Property prices are falling – and we’ve only just begun
We’ve held a rather dim view of Australian property prices for some time, and have repeatedly warned our readers that the price bubble would end in tears. New research seems to support our thesis. It shows the market is slowing, and home prices are falling the most since 2012.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
dom
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Hi Roger,
I read recently that during the GFC the countries affected by the housing downturn experienced 8% to 10% housing downturn in the first year on average and then a following 35% to %50 in the ensuing years.Do you think this is what we expect to happen in Australia?
andrew ronan
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Property as an investment has been an insane proposition for quite a while now, due to total disconnect between rental yield and market value, it’s been based on pure greater fool speculation for capital gain only, now it seems capital gains have turned to losses, and property speculators are beginning to understand the harsh reality of the once hip and trendy words “negative gearing “ those magical words realestate agents love to tantalise the latest crop of budding property investors with,
Not so trendy anymore now that they realise their actually paying to lose money.
The only thing I fail to understand about this insanity, is how does it keep happening? I know the ultimate blame lays with central bank monetary policy. But they don’t force these people to sign contracts.
The only thing that’s different this time is that the bubble has been sustained for much longer than usual due to very cheap money, which is about to become not so cheap.
Andre
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Hi Roger,
What concerns me is if development slows who will provide dwellings for our growing and aging population. Each year we need to build a city the size of Townsville just to keep up. Furthermore, I think the decline in Sydney and Melbourne is skewing the data. Isnt it possible that house prices continue to climb in the smaller capitals and regional centres because of people relocating from the two biggest cities?
Roger Montgomery
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It’s possible Andre, that can all happen (or not) independently of price, which this time look to be influenced by factors beyond the domestic.
Peter
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Totally agree Rodger.
I sold my house in a good lower north shore suburb last May. We got a very good price as it was a very desirable property with plenty of land.
From about April 2017 you could see the market going down week by week while the general media were saying it was all fine.
In our suburb the peak was Feb 2017 despite what the figures said.
The main point I’d like to make is no one seems to factor in the appalling quality of these new apartments in the suburbs. I’m involved in the remedial field and carry out inspections.
As a minimum 50% are so bad that major repairs say $10-$50K per unit and in some cases more are required within 1-5 years of competition.
The high rise, say 30-50 stories by the long term developers are generally ok.
Roger Montgomery
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thanks for sharing Peter.
peter s
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A mostly unspoken of consequence of low clearance rates let alone falling prices is that our state govt’s are 50% funded by stamp duty receipts. It is a much higher percentage for Vic and NSW. Since the GFC the stamp duty take in WA has fallen to half today of what it was in 2007. If the same happens in NSW and Vic they are going to really struggle with the budget deficit.
Roger Montgomery
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You are right Peter. Speaking of WA here’s a reminder: https://rogermontgomery.com/do-property-prices-ever-fall/
Alex
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It’s interesting that it really just comes down to the availability of credit. All this endless talk of immigration, negative gearing, 50% increase to CGT proposals, albiet contributing factors, are not the drivers of the property market. It’s simply a willingness of borrowers to borrow, and lenders to lend.
Roger Montgomery
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Nicely put Alex.
ian
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I agree Alex. Have plenty of friends that have bought houses over the last few years and the price they were “willing” to pay for the house was 100% determined by how much the bank would throw at them. It will be interesting to see how this plays out if credit availability is subdued for a meaningful period of time, my guess is much worse than the current 5 – 10% pullback that experts are predicting.
Robert Warren
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I really think the reserve Bank is responsible for this housing bubble and from what most economists say that falls of about 10% are an absolute joke when house prices have gone through the roof HAHA and how on earth can the people say we are close to a buying opportunity they are obviously the ones selling properties
James Staples
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What could possibly go wrong? To think these facts have been warming up for some time now. Imagine the headlines when it truly gets going. Of course with everything being so economically awesome at the moment in Australia we could obviously live with interest rates 100 to 200 basis point higher (not). What problem?
Laurent
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Nice article. Tighter lending and prices falling is combining with a noticable slow down in contruction and new home sales. If we are, where we think we are – at the precipice – then 2019 is going to be horrible! Sudden uptick in unemployment, construction slamming to a halt, retail tanking etc…
Roger Montgomery
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Thanks for sharing your thoughts Laurent.
wes smith
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Re.Property prices are falling – and we’ve only just begun.
I understand completely & have been following your articles on over supply & bubbles in real estate & the ripple effect.
I would like your thoughts on the “ripple effect” in coastal areas where I reside in Northern NSW where real estate prices have soared but supply is scarce …this is unlike the 3 major capitals where it blooked like there was over supply (high rises). Last boom up here there were houses for sale everywhere but this time a shortage of listings. Doesn’t mean this hasn’t happened before but I have not seen it.
Your thoughts?
Roger Montgomery
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I suspect tight supply may dampen some of the influences but it doesn’t preclude lower prices. If there were only four houses for sale then provided the prices buyers want to pay are lower, the gap alluded to in the article remains.
