There have recently been many articles in the media regarding changing property prices. Unlike shares, which can be accurately tracked day-to-day, property is historically an opaque market with less visibility on price movements. However, over the past few years computers with sophisticated programming have been able to track property markets more accurately and provide an increasing level of transparency. This has led to a range of property research reports providing up-to-date information on the markets and as a result, this information has flowed through to media publications reporting ‘booms’ and ‘busts’ that now rival the extremes previously associated with the share market.
Over the years I have often heard people say, ‘Oh, property always goes up’. So, when this recent downturn occurred it might have come as a surprise to some. In fact, these days we are reading or hearing about people who have purchased property, held onto it for five to 10 years, and seen little or no capital growth. And this isn’t just in one market; it’s in growth corridors, large high-rise developments, in different states and territories, metropolitan, regional … Clearly, the good old days of property being a ‘sure thing’ are now long behind us.
The graph below shows ‘Real Residential Property Prices for Australia’.
As you can see, we have experienced downturns in property for the following periods:
1. Q4 2003 – Q3 2005
2. Q4 2007 – Q1 2009
3. Q2 2010 – Q3 2012
4. Q2 2017 – ???
Interestingly, most of the pullbacks have lasted on average around two years. Historically, each pullback has ranged between –3% to –8%. And as household debt levels have slowly risen over time, so too have the more serious repercussions of the downturn for homeowners. It’s worth remembering that the most valuable lesson in leverage is that it can magnify the upside, but also the downside. Early drawdowns were around 3–4%, while more recent ones have been around 8% as household debt has spiralled upwards.
In recent times, we have been alerted to a reduction in borrowing capacities. This was first reported earlier this year by UBS analysts, as banks slowly changed their borrowing assessment methodology to consider individual spending patterns rather than applying a basic assumption of living expenditure. This has led to a potential reduction in borrowing capacities of around 20–40%, to around 80% of the mortgage market being serviced by the major banks.
So, what does all this mean? Well, a person on a gross income of $150K can now borrow around 34% less than before, and is effectively limited to a loan of around $538K.
Coupled with the impact of a slowing source of overseas buyers, we can see why recent moves in property prices have taken place.
How far will this drawdown go? Well, each state, city, region or suburb is unique in its own price movements; however, I would not be at all surprised if we find these overall figures continue to at least a 10% drawdown before this latest down-cycle is complete.
It’s important to realise that in property, as in all markets, a pullback doesn’t mean there won’t be opportunities. It is likely, however, that simply throwing money into the property market with a view to making a profit is going to be more challenging. We need to be a lot more selective in acquiring property and also the decisions we make around the timeframes for holding periods.
Like all great investment ideas, before you consider purchasing property, it is important that you seek out and obtain profession financial planning advice from a practising financial planner and, of course, I recommend AJ Financial Planning.