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Three scenarios that could trigger a fall in house prices

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Three scenarios that could trigger a fall in house prices

As we’ve regularly noted in our blogs, we believe the residential property market, particularly in the major cities, is overheated and due for a correction.  And it’s not just rising debt levels that have us concerned.

In the 10 months since April 2016, that is, since the RBA cut rates in May, Australian Capital City house prices have risen by 10.4 per cent per year.  In the year to February, Sydney house prices grew by 18.4 per cent and Melbourne by 13.1 per cent.

Auction clearance rates remain high – even amid a large volume of vendors selling, mortgage borrowing has accelerated again, banks aren’t reporting any significant increase in defaults or non-performing loans and newspaper columnists regularly report properties selling well in excess of reserves.

And given persistent weakness in labour costs and a related lack of inflationary pressure, it is unlikely the Reserve Bank will raise interest rates any time soon.  As a result, the outlook appears rather rosy for property investors and the prices of their properties.

But there are also problems.  One of those problems is the small matter of debt.  The other is the fact that humans are notoriously bad at predicting turning points.  In addition, we have become so specialized that we often fail to see the wood for the trees.

Recently, in the financial press, TD Securities chief macro strategist Annette Beacher was quoted saying: “I certainly do not want to see a house price crash – and only a slump in employment will spark that…”

Yes, a house price collapse could be a genuine problem for owners, particularly those who have leveraged to purchase multiple properties.  But let’s remember that there is an equally large number of people who currently cannot afford to buy. Those people would welcome falling dwelling prices.  And they may soon get their wish – the market has a handy way of ensuring that not everyone becomes rich.

It is perhaps more useful however to question Beacher’s logic of house price falls only being triggered by a tidal wave of job losses.

House price falls are not entirely dependent on individual property owners losing their jobs. I can think of at least three scenarios that would trigger price falls.

Financial stress

First, if an oversupply of properties causes vacancies to rise – as is occurring now 5-15 km from the Brisbane CBD – owners may encounter financial stress.  Rental yields in Australia are already at record lows and after interest and maintenance expenses, residential property investors are losing money.  Yes, they get a tax deduction for the loss but that’s the same as losing a dollar to make 50 cents.  Financial stress is a trigger for vendors to sell.  A job loss is just one of the causes of financial stress.

It’s interesting that financial counselling support lines are reporting significant increases in the number of calls for help with many of the callers being investors who have leveraged into multiple properties.  Their financial stress is not entirely caused by job losses; for many it’s rising interest rates on mortgages and/or a reduction in rental income as tenants migrate to recently-built cheaper apartments closer to the city.

Oversupply of apartments

Second, apartment developers are already under their own self-inflicted stress.  Having oversupplied the market with generic apartments and finding their overseas buyers unable to settle, thanks to capital restrictions in their home countries, developers are resorting to the types of discounting incentives we saw in the early 90’s.  Ten-year rental guarantees, holidays to Asia, frequent flyer points and even free cars are all recent examples of Australian capital city developers throwing everything at potential buyers to lure them in.  As the oversupply accelerates, expect developers to start lowering prices.

Rising interest rates

And, finally, if interest rates rise in the bond market, banks will find their funding costs rising and when that happens mortgage rates will have to go up.  This is independent of the RBA raising rates.

Household debt to income is at a record high of 189.6% and credit card debt is also at a record. While many point to record cash balances as a reason to be relaxed, it is a fact that the people with all the cash are not the same people as those with all the debt.

When debt gets too high (and keep in mind incomes are growing very slowly if at all) it’s a plain fact that spending slows.  Once animal instincts are sated, the spending and the price growth stops.  Slowing price growth may be all that it takes for some investors to reappraise their strategy and sell.

Stock market investors should be very cautious about property developers, construction companies, retailers catering to people fitting out their new apartments with appliances and furniture, and real estate agents.

This article first appeared in the Herald Sun Short Cut column.

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice 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 advice from a financial advisor if necessary.


  1. Living in Brisbane and seeing how big an employer of people this building boom has been (taking up a lot of the slack left over from the mining bust), it does beg the question though, what will everybody do when the tower cranes come down?
    It does feel like we will get the triple whammy of oversupply, rising rates and higher unemployment.
    It was very interesting to read just yesterday that the Reserve Bank received a gold star for their management of monetary policy over the years from another academic, you’ve love the way these guys pat each other on the back!!!