A Balmain-based real estate agent published the following earlier today in a livewire…
MATTHEW HAYSON
Cobden & Hayson
The June property market became a little like the movie Groundhog Day, with repetitious news reports on conditions and auction outcomes along with an overall funk in the market that was hard to shake.
At our open homes we could almost hit replay on a recording such were the conversations we were having with buyers and sellers. This is a warning before you read much further that this isn’t our most inspiring market review, however it is accurate to our experiences during the month. Having said that, many wise investors have made their fortunes buying smartly in a downturn market and this is the silver lining to an otherwise fairly miserable month for Sydney property.
June recorded many low points which included the worst auction clearance rate in seven years, the fastest decline in property prices over the same period and a raft of banks and market commentators declaring they had underestimated the speed of the property price decline and the length of time this correction may run. ANZ predicted in mid-June that Sydney prices will decline by another 10% which is considerable given we already feel that value has come off.
The vast majority of people who have dealt with a lender during June know of the current challenges in obtaining finance approval and from what we hear, this process may actually become even harder.
This is no market for speculation buying and selling. If you’re not committed to selling and meeting buyer demand, it is highly likely you’ll have a challenging emotional experience. It’s not that the buying market has all of a sudden become a bunch of overzealous piranhas. It’s more that the bulk of willing buyers have been tied down financially and these restrictions create hesitation, cause concern and are simply limiting buyers’ ability to pay that little bit extra to secure a property that suits them. As this environment has descended across the property market, it has placed downward pressure on prices.
Until banks rebalance their risk profiles or until APRA feels the appropriate measures to stabilise the property market have occurred, we can’t see this market getting any better.
As agents we are having direct and hard conversations with sellers every day which largely involve recalibrating an asking price to meet buyer demand. With an auction clearance rate hovering around 50%, this reflects a buyers’ market and also means that essentially half of the properties listed aren’t finding a buyer at the price the seller is proposing during the four-week marketing campaign. There is some good news and that is there are buyers still in the market and many are ready to purchase if they identify value. When we look at recent sales, you could argue values are back to 2006 levels for many properties and this has been identified by a number of people who are now entering the market to take advantage of the favourable buying conditions.
We may very well look back at this period and say “that was the time to buy”.
John
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Roger
“Our friends at UBS have been banging the same drum (with obvious implications for listed companies with either direct exposure, such as residential real estate developers, lenders and aged care community providers, or indirect exposure such as discretionary retailers”
What’s the link with ‘aged care community providers’ – I don’t get how that follows on from?
Roger Montgomery
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many who move from independent living arrangements to aged care, will care very much about the value of the real estate they are selling in order to fund their access to an aged care community.
John
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I guess the argument is business who invests in retirement villages etc will have customers with less money to buy a place in the village.
I am not sure if I fully ‘buy’ this argument as even if houses fall 20% a house (I am guessing) it will be worth far more that a place in a village?? What would rather happen is that the children’s inheritance would be reduced??
John
Roger Montgomery
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Villages are only one form of retirement accommodation. Aged care centers require accommodation bonds – an upfront cost that is payable to the aged care facility in many, but not ALL cases for the actual accommodation of the resident. It is essentially a loan to the care facility that the hostel or nursing home can then ‘re-invest’ to derive income for assistance with their maintenance of the aged care home.
The bond amount is “determined by the assets of the resident, the supply & demand for beds in each care facility & the socio-economic profile of the resident’s suburb”.
In Penrith or Liverpool in the Western Suburbs of sydney the bond can be as low as $200,000. On Sydney’s North Shore or Eastern Suburbs they can be as high as $1.5 million.
You see, property price declines will impact the number of people who have the funds to pay some providers…
Shane
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It’s intersting about Sydney prices. We have been watching suburbs such as Surry hills, Glebe,Redfern for 3years now, and have not seen any price drop.
Roger Montgomery
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Thanks Shane for sharing
Kelvin
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Hi Roger,
I agree we have turned the corner a while ago and it is only now starting to be acknowledged in the figures. However the question I have is Where are the tears?
After the resource boom ended we know that prices in WA and parts of Qld are (and remain) down 80pct in some cases. Yet somehow many owners still haven’t realised the loss. Banks seem to be willing to let these people “work through their situation” by slowly grinding them to death by continuing to pay their bad loans (even after selling the asset).
I know you called the Brisbane unit market very well and a simple Realestate.com.au search can show you 100s of disaster outcomes in Brisbane where owners have realised 30pct losses. In the world of Units, which are homogenous, that would indicate the entire building is nursing 30pct falls. Yet banks aren’t asking for extra equity?
What are your thoughts on how this negative equity phenomenon will play out in the case of the bigger citites where the negative equity could run into the millions for single borrowers? Why do you think banks are so ho-hum compared to the past about tapping borrowers for extra equity?
Regards,
Kelvin
Roger Montgomery
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Very good points Kelvin!