key is not to panic.

I’d actually encourage you to welcome a slowdown in growth. After a long period of price rises – about 75% in Sydney alone, we need a period of consolidation that will put a floor under these new price levels and provide stable ground for home values to rise strongly again in the next boom.

Of course, no home owner likes to see prices go down. But it’s important to remember that if we do see some price reductions, they’ll be small and short term. History tells us that good quality properties double in value every decade but growth is never in a straight line. More often than not, we have a few years of strong growth, a few years of little growth and round in circles we go.

I’d advise you to ignore all suggestions of a market crash. It’s not going to happen. Yes, we’ve had phenomenal growth over the past five years. That doesn’t mean we’re due to have phenomenal declines.

Property is now analysed – or should I say over-analysed, as closely as the stock market but property is not an asset class that changes overnight. We have too much population growth fuelling demand and too much of an undersupply to experience a crash.

Overseas commentators, in particular, do not understand this. They also don’t appreciate how ingrained it is in our culture to pursue property ownership. We have entirely different dynamics to overseas markets that will continue to keep our property values strong well into the future.

Now, the question on everyone’s lips is whether the Sydney and Melbourne markets are turning. Firstly, no one can ever identify the exact time of a turn – it will only become clear to us several months after it has happened because once again, the property market changes at a very slow pace.

As discussed in my column last week, new CoreLogic figures tell us that the supply of established housing stock available for sale in Sydney and Melbourne is at its highest level for this time of year since 2012. Does this indicate slowing demand? Yes. Is it a sign that the market is actually slowing or just a blip? Don’t know yet.

Saturday auction clearance rates remain very high. About 60% represents a normal market. About 80% represents a boom. For the past couple of months, Sydney has been in the 70% – 75% range. Does this indicate a slight drop in demand? Yes. Is demand still strong? Absolutely.

Again, when the property market slows down after a boom, it does so very, very gradually. In my opinion, I do think the Sydney and Melbourne markets are at or near their peak for this growth cycle. What’s going to happen next?

The two most likely eventualities are as follows:

1. The pace of growth in property prices will slow down but not stop. Property prices will keep growing but at a lesser rate per year

2. We have a minor correction, where the market will do as it has done before and give back about half of the prior year’s growth, so that would be around 5%

Neither scenario is cause for panic. If the boom is indeed over, then here’s my advice to people in the market:

If you are a recent buyer, don’t panic. Yes, you’ve purchased at what is probably the peak of the cycle but if you plan to hold long term (which is what you should always do) then it won’t matter if we experience a small correction. You’ve purchased a sound investment during a time of record low interest rates. Think about what your property will be worth in 10 years’ time – probably double!

If you are in the market to buy, don’t put it off because you think prices will plunge – it never happens that way. Take a sensible measured approach, set a budget and buy the right property for you.

If you are thinking of selling, now’s the time. It feels to me like we’re at or close to the peak of this cycle, so if you want to fully capitalise on this boom, now is the time to sell.

Property is a fantastic vehicle for wealth creation if you can hold it long term – and that means riding out market slowdowns without panicking; and staying focused on the goal of debt-free ownership down the road.

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