  2. It would be political suicide to curb and potentially pop this bubble now. Even less of an incentive when the pollies are probably long the benefits of residential property anyway with their own personal investments. I’d be surprised if there was some real action taken by the government. ScoMo’s recent comments “The issue of housing affordability and prices in Australia is the mismatch between supply and demand” sound a lot like Bernanke in 2005…. “House prices have risen by nearly 25 per cent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals”. Very easy to start justifying things that are ultimately unsustainable.

    That being said, what is really occurring (IMO) is that this wave of potentially “hot” and “dodgy” capital that is coming here via Asia – is propping up Australian housing values. It is forcing the marginal Aust buyer to pay up and overs and do so with leverage. A self-fulling prophecy that enables us to put a dramatically overvalued attribute to a whole asset class. Either at some point, the Asian authorities really clamp down hard on the capital leaving their countries and/or we see the natural increase in mortgage rates that exposes some of the stretched local borrowers. Either way it will expose the overvalued nature of the property market. Making a call on the timing of this is probably the lowest probability game in town….

    At the end of the day we really need a Gen Y politician to get in and make property affordable again. Put a stop to the ability of offshore money to buy our property after a few clicks on WeChat. And make sure that long term demand and supply is sustainable by removing some of the baby boomer policies (negative gearing, etc) that have led to the non value adding wealth creation strategy of sitting on property.

  3. Roger what’s then likely to happen?

    House prices fall and nothing more? Domestic and foreign investors selling equities, bonds and AUD from fear and presenting buying opportunities?

  4. I am amazed at how many analysts echonomist and those pushing the property stampeed say if prices do come down they will only fall by about 6% to 10% when in the last couple of years they have risen more than 100% so from say $500000 to $1 million how on earth do people think if a few thousand dollars in stamp duty is taken off a house price will help pay for the huge mortgage is beyond me government not releasing enough land and the RBA have a lot to answer to

  5. The Victorian Government is going to axe stamp duty for first homebuyers up to $600k, and interestingly – from conversations with my colleagues who live there – they are essentially rolling around in money right now thanks to the amount of people who have moved to Victoria and thus are paying rates, stamp duty etc.

    (What a problem to have !)

    n.b. In Victoria, I believe the stamp duty is calculated on the land component, not the purchase price, hence it is a LOT cheaper than some other States)…and we know that apartments have a minimal land component.

    The question is, “Why the need to axe stamp duty now, during what is essentially, a boom market ?”. You only do these things during a flat market to stimulate demand, and we saw what happened with the “First Homeowners Grant”, ironically labelled “First Home Vendors Boost” because the vendors just tacked $15k onto their houses.

    The Federal Government gave with one hand and the State Government took with the other hand (SA being the worst offender, in that the stamp duty on the median house price – $350k at that time – was WELL over $15k and never indexed since the inception of the GST in 2000, which was meant to replace Stamp Duty but never did).

    Meanwhile SA had full stamp duty concessions from 2013 to 2014 and a partial one is in effect until 30 June this year on apartment values up to $500k, but has not seen anywhere near the same construction level for these as Melbourne.

    If you have so many people moving to Victoria who are, as I would expect most, if not at least some who were first homebuyers (FHB) (from the point of view that if you are already established with a house / family etc. in another State or Territory and therefore not a FHB, you’re not likely to move interstate unless you REALLY have to because it’s a pain in the neck) – then why do you need to do this ?

    Even if the stamp duty was a miniscule earner, you’d keep it because it’s not worth getting rid of in terms of the bigger picture (i.e. it would be a nonsense if it cost more to collect it than it was to earn it, which is the only reason why you would axe it).

    No State Government can be so stupid that they say “I don’t need the extra money, things are great here”, so is this a measure to prop up the apartment market that they see is on the ropes ?

  6. I wonder whether a change to stamp duty has the potential to change the market. Instead of paying 4% up front, a state government could transition to say a 0.2% property tax and so even out their own revenue stream and at the same time reduce the barrier to entry or change and make downsizing more attractive.

  7. Hey Roger
    Scott Morrison is supposed to make an announcement on a 1st home buyers scheme in the May budget.
    The Government seem to always start meddling when the tides about to change.
    I would put legislative change as a risk. When the American government changed negative gearing rules in i think the 80s it caused quite a disruption ?

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