Cheering for a property crash? Think again.

I’ve lost track of the number of “experts” who have spent the last couple of years predicting a “massive collapse” of property values, and as the rate of growth is unquestionably cooling, I think it’s time to look clearheadedly at the market and what anything other than a low-percentage slowdown will cause.

There is such a thing as the law “of unexpected consequences” where a result is not what was the intent of the action, and I think an examination of the possible consequences of a “crash” is warranted.

Auctions in Melbourne only account for around 30% of property transactions overall, and there are property types which tend to sit in the market longer and not achieve the breathtaking results that others. So let’s not judge the entire country’s property markets by what is happening in these areas, there are cities and sectors which are not faring well at all. The property markets do no live in isolation from the broader economy and this is where we need to be careful about cheering on any largescale reduction in prices.

We have to keep in mind with all the reporting of runaway auction results, that the real estate markets are highly segmented; even within the current hot markets of Melbourne, Hobart and Sydney, the media seems to generalise and the impression is that the “market” is some amalgamous mass where there is no distinction between suburbs, or property types within them where apartments in the CBD and immediate vicinity are compared with those in more (or less) prestigious areas, and houses within high value areas being used as examples of strength in others.

We also have to remember that while the south east of the country is performing well, other areas (Darwin for example) are not, and others again (Perth, I’m looking at you) are just starting a recovery and the ripple effect from a major slowdown in the eastern seaboard values will have ramifications elsewhere as confidence erodes.

So, what would happen if there was (for example) a sudden and unexpected decrease in values of 20%? Well, here’s my take on it, and it’s a historical perspective; but bear in mind that lenders start making margin calls on loans when the value decreases below the loan ratio that will put a lot of SMSFs directly in the line of fire too.

Firstly, we’d see banks tighten  lending criteria on all facets of borrowing and lifting interest rates, making it harder to borrow; this would be followed by a marked slowing of buying and building activity across the board.

Once this happens, companies start to lay off staff. The result of this would be a reduction in incomes to those families, the knock-on commences – less money to pay for goods and services, food, rent, mortgages – leading to rising defaults and forced sales. Less money for goods and services mean industry suffers further and the economy in general begins to falter; rinse and repeat… 

Once it starts, the stock market will most likely stumble as investors look to sell and protect their portfolios, so further fear and uncertainty is created; inflation begins to rise, making it even more expensive to live – you can see where the cycle becomes harder for people on fixed or reduced incomes (superannuation, pensions etc).

This is called a recession, something we’ve been very fortunate to avoid in Australia for a quarter of a century, and one no one wants to see repeated.

The net result is that house values are driven off further than the regulators anticipated and the economic cycle is back to a point where it will take years to recover. Sure, housing might look cheaper in this scenario, but who can afford to buy it?

So before we start cheering for the “market to fall”, read up on the law of unintended consequences. If you think this can’t happen, think again… some of us have been around long enough to have lived through the recession of the early 1990’s, and that wasn’t fun for anyone.

 

  • 6 months ago


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