Will property prices fall? When? And by how much?

Will property prices fall? When? And by how much? What investors need to know

Listened to an interesting pod earlier by Christopher Joye for anyone that is interested.
Some points and in his words for those that don't want to listen to it.

12.5% -25% drop in house prices over a period of time across the board. Mainly Syd and Melb.

4 major banks have to increase rates as their returns are shrinking, because the regulator is forcing them to hold more capital and reduce leverage. The four major banks have about 5% equity deposits on their balance sheets and 95% debt. Which means they are leveraged about 20 times. As they are forced to use more equity and less debt, their returns are falling and they are going to try and increase home loan rates. Investments and home owner occupier.
That is inevitable over the next two years.

Cash rate is at 1.5%, let's assume the rba goes 100 basis points. So the cash rate goes to 2.5%, that means you're going to get term deposit rates at potentially 3.5%-4%. If you can earn 3.5-4% risk free with no transaction costs and daily liquidity, that will beat most of the yields you get in residential today. So there will have to be a repricing.

The key for investors is, I would be looking to exit the market over the next 1-2 years before the first rate hike starts. There will be tremendous opportunities when prices do fall 15-25%.
If you get more than 100 base points hikes, you will have a lot of borrowers that can't afford to repay their loans. Even though they think they can.

I'm very bullish in housing over the next 10-20-30 years, the fundamentals are very strong. Strong population growth, immigration. The RBA will be raising rates due to economic strength.

The residential market is well over due for a good reckoning. Doesn't mean it's not a good asset, just means we need to time our way into the asset class. I think this idea you can blindly hold onto property and ignore the cycle is madness.

I think we will see a 1.5 to 3 year correction in prices, and I think the RBA will cut rates, or stop hiking.

If prices fall 12.5-15%, you will see suburbs drop 30-40%, perhaps even more. You saw this in 2008-2009, in Portsea, Palm beach, in Toorak, Point piper. Prices were slashed 40%, premium markets.

 

If you've got a property that is cash flow neutral or cash flow positive wouldn't it best to hold it? Transaction fees from buying/selling property is around 7-8% + capital gains tax...

 

I listened to the podcast too and thought it sounded quite convincing. As always though, how do you know?

On this point though I'm not sure - you can possibly get that return in shares at the moment (although arguable whether more or less risky but certainly far less transaction costs and more liquidity). But no asset class other than residential property can you get such high leverage, and that's where the power is. Of course, with such high leverage, if it does fall 15-20%...

 

I agree but Sydney and Melbourne continue to defy us. I think I have called the Melbourne market peak at least 3 times in the past 18 months and Sydney maybe twice in the past 12 months? That would make me 0 for 5 in predicting peaks. I probably should be selling books about the crash

 

If you continue to do this, you will be deemed an expert .

 

Depends how much profit I guess.
And if you believe what Christopher joye says.

 

All that Christopher said makes sense.
Anyone disagree with what he's said? Or perhaps the bull run can continue a few more years?

 

Great site.
Haven't listened to the podcast yet but have heard the thing about the banks needing to increase profits on the news. It's not the RBA raising rates.
I don't think Australia as a whole is in for a correction. Sydney and Melbourne will drop a little when the boom ends as is the way of cycles but both cities saw stagnation and slump bottoming in 2012 so it's not like they've been going hell for leather for 25 years.
Darwin and Perth are dropping because of the mining peaks and troughs - they're getting their reckoning now.
Adelaide and Brisbane are healthy but hanging out for some booming activity so they are unlikely to drop.
TBH I think there are plenty of people currently sitting on the sidelines waiting for interest rates to increase. Therefore, I don't really think there'll be much downward movement in property at all - except that related to mining. Which even then, if you scout around his site, shows that there is quite a bit of growth and yield in some mining towns.
So .... no.
in my not so humble opinion

 

Sydney population is crazy. Getting places on Saturday... Forget it. I used to get places via vehicle on Sunday no problem, not anymore.

I have been $10-20 per on Sydney properties in this low interest rate era...
Me thinks, a lot of investor will jack up this amount or more for every 0.25 increase....
The house price will fall a little, rent will go up a little... Eventually we're back to 5% yield before next cycle repeats....

 

If lending continues to tighten markets I believe in Australia will soften. It is not if but when.

In the main I think investors are in greed mode, now when fear sets in the tables will turn.
Fear for me set in about 6 months ago so I am out now and watching. Fool me if we have another 2 years in this boom cycle.....

MTR

 

Agree. I thought the peak was end of 2015. Put my money where my mouth is, sold a property, missed out on another 100k of growth. Fail.

 

I'm torn with making a decision at the moment, to buy a ppor now or wait a couple years for the correction.

 

From a banks agm i went too this morning they said they have just over 9% equity deposits on the balance sheets,and most of the talk was about the adverse business conditions including deterioration in property values of both residential and commercial property under the models they use,and as one said over the next six months we may well see who been swimming naked when the tide goes out..

 

Yes power in leverage agreed, but after transaction costs your getting around 2.5% returns he said in resi. No point in leveraging further at those returns.

 

I guess it's good to get out if you made some serious cash, but if it's little what's the point? The exit and if you buy in again costs, will eat up most of the profits. Unless he's right and predicting 30-40% drops in higher end market suburbs.

 

I’m in the same boat mate. Decided not to let my investor mindset control my life and moving forward in it, so we’re looking for a PPOR in the $1.1 – $1.3 bracket so we can start a family and enter the next chapter. I won’t lie it keeps me up at night sometimes, am I making the right decision? I don’t know.

 

So what does your investor mind say to do? I wanna hear from the investor side only please lol.

 

Not to buy as I see a correction coming 10% or so, not 40% crash though. The biggest unknown is time. Will it correct next year? That would be nice. Will it correct in 5 years time? Don’t care, too far in the future.

 

I would not sell unless I made significant gains, no point to it.

I buy in trust structure and use a few strategies to reduce tax, I operate like a business.

I can make my money work harder for me if I take it prior to peak because it may/may not drop more than 10%?? who knows but flat markets can stay flat for 7+years while still servicing debt.

 

I sold in Melbourne in late 2105 too. In my area, prices actually dropped after that. I believe they came back again recently but I wasn't going to wait around to squeeze a bit more out of the lemon. I put the money from the sale to good use.