What’s really happening with property prices

Ignore two great housing myths to get a more balanced picture of what’s going on

Is the housing market facing a crisis of confidence, as some real estate commentators say? Or is it facing deeper and more widespread problems? Channel Nine’s 60 Minutes segment Bricks and Slaughter, which aired in September, claimed that house prices could fall by 40% in the next 12 months. It was widely slammed as irresponsible scaremongering by many notable analysts. Louis Christopher, managing director of SQM, who said on the program that Melbourne and Sydney house prices were heavily overvalued, told the ABC’s Media Watch that he “was disappointed and unhappy … the segment was sensationalist to say the least”.

In A Crisis of Confidence in our Property Markets, a recent podcast by property commentator Michael Yardney, he started by saying: “Consumers are scared. Homeowners and property investors are worried. And our media is killing our property markets and our economy.” Yardney interviewed Andrew Wilson, chief economist of myhousingmarket.com.au, who said the market had lost its nerve despite our strong economy, pointing to high employment, high migration, a boom in first home buyers and the lowest interest rates on record.

So what’s really going on and how can you, as either a home buyer or investor, take advantage of the current conditions.

First, it’s a myth that there is an “Australian housing market”. We have myriad house markets in this big country and it’s our two biggest cities, Sydney and Melbourne, that are experiencing the biggest falls. Prices are down 7.4% and 4.7% respectively in the year to October 31, according to CoreLogic, and are expected to fall a bit more.

Another myth is that housing is unaffordable. Again this is mainly a Sydney and Melbourne problem, as can be seen from a table (below) compiled by the respected commentator Michael Matusik.

Sydney, Melbourne and to some degree Hobart are overvalued, says Matusik, but median house values for the rest fall between four and a half and five and a half times median family household income. His general affordable price benchmark is five times median household income but it’s higher for Sydney and Melbourne because, he says, history shows that these two cities command a premium.

“If it all goes to shite then maybe the damage is most likely to be contained to a few spots,” he says. “This, of course, assumes that things economic don’t implode or that we don’t panic. Greed often turns to fear.”

Matusik sees very little room for house prices to improve unless either costs decline or incomes rise. “My take on this is that we are likely to experience ‘the big yawn’ for the next five years, but maybe 10 years or so, whereby dwelling values don’t rise much across most places in Australia.

“House price growth over the past 25 years was largely manufactured by the reduction of interest rates, while at the same time punters were encouraged to borrow a lot more.

“Unless you bought at the height of the boom and overpaid, plus overextended yourself, then the coming changes over the next five to 10 years might not have that much impact on you,” says Matusik.

That prices are becoming affordable and the pace of growth is slowing should be good news for first home buyers.

Investors, especially those who expect a Labor federal government to be elected next year, will also be watching for opportunities to buy ahead of the election if prices ease. Labor plans to limit negative gearing to new properties and to halve the capital gains discount to 25%.

The vital thing, whether you’re an investor or a home buyer, is to assess the fundamentals of the area you are buying into and not overborrow, although that is less likely now banks have curtailed lending for houses.

Pam Walkley, founding editor of Money and former property editor with The Australian Financial Review, has hands-on experience of buying, building, renovating, subdividing and selling property.