13
November
2018

Is a property crash imminent or is it a media beat up?

Is a property crash imminent or is it a media beat up?

Last Sunday, Channel 9’s 60 Minutes program ran a segment suggesting that Australia is about to see the biggest property crash in our history.  There was talk of a 40% drop in property value in our major cities and the end of the seemingly endless growth cycle.  In my view, 60 Minutes have taken the extreme position, it makes a better story, but the problem is real.

The average Australian is far more bullish on property than any other asset. I‘ve heard numerous people say that you can’t lose money on property; we also hear enormous growth expectations like property doubles every 7 years.  Most people don’t blink about gearing up to 90% or more into an investment property, often using equity in their residential property to front up their 10% contribution to the property. That mindset has all the hallmarks of a bubble, and, as we know, bubbles burst.

In order for a bubble to burst there is normally a catalyst. Unfortunately, we have a few looming issues, any of which can easily burst the bubble. For me, there are 4 main dangers to the property market.

The relative high cost of property- What is too high is always subjective however, if we look at property as we would any other investment, the cost compared to the income it derives is ridiculous. Rents compared to property values are way out of sync. The value of any investment ultimately should be linked to the income it provides, on this measure, currently, property is well over-valued. The other measure is the comparison of property to wages, this will drive future demand. People are limited to what they are able to afford.  Currently, we are spending a higher percentage of our income on our housing than ever.

Tightening of lending practices- It is hard to get a loan right now, and getting harder. During the boom it seemed to be a game of chicken, whichever party was prepared to borrow the most against existing properties won the auction day. In my view, banks lent some people way more than was sustainable long-term. The real issue here is that so many people opted for interest only, as that is all they could afford to repay. Those interest only loans will all come up for renewal in the near future and many will be required to move to principal and interest. Many won’t be able to afford it, and be forced into a sale.

Interest rate risk- We have record low interest rates. At some point, these are going to ease up. Each rate rise will see people go past the point they can afford and this is likely to see a lot of forced sales. In some cases, if they are forced into a sale at a loss, they may lose their principal property as well.

The wind back of negative gearing and capital gains discount- Negative gearing and the capital gains discount are on the agenda to be wound back. They are artificial accelerators to the property market and, from a pure economic point, make no sense. Negative gearing is an incentive to pay more for a property than it is worth because it is subsidised by a tax break.  The theory being that someone else will also pay too much for it in the future.  It is also nonsensical that we pay more tax on our salary and wages that we work for, than we do for investment income that we don’t earn. At some point both will be reduced.

Unfortunately, it looks like we are going to experience a downturn in the housing markets, which will have a flow-on effect to the economy as a whole. I don’t envisage that we will see a 1990’s style Japanese crash that will take decades to correct itself - but we should be concerned.

On a positive note, perhaps this will provide an opportunity for first home buyers to enter the market at a more affordable level.

Author; Alex McKenzie Categories: Author, Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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