A tale from an epic housing crash

Believe it or not, there are actually other cities in the country apart from Sydney and Melbourne and a few of them have been experiencing fair-dinkum housing crashes for years.

I bought in the middle of what was probably the second biggest one (Darwin) and thought I'd share what I learned.

My wife and I moved to Darwin in 2010 and it was boom time. The mining boom was in full swing and property prices seemed to be on a never ending rise upwards (sound familiar?).

Then Inpex happened.

Japanese giant Inpex announced they were going to build their 36 billion dollar gas processing plant in Darwin. It was the biggest project in the southern hemisphere at the time. It required 8000 workers all of whom were going to be well paid in a town of 150 000 people....

BOOM.

Property shot up again, making Darwin more expensive than Sydney by a fair margin. Rents went skyward and as a young FHB...any hope that I ever had of buying property sailed out the window (ring any bells Sydney?). I was young, fed up and angry, not unlike a lot of the posters on here.

Whilst this was all happening the developers came and built high rise after high rise after high rise in the CBD and estate after estate in the burbs. (ding a ling?). When the local media questioned the necessity for all this accommodation they were told that future population growth would soak it all up.

Then all of a sudden, just as the last tile was being poorly laid. The mining boom ended and the economy tanked. It was about 2013 and we all began to wonder what exactly was propping everything up? Why weren't there any lights on in the high rise? Shops started to close, the vacancy rate went up and I started charting Darwin's listings so I could see what was really going on.

You'd think that prices would plummet, but no, they didn't. For the next 2 years prices remained stubbornly high. Developers were even still trying to flog high rises with "free cars and a washing machine", but the horse had bolted and the buyers were no where to be found. The listings started to pile up too, everyone wanted out at top dollar but nothing was happening.

By 2015 the vacancy rate was 9 percent in the CBD. I repeat, NINE percent.

It was only now the prices started to tumble. And boy did they tumble hard. properties that were 700k were now going for 600k then 550k then 500k. Units that were previously 450k were now 300k. The real carnage though was in the CBD (surprise!). 600k units there dropped to 350k....ouch.

Admist all the doom and gloom, there was a group of us who thought it was Christmas. All of a sudden it was cheaper to buy than rent. Us young professionals who 5 years ago had thought we'd be renters forever were now able to get a property. And not just a poo-box, but something really quite nice.


Around 2016/2017 we all went shopping. We only bought PPORs and we bought them all at a discount to the already discounted price (to insulate ourselves from further falls). We were all on 80 - 100k pa and buying for 3-400k. These are nice, sensible numbers.

2 years on some of us are down a little (10-15k?) but most of us have held steady...either way we're all miles ahead of where we'd be if we were still tenants.

My friends that bought during the boom have also held on. None of them have sold. They would all be down well over 100k but the properties still rent out and life still goes on.

It will too in Sydney and Melbourne.

Basically what I'm trying to say is that:
- A crash brings equal amounts of pain and opportunity. Prepare for the opportunity.
- There is a lag between the market moving and sellers getting the memo. Usually the lag is a few years.
- If you've gone in too deep with debt, selling earlier is better, before the lag kicks in.
- Do your own charting and research on the ground. Forget the mainstream media.
- Different areas and property types are affected differently. Learn which are the good ones and target those.
- Avoid high rise apartments. Don't even think about it.
- Buy something you actually want to live in. You'll have a lovely place to ride out the storm and be in a better position once the clouds clear.
- Keep debt low and buy something you can comfortably afford.
- Wait until the sellers are hurting and buy at a discount. This will insulate you from further falls (to a certain extent).

 

Well said...same will happen in Sydney and some parts of Melbourne.....it is a matter of time....

 

Good summary and advice. Perth has had a similar but less severe experience, however it was the 20% drop in rents that has caused a lot of pain for investors looking to hold on and ride out the downturn. What did Darwin rents do over this time?

 

Ahh.... But Sydney is different. Prices may go down but it won't be a catastrophic crash. Sydney ain't a one horse town. The Druitt ain't a one bogan 'burb either.

It will take a hell of a wallop to knock Sydney over. And if that happens, the rest of the country will be feeling it.

There's talk already that Sydney could pick up again in about 2 years time due to immigration. Looking forward to that and an 05 Monaro!

 

@hammer many of us here know & share your sentiment (at least those that live north of the borders) IMO, you have articulated the point well.

As for Sydney & Melbourne suffering the same fate, it's a bit more complicated there as those cities have a far more diverse industry & economic base.

Although they're more resilient they definitely aren't immune however the catalyst for a major correction in Syd/Melb like Darwin experienced, would need to be so profound that it would send economic shockwaves nationwide. Probably needed all things considered but probably also not really in most people's best interest either.

