Is the Value of Your Property Going to Halve Over the Coming Years?

It seems like every other week someone comes out and calls house prices to drop by half their worth. The so-called experts predict the worst is still yet to come.

It seems so easy to anticipate a housing crash. To promote the doom and gloom view.

The headlines are always emotional. Peppered with words such as ‘crash’ and ‘property Armageddon’ and such.

But really, is the value of your house going to halve over the coming years?

Let’s take a few deep breaths and try to get a sense of perspective.

First off, even in the really bad recession of the early 90s, when unemployment nearly touched 11%, property never fell by half.

So, falls of 50% right now would be historically unprecedented. You can’t base your investment decisions around the work of all the analysts. You have to look around and work out a few things for yourself.

One thing you could check on is the unemployment rate. Last time I checked the unemployment rate was holding steady around eight-year lows and the workforce participation rate was at record highs.

Number two, you could also look at interest rates. The Reserve bank has recently cut rates to record lows and the forecast is for more rate cuts to come.

And three, you could also look at population growth. And all the projections on that front are forecasting strong population growth in the decades to come.

So, just on those points, there are a few things tracking positively for property at present. I’d be a little cautious predicting house price falls in the order of 50%.

If house prices were to fall further, as some say, I say well and good. Let them fall.

But if you’re waiting for price falls in the order of 50%, waiting to time the market, waiting to snap up the bargains at the bottom, you could be waiting some time.

Keep in mind also, the falls in house prices which have been heavily publicised are in part credit related and specific to Australia. Rather than some systemic weakness in the housing market.

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The impact bank loans have on house prices

The Australian Prudential Regulation Authority (APRA) placed clampdowns on interest-only loans and investment lending in general.

APRA required banks to assess a mortgage on the ability of homebuyers to repay their loans at an interest rate of 7.25%. It made it that much more difficult and affected house prices in a very negative way.

Remember, what the bank allows you to borrow has a big say on where house prices go. It explains in part why house prices came off their highs.

But, if you missed the news from last month, APRA announced they’re now relaxing that lending rule. So, you have to understand, that will flow into house prices. It is likely to cushion any further price falls.

The other thing to keep in mind is that the clampdown in investor lending has curtailed some building. We’ll see how it all plays out, but less building could lead to undersupply issues in the years ahead. Which again, would give house prices a boost down the line.

This is just all my opinion. And the last thing you need to make your investment decisions, is another opinion. Mine, or otherwise.

But if you want to get to some semblance of the truth, stop reading the financial press.

And follow the weight of money instead.

If you get nothing else from my writing. Learn to read a chart, and read about the economy through the charts.

And they’re running counter to all the dire predictions.

I’m not going to bombard you with a whole bunch of charts. If you want to check it out, you should be able to bring up the charts yourself.

But stocks like REA Group Ltd [ASX:REA] and Domain Holdings Australia Ltd [ASX:DHG], which can give you a bit of a feel for market sentiment, are both busting higher.

Also, for property to fall in the order of 50%, you want to see signs of a weak economy. Which might eventually lead to some distressed selling.

But if you bring up the chart of say an office real estate investment trust (REIT) like DEXUS Property Group [ASX:DXS] or an industrial REIT like Goodman Group [ASX:GMG], they’re both busting higher. It just suggests demand for office and industrial space remains strong.

To call a collapse of some sort you’d want to see the REITs breaking lows from years past. It’s just not happening at present.

You do have to work things out for yourself. Because the analysts will often mislead. I’ve found following the weight of money is a far more reliable guide.

So, is it better to wait? To buy property which might be cheaper in a year’s time?

If you’re trying to pick the property bottom, so you can snap up a bargain, my view is that the market will rarely make you look that smart.

Enjoy the weekend.


Terence Duffy,
Chartist, Time Trader

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia