- Each state is performing differently, and within each state there are many markets.
- Take price drop advice from media, experts and doomsayers with a grain of salt.
- Now is a great time to buy - you have the upper hand in negotiations and less competition.
Following today’s announcement by the Reserve Bank of Australia (RBA) to raise the cash rate by 25 basis points to 3.35 per cent, there is no wonder that home owners are left wondering how this impacts the value of their homes. Meanwhile, those who are looking to buy property in the current markets are questioning whether it is the right time to buy, or if there is a property market crash looming on the near horizon?
The big four banks have all predicted that house prices will continue to tumble this year with many experts predicting the falls to again be in double digits. But when looking at the property markets on a more micro level, you will start to see what is really going on.
When you are a professional property buyer the market trends and signals are clear and this makes it easier to predict how the markets are going to react to the RBA’s cash rate decisions.
Look at the micro picture
Most importantly, try to keep things in perspective. Whilst the big picture shows that, overall, the Australian property market is in a downturn, this does not mean that all the nation’s property markets are being impacted equally. Some markets are being hit more strongly than others, whilst some markets are even seeing strong growth.
When the media reports on how the Australian property market is performing, it is very general. It does not distinguish between the different performance of each state, and within each state there are many markets, and each of these markets are at their own stage in the property cycle.
As an investor, you will recognise that there is not one overall market but rather multiple markets with property values falling in some locations, stagnant in others and there are even a few locations where housing values are rising.
Supply and demand is still king
The property markets are very reliant on the demand supply matrix. In area’s that have very strong demand for properties but the supply is low we find that when new construction is not meeting demands then the market may still have growth regardless if the overall Australian property market is described as being in downturn.
The RBA’s cash rate will influence the interest rates set by lenders and this will impact buyers serviceability (the borrower’s ability to pay back a loan in the eyes of the lender) so the properties that are impacted the most are those at the higher end of the market, the high-end properties that may now be out of buyer’s budgets.
Prospective buyers are also worried about the current high cost of living so are cautious about over extending their budget to buy the property of their dreams.
What’s influencing the current market growth?
Even with the current interest rate hikes we are seeing growth in some property markets. We have noticed that the growth rates in many markets is at a slower rate compared to a couple of years ago but it is still growing, and it is strongly dependent on the particular area and property type.
This means we are seeing the areas that recently experienced double-digit growth now slowing to single digit growth. If you are an experienced property investor, you would look to buy property in an area that has multiple growth drivers to protect against a fall in any one industry.
The reduction in buyers’ borrowing capacity resulting from the recent interest rate increases has driven a slowdown in many property markets, and some buyers have had to exit the market altogether as they are no longer able to borrow enough to afford to buy in a capital city.
When will interest rates peak?
The impact of interest rate hikes on the property markets throughout 2023 is reliant on where the height of interest rates lands. The Commonwealth Bank is forecasting interest rates will peak at 3.5 per cent, whereas Deutsche Bank economists are predicting a much higher official cash rate of 4.1 per cent by August this year.
The peak of interest rates is determined by whether the rate of inflation can be curbed, but we are not expecting to see interest rates peak until the latter of 2023.
Will property prices crash in 2023?
According to ANZ CoreLogic’s most recent Housing Affordability Report, capital city property prices are set to fall 18 per cent over the balance of 2022-23, before climbing by a modest five per cent in late 2024. This is much higher than what the Reserve Bank of Australia is predicting, which is a national house price drop of 11 per cent by the end of 2023.
But you need to take this advice with a grain of salt. The experts at Commonwealth Bank predicted 20 per cent plus price falls in the Australian Property Market during the pandemic, however we actually experienced price increases in many markets across the country.
As an experienced property buyer, I know that ‘no one has a crystal ball’ meaning that no one can really predict what will happen with property prices this year, but I do understand what to look for that would trigger a price “crash” and I understand how to protect my investment properties from a price downturn.
The perfect property price crash storm
In order for property prices to crash, we would need to see a storm of the following:
- Rising interest rates, alongside
- rising unemployment, alongside
- rising cost of living, alongside
- a downturn in the economy, alongside
- a drop in housing demand.
One thing that is keeping our property market strong is the unemployment rate.
Currently, the Australian unemployment rate is at 3.5 per cent which is the lowest ever since the mid-1970s. There is actually a shortage of workers available in many industries at the moment.
A safe level of unemployment is considered around 4.5-5 per cent and we would begin to worry if unemployment started rising above this to around six per cent or more. For a crash to occur we would need to see unemployment above six per cent or closer to the seven per cent mark.
Currently, there is such a strong demand for housing that builders are unable to keep up. The rising cost of materials and lack of available land in popular areas means that there just isn’t enough housing being built to keep up with demand, so much so that this has led to a housing shortage crisis across the country.
How to protect your investment property from declining in value?
If you are worried about a fall in the property market, the best way to protect your investment property is by manufacturing equity in your property so that it doesn’t matter how the market is performing, you are still able to make some gains on your property.
To manufacture equity in your property this can be done through renovation, subdividing or developing the land. Basically, anything that will create more value for your investment property is how you can manufacture equity in your investment, so you no longer need to rely on the growth of the market.
What’s the future of the property market beyond 2023?
There is speculation that the Reserve Bank of Australia will bring the cash rate down to under three per cent in 2024 which is when we will see the current buyer’s market starting its pivot into a seller’s market and this is when we will start to see high clearance rates, competitive auctions, and rising property prices across the capital cities.
Property will always move in cycles, but remember that property is a long-term gain and you just need to ride out the waves for the long term.
For more information, pick up my book Buy Now – the Ultimate Guide to Owning and Investing in Property – it tells you all you need to know. My book Positively Geared – How to Build a Multi-Million Dollar Property Portfolio from a $40K Deposit is not bad either (in fact it’s a bestseller!).
