Why You Shouldn’t Bet on A Housing Price Collapse Just Yet

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Property investors have had a lot to contend with recently. Every day they’re bombarded by conflicting reports on the state of the housing market. Some property experts are forecasting enduring house price rises. Yet others point to an imminent property crash. So which is it? The answer: a bit of both.

At least that’s according to a new report by construction analysts BIS Shrapnel. They expect to see house prices remain flat for the next three years up to June 2018. BIS predict that median house prices will rise incrementally over the next two years. After that, prices will regress back to current levels.

Importantly, they also forecast contrasting fortunes for houses and units. Whereas house growth will remain flat, unit prices are set to fall. I’ll get to this in detail shortly. But first I think it’s worth summing up what this means.

If BIS are correct, then it means a housing crash isn’t coming for another three years. That will come as a relief to many worried about a potential doomsday scenario.

At the same time, it may change your own view on investing. You wouldn’t be alone either. Many would-be buyers remain undecided about making any immediate commitment to purchasing an investment.

The concerns over a housing bubble crash are just too hard to ignore. That’s especially true if you’re investing in Sydney or Melbourne. Prices in Sydney alone have grown by 18% in the past year.

Adding to concerns, how can we be sure that Australia’s economy will avoid a recession? We can’t be. Price growth, plus a sluggish economy, are valid concerns that could point to a housing bubble. It’s easy to see why many investors are unsure about buying into the market.

What does all this mean for you?

Is it worth investing and taking the risk of buying in when prices are potentially at their peak? If BIS projections are anything to go by, every case should be judged on its own merits.

For owner-occupiers, these forecasts may ease some concerns over a potential market crash. Some people are happy to know that prices won’t tank hard in the next few years. On the other hand, other owner-occupiers may be put off by stagnant prices over the next few years. It really depends on what you want from a house.

Investors however are likely to be less impressed by BIS’s data. That’s especially true for those that rely on negative gearing strategies, which rely on rising property values. What’s more, it depends on whether you’re buying a house or a unit.

Mature investors buying houses may be more inclined to invest. At least compared to younger investors anyway, who gravitate towards cheaper units. They may find it harder to stomach as unit prices drop in the next few years.

Frankly, there’s a lot to process for anyone thinking of buying into the market. One way to clear up some of the uncertainty is to take a closer look at what the data says.

Why there’s no major housing crash on the horizon

BIS has quashed the idea that we’ll see a dramatic price correction in the near future. Instead, they believe that median house prices will undergo slight price movements from their current position.

According to their report, growth in median prices across Australia will remain flat between now and 2018. The only exceptions to this are Sydney, Melbourne and Brisbane.

BIS expect that these cities will continue to make decent gains up until 2017. After that however, they’ll fall back in line with the rest of the country, undergoing marginal price declines.

The three reasons for this

Firstly, the mining industry’s struggles will continue to force down house prices in Perth. That alone will ensure that values in Perth remain below their historic peak at least until 2018.

Secondly, housing oversupply in cities like Adelaide and Canberra is set to keep a lid on price growth in those cities. This issue has been plaguing these markets for years now, and its set to persist until 2018.

Thirdly, in the case of Sydney and Melbourne, BIS expect that rising interest rates will lower demand, causing prices to drop slightly. They believe the Reserve Bank will raise rates by 0.50% starting in late 2016. Naturally, loan repayments would go up in the case of any rate rise, as would the cost of borrowing. And when borrowing becomes more expense, demand for home loans drops accordingly.

Median house prices set for flat growth between 2015 and 2018

As we’ve seen, prices in Sydney, Melbourne and Brisbane will continue to rise slowly up to 2017. After that, some of those gains will be offset by falling prices.

Outside of Perth and Canberra, every major city in Australia is expected to see lukewarm gains in prices over the next three years.

Median house prices in Sydney will only rise by $20,000 to $980,000. That’s a far cry from predictions that Sydney would break through the one million dollar median price barrier soon. Similarly, Melbourne median house prices may only rise by $25,000 to $655,000.

In percentage terms, that’s a relatively flat 2% and 4% rise respectively.

The one exception to this is Brisbane. BIS forecasts that median prices in the third biggest city in Australia could rise by 13% by 2018. That would send median prices rising by an impressive $70,000.

That’s certainly striking when compared to Perth. The mining industry’s struggles should continue to weigh down on house prices in Western Australia. Median prices in Perth are set to fall from $580,000 to $565,000 by 2018.

As for the rest of the nation, oversupply will remain an ongoing problem. Take Adelaide for example. By 2018, median house prices will only rise by $5,000 to $455,000. The same is true for Tasmania and ACT, where oversupply will constrain prices for the foreseeable future.

So that gives us an insight into the potential state of the house prices in the near future. Not great, but not disastrous either.

Yet how will unit prices fare by comparison? After all, that’s what many investors are interested in. Unfortunately, BIS paint a much gloomier picture when it comes to unit prices.

Unit prices set to fall across most major cities by 2018

The oversupply of units is set to negatively affect prices across most of Australia by 2018. According to the BIS, demand for units won’t be strong enough to support the supply in the market.

For that reason, they see unit prices falling across all cities, barring Brisbane. Of the losers, investors in Melbourne stand to experience the biggest drops in prices. Median unit prices in the Victorian capital will fall to $480,000. That’s a 4% drop from their current $500,000 level.

Sydney will see a slight drop too, with median prices falling by 1% to $670,000.

Equally, Perth, Canberra, Darwin and Hobart will all see declines in median prices by at least 2% each.

The exception to the rule once again is Brisbane. Unit median price there are set to follow in the footsteps of house prices. By 2018, median unit prices in Brisbane will rise by $25,000, resulting in a 6% increase.

So outside of Brisbane, unit prices are set for a rough few years. But why exactly are unit prices falling steeper than house prices?

Falling migration rates contributing to lower unit prices

BIS attributes the overall drop in unit prices to falling net migration. They see this as a major constraint on investor demand. Simply put, the fewer people there are to rent to, the less attractive a unit investment becomes. The drop in net migration is significant too.

Between 2012 and 2014, net migration fell by 50,000 annually. That’s made worse by the fact that most people who migrate come on temporary visits.

For this reason, BIS expects falling migration to hurt rental demand by 2018. The consequence of this is that rental yields will continue to fall as well. That’s likely to put off many investors, especially those who adopt a negative gearing strategy to their investment.

Negative gearing makes sense as long as property prices are rising. But it makes less sense in a depressed property market. Considering that’s the future we face in the next few years, it may put off many investors buying in at the low end of the market.

Nonetheless, the BIS report should ease some concerns that the property market is in bubble territory. But not one that’s on the cusp of bursting anytime soon.

If interest rate hikes are put on hold until late 2016, prices in Sydney and Melbourne should keep rising. After that, it remains to be seen how accurate BIS’s forecasts remain.

Perhaps the most important take away is that rate hikes could have marginal effects on house prices. Investors and owner-occupiers will certainly hope that’s the case.

Mat Spasic,

Contributor, The Daily Reckoning

PS: The Daily Reckoning’s property expert Phillip J. Anderson remains bullish on housing. Like the BIS, he doesn’t see a price crash any time soon. Yet unlike the BIS, he believes the Aussie housing market will continue growing for another decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade. He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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