Another credit crunch like the GFC or APRA changes, or some other significant economic downturn would do it but is less frequent/likely than events triggering corrections in regional cities.

 

Same thing happened in Spain when I was looking & buying. First the sales dry up, it takes a few years for sellers to accept the new lower price reality.

But the capital was hit the least (only 30-40% down) & recovered the fastest, the costas are still down, they dropped over 50%. I bought two places, my Barcelona place is up, the coast is still down on what I paid 7 years ago (and I got it 30% off peak then).

 

Hey, I never said that Sydney Melbourne would be as hardcore as what we saw up here...I've given up trying to predict this stuff....but regardless of the severity of the drop - the principles (and the opportunities) still apply.

 

About the same, but they were coming down off a much higher base.

 

Mining towns in WA have been hammered Karratha, Pt Hedland, Newman. - 50-65%

Some regional centres in WA - Mandurah, Dunsborough 30%+

I suspect other mining towns QLD also got hammered

 

Prices are actually weekening around the world.

London New York Vancouver Toronto and many many other cities.

So the current state of affairs is in some cases world wide.

Cananda has Introduced stress testing on loans. I guess similar to APRA here to reduce risk.

I feel current affairs are more global than we think here in our shell of Australia.

 

Except we have the dubious honor of topping all the household debt ratio charts...

 

Well we can always move to Turkey and Argentina which are near the bottom.

Oh wait...

 

Smart investors cut their losses and move on. I was told not to sell my house in Perth in early 2016 because the market will rebound again next year but that didn't happen. If I held on I'd be dealing with less rent and increasing mortgage rates.

 

Were people still buying on the way down in Darwin? Stock is really building up in Melbourne and that's with new listings dropping (this year no one wants to list their property because of the market slump. My concern is they'll all do it at the same time next year when they realize things are going to get any better).

Did you ever see sales in Darwin that made you think the downturn won't be so severe because this and that sold.

 

As others have already said Sydney and Melbourne are different beasts so I don’t think it will play out like that. My guess has always been a 10-15% price reduction based on credit tightening and that’s about it.
I then think we will then head into a lull of around 3-4 years of no growth at which time papers will have nothing to write about, credit tightening will ease (albeit a fraction of glory days) but rates will remain low and that is what will keep the market a-float and potentially back up again.

One thing however is certain and that is the CBD apartment market like you noted is in real big trouble! Tower after tower is going up and with overseas investment dried up and also local investors either too smart to invest in the CBD or maxed out won’t touch this new stock coming to market. This is where I see the most pain and the losses will be more around the 25% mark.

The reality is the Melbourne CBD market has been losing growth in inflation for 5+ years now.
My mate who lives their just got his apartment revalued and it’s worth the same amount he purchased it 5 years ago (and that was with a generous desktop).

 

let's not forget that Perth and Darwin started tanking shortly before the RBA cut interest rates. That would have slowed the downturn a bit also. Melb and Syd might not be getting that so indeed it could turn out very differently for that reason alone.

 

A few people bought on the way down in Darwin but it really was minimal....there were hardly any buyers at all. We all went on strike.

The stock building up is kinda the first part of the process before the pricing release valve gets opened.

This will happen for sure. It's human nature and all part of the "lag".

Hmm. Well the emporer kinda had no clothes...(700k for a poobox in Darwin...really?!) so we all figured the market here was due for a royal smack in the chops. But once things arrived at sensible pricing (450k for a house, 300k for a unit) things started selling and I thought that might be it, and for the most part it has been but then again the royal commission happened......

 

Every time I hear about unit oversupply my thoughts wander back to the Docklands price crash in 2004 ... lot of nightly news speculator squealing when off the plan buyers were expecting to on-sell at a profit before settlement but got stuck and couldn't complete themselves.

The market always overshoots in construction

But, as always, some shed blood and some made a killing - and within 2 years everything was absorbed back into the market and everyone continued on their merry way.

 

This is a pretty spot on assessment IMO, though I think the falls will overshoot 10-15% by quite a bit. I reckon %15-25 inner ring Melb since we already seeing 10 in a lot of places and there's no slowing.

Even %15 off your typical 1.5m house is $225k, %20 is $300k.

I need a PPOR after returning from OS, but I'm not keen to get caught holding the bag. Late 2019 - 2020 will likely see much better value.

 

The areas I follow I’m seeing around 5% right now but admittedly they are in the 600-1mil range so less variance. I know I got my PPOR valued 6 months apart from different valuers and both came out the same.

I just can’t see 25% under current conditions UNLESS rates move. By all accounts rates are not going anywhere for a while yet.
On the contrary people who can refinance (MOST PEOPLE!!!) are enjoying very low rates, big pricing discounts and cash backs that after the cost of refinancing can almost cover a holiday.