Why will the Australian Property Crash?
Let’s recap on whats happened to date with the property market;
- The Chinese Government limited the amount of money coming out of China. This will make it difficult for foreign investors to pay for their “off the plan” purchases made a few years ago.
- Recent Australian restrictions and crack downs on foreign purchase arrangements will also ease property demand.
- A few years ago, using the terminology “Australian housing bubble” was snubbed, now it’s widely accepted.
- Philipe Lowe from the RBA has shown recent concern with the “high risk” of serviceability of property for the average family.
- The RBA is constantly tightening lending restrictions and have stated they will continue to do so.
- ANZ, NAB, Westpac and St George have increased home loan interest rates before the RBA. Red flag
- Wage growth has been on a steady decline and will probably continue that way. This may even mean wages could fall in future.
- Almost 50% of all loans are investor only which strongly suggests market speculation and fabricated property values. Red flag
- Record high debt to income ratios are likely to mean that property owners will only be able to make very few mortgage repayments after loosing a job.
- After speaking to many friends and a number of random people about purchasing property, many stated that the reason for their purchase was so they don’t “miss out”, in case it keeps going up. Purchasing without rational of price or value couldn’t really be any more of the perfect definition for a bubble.
- It is likely that at some point, tax benefits such as negative gearing will be abolished or tightened.
- After every investor and buyer have ran up their property spending spree, purchasing is likely to plateau, which is a possible fall trigger.
- The stock market is overvalued and will be tested in the near future as it is now around 2 years overdue of a bear market. When the bear market does come, consumer confidence will be challenged and as much as people believe that property will be the safe haven, Australian house prices did fall in 2008 by as much as 28% and we didn’t have anywhere near the bubble we do now. So it doesn’t take a genius to figure that the growth we have had since means an increased risk of a greater fall.
- People will genuinely have tough times due to the high debt to income ratio and voluntarily or involuntarily sell.
- Every single cycle of irrational growth in the history of mankind has always experienced the other half of the cycle. It doesn’t matter if it’s property or Tulips, yes I said Tulips. Read the Tulip Mania Bubble.
- Investors will want to cash in to lock in their profits on growing concern of a property downfall as regulators and banks come out with increasing concerns about housing debt and serviceability.
- Investor only loans have a speculative nature whereby only a minor fall in house prices may be sufficient to trigger these investors to “sell off”. Since around 50% of loans are investor only, everyone selling at a similar time is likely to be rapid and aggressive.
- The property bubble burst in Ireland, Spain and the United States, why do we think were invisible? While some argue that we may have tighter lending restrictions and are therefor more resilient to a housing burst, the problem is not the regulation of better loans. Australia’s problem is investors and banks overvaluing the property itself. While we know that the US had a particular case of bad loans in 2008, we should remember that bubbles generally burst because of a spontaneous realisation of overvaluation.
- Economists such as Chris Richards, recently stated that it may be a bad time to buy. Red flag
- Australia’s household debt ratio of around 160% means that the RBA is unlikely to cut rates any further than 1.5% which is likely to slow down the fueling of debt.
- The record high debt to income ratio also implies that it is possible we are close to reaching a ceiling for property accumulation. This will eventually create a virtual cap of the property price which will plateau, which could be a fall trigger.
- CBA stopped refinancing investor only loans. Red Flag
Is there anything the Government can do to fix the housing bubble?
In short, no, the debt has already been issued, meaning property owners are in a considerable amount of debt for the price they had purchased that property. Property investors buying around the peak would obviously be most affected when the prices fall.
Isn’t there an Australian housing shortage?
Over 200,000 properties are owned by foreign investors that are vacant, they are sitting there doing absolutely nothing, yet most people are living somewhere. House sharing is becoming increasingly popular and people are becoming more accepting of the idea at least for the short term. In my opinion the housing shortage will not support a property sell off. The volume of the market will be far greater and stronger than the claimed shortage of around 250,000 homes.
How bad will the Housing Crash be?
If property falls in value by as much as 40% or more as some analysts predict, then this is very likely to put the country in a serious recession. The reason is that our entire Australian economy is so reliant on the property industry.
Referring to the chart below, the ABS (Australian Bureau of Statics) shows a significant amount of business are, has to do with or somehow related to property and construction. This can be catastrophic since a housing crash will decrease total wealth while at the same time take an enormous amount of jobs along with it, as the construction industry and many related businesses record major losses.
When will the housing bubble pop?
No one knows the answer, but here are some likely triggers;
- Low auction clearance rates
- Higher unemployment rates
- Spontaneous relatisation of value
- Investors cashing in profits
- Decrease of consumer confidence
- RBA and/or Banks increasing home loan interest rates
- Foreign sell off
- Tightening lending restrictions
- Abolishing negative gearing and other tax related deductions
- A change in Superannuation laws
- A stock market crash
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