Aussie property is a hot topic. With global markets settling down, attention has turned back to Australia’s property bubble — a problem they’ve been talking about since 2007. It makes sense that they would beat this drum. Headlines of an ‘impending doom to affect all Australians’ is what sells.
Around 70% of dwellings within Australia are owner-occupied. So if something drastic were to happen, Australians’ net worth would get ravaged.
To state that Australian property will drop by 40% might not be entirely accurate. Our property market is not propped up by credit card debt. And those who can’t afford mortgages generally don’t get them. The market consists of average everyday Australians trying to create wealth.
This type of story grabs readers. Warning that homeowners’ wealth will implode is good for sales.
But claims of a property correction aren’t too far from the truth. To borrow from Animal Farm, some properties are more equal than others.
What I mean is, various property types comes with different levels of risk. This is why it’s so frustrating when Australia’s entire property market is lumped together by commentators.
Using the term ‘Australian property’ means you are taking the average across the nation. This average includes extremely profitable areas…and some extremely unprofitable areas. Even if property prices trend down for the next 10 years, you can still create wealth in the market.
How? By taking the time to select the right property in the right area.
This statement is as true in the stock market as it is in real estate. Picking the right stocks at the right time can make you a wealthy investor. And it’s no different when it comes to property.
Supply and demand
When it comes to property, like all assets, prices are dictated by supply and demand. If there are more sellers than buyers, prices will fall. So you can imagine why property investors might not look on favourably at CBD apartments.
According to a CoreLogic new settlement risk report, there are 92,102 new units set for completion over the next 12 months. And over the next two years this figure is expected to rise to 231,129.
An article in the Sydney Morning Herald this morning also highlighted the coming risk. Australian apartments could soon experience a rapid drop in prices. But not just any apartment. Off-the-plan apartments seem to be in for the worse of it.
Let me explain.
Any mortgage broker will tell you that lending rules could change at the drop of a hat. In the past few months, banks have continued to tighten up lending. But it’s not because they don’t want to lend. It’s because they are pressured by regulators to do so.
Changing these lending rules will become very problematic for off-the-plan owners. Once you’ve bought an off-the-plan apartment, all you need to do is pay the deposit. It’s not until months later that you need to approach a bank for a loan.
But since rules have changed, many investors are risk of losing eligibility. So if they cannot find any source of funding, they will likely foreclose.
Many financiers claim that their clients have already been frozen by Aussie banks, and now face foreclosures. Some investors are even deferring settlement dates. They’re using the extra time to find additional funding.
But for those who cannot attain funds, they will lose their deposit, and the apartment will be back on the market. If this happens to enough investors, thousands of new apartments will come onto the market.
Foreclosures would not only hurt investors but developers as well. Some developers have already cancelled projects. And they are now concerned about financing exciting projects. The matter at hand could have a huge impact on sentiment — and the wider economy as a whole.
Billions have been invested into these high-rise city apartments. They are reshaping many of our capital cities; most have been sold off-the-plan.
So while regulators might have good intentions, their actions could very well cause prices to sharply drop. But this drop would only be experienced in the apartment market. I find it hard to believe that house prices in Toorak will drop because there are too many apartments in the city.
Junior Analyst, Money Morning
PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research. Take control of your financial future. But where do you start?
If you’re interested in investing in property, check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!
To get your copy of Callum’s report, click here.