The Property Downturn

Successful wealth management isn’t just about taking advantage of immediate opportunities. It’s also about understanding developing investment trends, which could take years, and working out a strategy to deal with it.

It maybe building a position to ride the trend or it could be positioning yourself to avoid any related damage. Often identifying those longer term trends is understanding the investment cycle and its current stage.

We try and regularly assess these longer term trends because it’s important to get a big picture view.

Property is a classic example. Recent independent property data shows property values are dropping across the country ranging from a slight easing in some areas to a major crash in places like the Gold Coast.

We’ve been cautioning people about residential property for nearly 3 years and were regularly castigated for scaremongering because back then property was booming.

A summary of snippets from past columns highlights our views;

October 2008; It is very unlikely that the Australian residential property market will plunge anywhere near the extent of the US… but the tightening of bank finance will have an impact on residential property values. It is simple investment fundamentals.

May 2009; The facts of life are that property does fall in value. Like every other investment, residential property moves in a cycle up and down.

August 2009; The one thing you don’t want to be is a forced seller. Any downturn won’t be immediate but it is time to start preparing for the tough times ahead by increasing the equity in your home.

June 2010; As you know we’ve been a little concerned that our property market and how it seems to have skipped a much needed correction which the rest of the world has gone through… the bubble is deflating. By how much depends on which market you’re talking about.

November 2010; Sales success in the current property market has reverted back to classic investment fundamentals. Price the product to meet the market and it will sell… which may mean dropping the price.

The property downturn is just beginning. Over the last 3 years we’ve been suggesting readers direct spare cash toward paying down their mortgage and thereby increasing their home equity. The fear has always been that when times are tough in property, banks tighten their lending criteria and target borrowers who are highly geared.

There’s nothing more frightening than being a forced seller in a falling property market.

Those who have heeded that advice should be well positioned to ride the downturn. As we always say… every boom is followed by a bust and every bust is followed by a recovery. The property downturn will end eventually, it’s just a matter of timing.

But given current conditions, any pick-up will be a long way off.

There are a number of factors working against a recovery in residential property values;

. banks continue their tight lending policies which is demanding higher deposits and lower repayment to income ratios.

. clearance rates remain low which means there is a continuing build up in stock. The time it takes to sell a property has lengthened considerably which means, for example, property which didn’t sell last Spring is more than likely hanging around this autumn.

. sellers of old stock get desperate and slash their prices which then put downward pressure on the value of new stock coming on the market.

. the dramatic fall in skilled migration numbers means there is a drop in potential new buyers.

. expat Australians who were buying up big when the Australian dollar was weak are now selling up big time to cash in on the higher dollar. They then take the money back to where they live now because it goes a lot further.

. the two-speed economy means there are significant parts of the economy doing it tough and putting people and business under financial stress.

This last point is probably the most significant. Last week the Reserve Bank commented that the Australian economy could have contracted in the March quarter while ANZ boss Mike Smith said the level of financial hardship in parts of the economy was not being recognised seriously enough.

Property is being caught in a serious pincer movement from a number of factors. Three years ago we were cautious… and we still are.

Comments

0 #8 2011-05-27 22:10

12 months ago there was complete denial that real estate was in trouble, but now the realization is beginning to dawn on many that something terribly serious is about to occur in Australia. Australian housing is vastly, dramatically overpriced, by all reasonable measures. The recent analysis by The Economist is right on the money, and anyone will see from the excellent blogs on AustralianPrope rtyForum.com just how overvalued Australian housing really is:

http://australianprope rtyforum.com/pages/blogs/

The bigger the boom, the bigger the bust, and the property boom that began in Australia in the nineties evolved into the greatest real estate bubble known to mankind. The bust that's coming will be a doozy. As 2011 unfolds the spruikers will come to understand that real estate in Australia is dead for generations.

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0 #7 2011-05-27 21:01

Hi,

What happened this week on "7" Sunrise to the follow-up to the recall of the SQM managing director Louis Christopher? Did this get the "kibosh" from the Real Estate Lobby?

Or did I/we miss it?

Is there a web link if it actually happened?

Disappointed!

ChrisofSyd

Chris, you missed it... but don't be too disappointed I'll be doing a blog on it tomorrow, May 30... Kochie

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0 #6 2011-05-23 22:49

i like the way the article is set up, it has lots of infomation in point form which is easy to understand.

I still think the responsible financial property message should be- buy up, take advantages of good value,there has never been a better time to buy.That would keep the market moving. Then continue the message with be responsible, prepare for property down turns and one wage ,sick ness. Save up enough deposit that will give u enough buffer for the lower times that naturally comes in a property cycle.

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0 #5 2011-05-15 12:56

Kochie,

I don't think anyone can be castigated for property advice, especially over the longer term. I have been a big believer in: "Whenever anyone buys into ANY investments, you are not buying the item invested in, but rather you are buying time". The longer you hold it, the more valuable it becomes. Looking at property since the 1920s, this is particularly true. While cycles make some times better than others to get in, over the long term, the best time to get into well researched property is now....regardless of when 'now' happens to be.

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0 #4 2011-05-10 17:21

Good work Kochie. You were right.

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0 #3 2011-05-09 22:27

Nice article mate. Are banks able to revalue your property and therefore adjust maximum loan amount of a line of credit (lower maximum amount due to home not being worth as much as last bank value).
Thanks

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