Should We Be Expecting A 40% Drop In Property?

John McGrath

Real Estate Expert

A recent TV program presented a particularly grim view of Australian property, suggesting the market could shortly spiral out of control with up to a 40% fall in home values within the next 12 months. It’s going to be Bricks and Slaughter – get out while you can!

This story was particularly misleading and unsurprisingly melodramatic. I say this having now experienced five property cycles in my 35-year real estate career and each time, often at around this stage of the cycle, the same old headlines re-appear.

Steve Keen predicted a 40% drop in 2010, Johnathan Tepper predicted a 30% to 50% drop in 2016. Of course, both were ridiculously inaccurate.

image via McGrath

Generally speaking, the sponsors of such theories are seeking self-promotion. They are inevitably looking to promote a book or attract eyeballs to their websites.

It’s interesting to note that respected commentators like Louis Christopher of SQM Research, who was featured on the program, has since stated that his views were distorted and taken totally out of context.

Louis Christopher: “I was disappointed and unhappy…the segment was sensationalist to say the least.”

If you saw this story, please don’t let it scare you. Our property market is one of the most stable in the world because there are so many fundamentals keeping its foundations strong at every point in the cycle from peaks to troughs.

Let’s look at a few of them.

Firstly, two out of three Australians own their own home or are living in a home with the owner and one in three are in a rented place. Of the 66% who own their home, half of these homes are fully paid off with no loan whatsoever.

Next, let’s look at the generational change occurring, where many Baby Boomers (aged 60 to 75 approximately) are assisting their children secure a first home and of course as the life cycle turns, many will also be leaving their often considerable assets to their kids.

In the main, most Australians are wealthier than ever before through their property, other assets or indeed, inheritance. Statistically, the average Australian is worth around $395,000 which is at record highs.

Next, let’s look at the underlying factors that we are experiencing today that may affect property, negatively or positively.

We are enjoying a robust economy, low levels of unemployment, record low interest rates and significant overseas immigration and investment. None of these are likely to change significantly into the future. After all, we are the lucky country.

On top of this, our country has a unique population concentration with just under 70% of Australians living in one of only eight capital cities. This concentration, coupled with a chronic undersupply of housing particularly in Sydney and Melbourne, keeps a rock-solid platform under home values.

When you combine the strong levels of home ownership with the robust economic and social markers, it’s easy to see why the negative pundits have consistently got it wrong. The market will ebb and flow over the short term but the long term macro view is strong and stable.

In terms of what’s next, I believe the property market has seen most of the value declines it is going to see this cycle. In many markets, there has been a 5% to 10% decline in values this year and I think we may see another 5% to 7% in some areas.

At the end of that, there will either be a steady period of market stability or even a small positive rebound back by a few per cent.

Unless we see a total financial catastrophe engulf the entire world, a 40% drop in the Australian real estate market is never going to happen. Australian real estate is one of the best investments on the planet and that isn’t changing!

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