What Could Your Property Be Worth?

Mortgage concept by money house from coins, property

Thought about buying a house recently? Or even selling?

If you’ve been looking into the real estate market, or simply watching the news over the past decade, you’ll have noticed that housing prices have soared.

It also would have been quite difficult for you to miss the housing crisis currently spreading throughout the country.

In Sydney and Melbourne, there’s little opportunity for first home owners to buy a house without the help of their parents. Especially if you want to live closer to the city. Most are buying in the outskirts of metropolitan cities, facing long commutes and a lack of services.

But over the past year, evidence shows that the market may be about to turn.

As reported by Business Insider, the Commonwealth Bank of Australia (CBA) believes property prices will continue to fall, as we’ve seen them slowly do in recent months.

But it’s not only the CBA who believe there’ll be a continuation of the housing market downtrend.

According to the CBA, there could still be some 18 months of the cyclical trend to go.

Senior Economist at CBA, Gareth Aird, told Business Insider:

The recent evidence suggests that Australia’s latest residential property short-run cycle has come to an end

After a little over five years of incredibly strong property price growth, driven by Sydney and Melbourne, dwelling prices have been deflating.’

CoreLogic provided data, supporting Aird’s statements above. Last month, prices dropped on average across all Australian capital cities 0.38%. This means house prices have continued to fall for the sixth month in a row. This is the first time that has happened since 2012.

In the graph below, you can see that both Melbourne and Sydney dwelling prices have been falling for quite a few months:

Dwelling Prices (annual % change) 25-05-18

Source: CoreLogic

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And why does Aird believe that prices will continue to fall for the next 18 months or so? Credit lending…

Credit standards are likely to be further tightened, supply will continue to lift, mortgage rates are more likely to go up than down and buyer expectations have adjusted downwards from exuberance to more rational levels.

We believe there is enough evidence to suggest that property prices are likely to head lower, particularly in Sydney and Melbourne.’

Aird went on to explain how far he expects falls to go:

Our base case for property prices has them down by 3-6% per annum in Sydney and Melbourne by end 2018

That would take the fall in Sydney prices from its July 2017 peak to around 7½%. For Melbourne, prices would be down by around 5% from their November 2017 peak.

Some further dwelling price deflation looks probable in 2019 and we see the peak to trough being around 10% in Sydney and a little less in Melbourne.’

Morgan Stanley believe that Australia’s housing market will continue to weaken. And they have the evidence to prove it. As you can see in the Morgan Stanley’s Australian housing model (MSAHM) graph below, the housing market is weakening. The MSAHM includes a range of factors as the basis of their findings. According to Business Insider, these include: ‘supply-demand balance, rental market conditions, mortgage serviceability, housing market accessibility, credit supply and house price expectations’.

Exhibit 6: The housing market has weakened, and our housing model (MSHAUS) suggest more declines are coming 26-05-18

Source: ABS, RBA, Bloomberg, Morgan Stanley

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Morgan Stanley told Business Insider they believe the decline in prices is due to ‘the likelihood of renewed softening in building approvals.’

They also envision unemployment rates rising: ‘We see unemployment drifting higher to 5.8% in the first quarter of 2019 before falling gradually to 5.3% in the December quarter next year, delaying hopes of a wage recovery.’

But both Aird from the CBA and Morgan Stanley believe that interest rates won’t rise in the near future. Aird also believes that interest rates can’t rise over the next 30 years, as they did over the last 30.

While Morgan Stanley and the CBA believe prices will continue to fall, they don’t believe it’ll be too drastic of a plummet. However, Port Phillip Publishing’s newest Editor, economist and bestselling author Harry Dent, has a knack for predicting global financial crises. And his prediction for the end of Australia’s real estate bubble is less cautious. He predicts that when the next GFC hits the world, Australia’s property market could crash by 50%! You can read about why in his free daily newsletter, Harry Dent Daily. Sign up for that here.

This week in Money Morning

In Monday’s Money Morning, Harje discusses the idea of ‘new media’. New media is very much computer based and includes things such as Facebook, YouTube and even podcasts. In this day and age you don’t need to be watching the news or listening to the radio for updates, it’s all at your fingertips. New media allows everyone to have their own voice online. It cuts out the middle man. Exactly how bitcoin’s use of blockchain cuts out the middle man. If you’d like to find out more about blockchain technology and how companies and cryptocurrencies are using it, go here.

In Tuesday’s Money Morning, Harje discusses the world of eSports. eSports is becoming so popular and competitive that there’s even a push for it to become an Olympic sport. And companies that produce these games have seen massive gains, unlike the All Ords, which has barley provided any gains for investors. But if you want to find out how you can make these types of gains, rather than just read about them, read Harje’s article here.

On Wednesday, Harje used the Banking Royal Commission to showcase — not how deceitful they’ve been — that in the near future you may not even have a bank account with one of the four big banks. Instead, you may have the option to open one with a major online retailer. But what may really surprise you in Wednesday’s Money Morning, is the revelation that there is a large percentage of people who don’t even have a bank account! If you’d like to find out more, click here.

In Thursday’s Money Morning, Harje looks at delayed gratification. By reinvesting earnings, you could potentially make bigger percentage gains than you would if your stock paid out your dividends instead of just reinvesting them. Take Amazon, for example. As Harje explains: Had you invested in the company, you could’ve earned 15–20% from just reinvesting earnings. To find out more about potentially explosive stocks on the ASX, go here.

In Friday’s Money Morning, Harje discusses stocks on the ASX 200. Now as Harje explains, while you wouldn’t have made a huge percentage in gains on the ASX in the last couple of years, it’s still more than you would’ve made had you just kept your money in a savings account. And you barley had to lift a finger. However, if the banks of Australia struggle, so does the ASX. But Harje has another solution to how you could make some potential gains on the share market. And it’s outside of Australia, to find out more, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

Alana Sumic

As the Editor of the weekend edition of Money Morning, Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets.

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