Predictions of massive price drops always happen when there is an economic shock of some sorts.
Forecasts of 30 per cent property prices drops that are seemingly imminent, but which ultimately never happen.
In fact, after the GFC and the last recession, any temporary softening of prices soon turned into sustained growth.
Source:Corelogic
This time again, the same is likely to be true, but in a more significant way.
That’s because we have the lowest interest rates on record, which the Reserve Bank has told us will remain that way until Australia again reaches full employment – a timeframe of a number of years into the future.
What have prices been doing?
Property investment is, unsurprisingly, impacted by consumer sentiment.
So, when people are fearful, sales drop off and prices flatline.
Conversely, when people are confident, sales soar, along with prices.
The uncertainty about the impact of coronavirus on the economy has seen sales prices reduce somewhat, but it’s not what it seems in my opinion.
Rather, people are currently paying the listing price instead of five or even 10 per cent above it, which is not a technical price reduction at all.
At the time of writing this, we aren’t seeing significant price falls come through the data, but that is also because most property metrics lag reality by about three months.
So, when the data for the current quarter becomes available in a few months, it is already old news and the bottom of the market would have already passed.
One of the factors that generally causes sudden price falls is mortgagee sales and that is not happening – and is unlikely to happen as well.
That’s because of the various financial support programs available, such as JobKeeper, but also mortgage repayment pauses and rental support packages.
This means that property owners aren’t suffering the same level of financial distress as perhaps has been the case during other economic downturns.
Also, with fewer active buyers, many vendors are holding off listing their properties for sale, which is helping to prevent price falls.
What will happen to prices next?
Like with pretty much every market cycle, most people sit on the sidelines until there is “proof” of better times on the horizon.
Of course, by then, they have already missed the best buying opportunities.
This is currently the case, with many potential buyers waiting until restrictions have been eased and a more normal life has returned before entering or re-entering the market.
This means that there are presently excellent property investment opportunities available because there are fewer buyers competing on the same properties.
Indeed, it is almost the Holy Grail of a property investment cycle, with the combo of softer property prices and cheap credit.
However, not long after the fear has dissipated and restrictions have been removed, hordes of buyers will scramble to get back into the market, because of the following factors:
- It’s the safest asset class with a history of withstanding even the most severe of economic downturns.
- With hundreds of billions of dollars entering our financial system, we will see higher than usual inflation over the next five to 10 years, which will devalue the dollar and see real estate prices rise. The inflation will also devalue debt.
- Money is becoming worthless because of cheap credit, plus with savings doing nothing for you in the bank, people are looking for a safer return via real estate.
- We are in a deflationary period. So, to get us out of this situation, we will be printing money. Perhaps we will even move to negative interest rates to stimulate spending, which will likely motivate more people to invest their cash into a stable asset like real estate.
That’s why, with interest rates on track to be only two to three per cent for a number of years, as well as fewer buyers transacting, my money is on property markets starting to boom before the year is out.
