The media have run various articles over the past week with a range of enticing headlines that state something like: RBA predicts a 40% drop in house prices.
Now if you're a first-time home buyer or someone keen to step up the property ladder, this may sound like good news. Finally, Sydney prices could fall back into reasonable territory!
Isn't it?
False – it just won't happen.
Those who own their own home or have an investment property may read this type of headline and find themselves worried and anxious about the value of their properties – yet another thing to fear in 2020.
These titles are successful in that they generate "clicks". But they also fuel people's fears and insecurities. As a community, are we talking about RUOK? By day, but it is important to do more than talk – when we see an opportunity to educate, inform or support others to sleep better at night, it is our duty to take it.
As a journalist specializing in real estate and finance with over 15 years of experience, who has interviewed more economists, bank executives, CEOs of the industry industry and researchers that I have had hot dinners, I have been exposed to a wide range of knowledge and expertise on the drivers of growth and influences in the Australian property market.
And so, before you worry too much, I'd like to offer you another perspective.
What will keep property values ??from dropping 40%?
Australian property prices are not expected to collapse by 40 percent – and the latest research from the Reserve Bank of Australia (RBA) has not suggested they do. would.
In fact, the headline "Predicts Potential 40 Percent Drop" is misleading, as it is not at all what the RBA has suggested.
Rather, the RBA looked at what the effect of a 40 percent drop in house prices would be.
The authors of the report, Jonathan Kearns, Mike Major and David Norman, wrote a research paper entitled "How Risky is Australian Household Debt?" in which they examine the current state of play with household debt in Australia.
Against this background, there is a section of the report where the authors explore "Household Debt Stress Tests".
Their objective is "to assess how the presence (and increase in) debt may affect household consumption in times of stress" and involves a "hypothetical severe stress scenario".
“The scenario involves a drop in employment by 8 percent and house prices by 40 percent. We believe this to be an extreme but plausible scenario, broadly consistent with the shock experienced by some countries during the global financial crisis. "
Some notes here:
Australia is not among the countries that experienced a 40% price collapse during the GFC. Our banking and financial systems were very different and much more robust than those in the United States (which suffered declines of up to 40%) and after more than a decade of regulatory reform they are even more so. risk-averse today. Much of the collapse in the US housing market is due to non-recourse loans – which we don't have in Australia.
The RBA does not “predict” a 40% price collapse. They model what might happen to households in Australia, if such a situation arose. Which brings me to the third point …
Our government will not allow real estate prices to collapse by 40%.
They will step in first with regulatory changes, tax reform, grants and subsidies, investments in infrastructure and other measures.
Look at how the federal government has intervened since the pandemic began to wreak economic havoc in March: billions of dollars in grants, grants, lifelines and projects were announced.
Or to be more focused on ownership, look how they reacted when the markets in Sydney and Melbourne exploded a few years ago. Investors were penalized by higher interest rates, lenders were forced to limit the number of homeowners they lent to, and other steps were taken to remove some of the heat from the market.
In Australia, real estate and related industries employ over one million people. Property is the main driver of household wealth and the real estate business is the main contributor to state budgets (in the form of stamp duty).
For these reasons and more, our governments, policymakers, and leaders are likely to take action and help adjust the price if it appears our real estate markets are headed for a global collapse.
Why such "predictions" can be dangerous
Of course, it is not possible to predict what will happen in the future, especially as the pandemic continues to shake things up.
But here's why this type of reporting is so reckless: People are already stressed. We are already living in “uncertain” and “unprecedented” times.
Hundreds of thousands of Australians have lost their jobs, or have a job / income, but nowhere near enough to stay afloat indefinitely. Our Victorian residents are still living in lockdown.
Some small businesses simply will not survive the pandemic and the collective amount of stress, doubt, worry and worry about the future has never been greater big.
In the face of all of this, the last thing people need is to worry that the value of their property will also plummet – especially when the likelihood of it happening is so low.
So where do you go from here?
At times like these, I like to rely on experts who really know their stuff and one of those economists I always trust is Dr. Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital.
Oliver has decades of economic experience and in his regular columns he delivers the latest economic news in an easy-to-read manner, without all the effects and pride that articles on Click baits tend to generate.
In his latest update Oliver writes: "Australian home prices are currently protected by income support measures and bank payment holidays, but higher unemployment, immigration stoppage and a rent vacation will push prices down next year. Home prices are expected to drop around 10-15% from their April high. "
Keep in mind that this is a general statement (given that the real estate markets in each state and city operate on their own engines of growth) and that since the April peak, many markets have already seen a drop in median values ??of 2-5 percent.
This means that some markets could see a median decline of up to an additional 5-10 percent over the next 6-12 months, but this does not apply unilaterally.
In some desirable and affordable family suburbs of the Gold Coast, for example, demand is currently very high. I know of a seller who just listed his three bedroom family home with an expectation of $ 650 to $ 680,000. The agent suggested they could hit a price with a seven in front of him. On the first open day, 34 groups came and seven offers were made!
The house is now subject to a contract for $ 728,000.
Conversely, a few suburbs away, I know of a much larger and more opulent four bedroom house with a swimming pool that was listed at $ 925,000 just as the pandemic struck. It is not as affordable and appeals to a smaller number of potential buyers. With less demand, she sold and settled in July for $ 800,000 as sellers were desperate to move on.
Here is the unspoken truth of the real estate market: At the macro level, there is data and research to support all kinds of trends and ideas. But when you go there, at the micro level, it is heavily influenced by personal circumstances.
Which brings me to my last very important point. Even if your home is in a suburb or area that is experiencing a decline, and even if that decline hits Oliver's worst forecast of 15%, it only becomes a problem for you if you absolutely need to sell.
If you are worried that you might find yourself in a situation where you have to sell your property for a loss, be proactive now. Our survival guide might help investors. There can be affordable but impactful small renovations you can do to increase the value of your home. And you can talk to your bank or lender about extending the deferral period on your loan by four months.
Just be careful not to worry too much about "predictions" at a time when no one can predict anything with any certainty.
Do your best to be clear-headed, focus on the facts (rather than speculation), and seek professional advice if necessary. And don't get too far ahead of yourself: Stay tuned for the next three months – no more, no less – and you'll be well positioned to avoid the emotional roller coaster that the news cycle can bring.
