Home prices in a crisis
Australian home costs have been decreasing greatly over the last year, driven primarily by tighter lending criteria, affordability limitations in certain markets, a significant rise in land listings along with a drop-off in the foreign and local investor demand. The scale of these declines, although still small now, has captured many investors off guard, forcing a swathe of speculation as to how big the recession will be. Many guess it is going to wind up being that the longest and biggest in many decades after property expert valuations have been seen to decline.
Experts declare five different key drivers which could see the housing market correction become a housing market crash. The dangers stem from policy changes which have already been implemented or are suggested to be set in place.
The key drivers
One potential driver might be a further reduction of credit availability, maybe in response to recommendations of the banking Royal Commission, which are expected to be announced at the start of 2019.
It’s also likely that construction in residential buildings, particularly in the apartment sector, could decline fast, raising the potential of a deceleration in the national economy and could lead to a surge in unemployment. The reduction of interest-only lending due to limitations announced by the banking regulators of Australia (APRA) in early 2017 could lead to slowing housing sales as some borrowers are forced to switch to full term interest + original cost loan repayments. Another possibility is a squeeze on household incomes as interest-only loans convert to principal and interest loans over the coming period.
The final domestic risk declared as a possible catalyst for sharp declines in the property market is one that has been talked about frequently in recent months — The Labor party has suggested changes to capital gains tax and negative gearing for investment in property.
A perspective by Macquarie Bank’s Australian economics group, states that with Australia’s already raised household debt levels and housing unaffordability, the capacity for a wider macroeconomic slowdown is possibly the biggest danger that may make the present downturn a great deal worse.
When people have jobs, they have expendable income. And if they have income it will reduce the possibility of forced selling from homeowners. Despite those dangers, his baseline position is that the Australian market will have the ability to resist the effects of falling housing prices, placing his faith in continuing strength in the labour marketplace to help sustain family spending amounts. But like a lot of other forecasters, he acknowledges that the housing recession will probably be bigger than first believed, particularly in Sydney and Melbourne where prices have dropped the speediest of any capital city this season.
After falling by 2 per cent in 2018, on average, professionals expect nationwide housing prices to fall by 3-8 per cent in 2019. Experts hypothesise other big markets and cities to fare better over this period, although he still expects either slower growth or slight declines in most of the other cities. Investment within the industry still has the potential to generate positive returns, however, understanding these key drivers are integral to this.
Top tips for success:
There are many things you can do as an investor to shield yourself from market exposure. Remember that information is power, and that many things can affect the final outcome. These are our top 3 tips:
- Pick an agency for commercial property sales that filters for low-risk investment opportunities
- Understand what type of market your property is in (e.g. residential, retail, etc.)
- Consider how the areas will change in value based on the drivers described above.
Knowing this information, you should be in a good position to find the value in an otherwise declining market.