For as long as Australians have been obsessed with real estate, commentators and pundits have been equally fixated on predictions of market downturns.
But how often do those particularly gloomy forecasts actually happen?
Those worried about the outlook for property markets have been urged to “take a chill pill” and consider the long-term fundamentals of bricks and mortar, Martin North of Digital Finance Analytics said.
“Looking at the property price index every day is not that helpful,” Mr North said. “I do encourage people to have a long-term view and just relax. Ignore the noise.”
Of course, that can be difficult when the volume has been dialed up to 11.
Major banks have already adjusted their property price forecasts for 2022-23 after July’s interest rate rise, the third of an expected tranche of Reserve Bank hikes this year.
CBA predicts a 6% decrease in home prices across Australia over the rest of this year, with 15% falls in 2023. ANZ sees 5% falls over the rest of the year and a 10% drop in 2023. NAB predicts a 2.25% decrease in 2022, before a further 15% correction next year.
Some property market commentators are even more bearish.
Coolabah Capital’s Christopher Joye has tipped that prices could plummet by up to 30% if the RBA lifts interest rates as heavily as he believes – a predicted 4.25%. That would equate to variable mortgage rates of around 6.5%.
Once again, forecasts are emerging of steep decline in property prices. Will they pan out? Picture: Getty
Why are we so worried?
Doom and gloom is the prevailing mood in the international economy as the world struggles out of the COVID-19 pandemic and into geopolitical turmoil sparked by Russia’s war on Ukraine and mounting concerns over China’s ambitions in the Indo-Pacific region.
Global supply chains have been disrupted by the war and China’s ongoing Covid Zero policy, with the cost of everything from timber to petrol continuing to climb.
Stock markets are fluctuating wildly as investors become more risk averse.
Interest rate hikes have been bigger and faster than expected. Picture: Getty
But at a micro level, it’s the surge in inflation and the resultant interest rate rises that will have the biggest impact on Australian house prices.
“During the onset of the pandemic in March 2020 to May 2022, property prices increased 35.3% as interest rates continued their 11-year trend of declining and shifted to their lowest ever level,” Cameron Kusher, PropTrack’s executive manager for economic research, said .
“It was always likely that coming off a period of historic low interest rates and exceptional price growth would see prices fall and [growth] normalize.”
How much will the housing market cool? It depends who you ask. Picture: Getty
What does history tell us?
The Australian property market has proved to be remarkably resilient to global economic shocks.
Prices actually rose during the recession of the early 1990s despite widespread speculation of a total market collapse.
They dropped initially at the onset of the Global Financial Crisis in 2008 but recovered strongly, even though expectations were for a hefty correction.
And despite similar warnings of a 20% to 30% market crash during the early stages of the pandemic in 2020, depending on who you asked, we ended up with an unprecedented boom.
At the onset of COVID-19, forecasts were of a collapse in property prices. They boomed instead. Picture: Getty
The key to all those recoveries – or disasters averted – was the economic stimulus provided by state and federal governments and, most importantly, the RBA via reduced interest rates.
Interest rates were at an eye-watering 17.5% before the 1990 recession and then fell steadily as the economy – including the housing market – rebounded.
During the GFC, rates went from a high of 7.25% in June 2008 to a low of 3% in less than 12 months, sparking a reversal of an initial 7.6% housing price decline.
And the COVID crisis saw rates drop from an already low 0.75% in March 2020 to an historic low of 0.1% by November of that year.
“The critical lever is availability of credit,” Mr North SAID. “If there’s more available, people can borrow more, they can pay more, and that gets markets going higher.
“If you think about the GFC and Covid, interest rates were cut, lending standards were slackened, and there were other borrowing stimulants applied to bring people into the market.”
But it’s a bit different this time
While falling rates proved to be the catalyst for housing to surge through past economic crises, this time they’re going in the other direction and many economists are more open to the possibility of those worst-case-scenarios.
“It has been very common for there to be predictions about significant declines in property prices that have not transpired, often due to the RBA reducing interest rates and federal and state governments providing significant stimulus to the market,” Mr Kusher said.
“This time it is very different. We’re coming off a period of historic low interest rates and while governments are offering incentive for first-home buyers, the higher interest rates will offset some of that.
“The main differences though are that we’re coming off a period of extraordinary price growth over recent years and the RBA has signaled they are going to lift interest rates rapidly to try and stem surging inflation.”
A correction could be brief, particularly if the RBA begins cutting rates again. Picture: Getty
Mr North agreed, adding that psychology may also play a part in any price move.
“If you look at consumer confidence, it’s down to the same level as it was during Covid and consumers may decide to stay on the sidelines and wait this one out,” he said.
“And if people decide to get out before prices fall further, an increase in listings would suggest prices could drift even lower again.
“If property investors don’t see capital appreciation, they tend to be the ones who leave the market first. They’re more fickle – owner-occupiers can just relax a little providing they can still make those repayments, or they don’t have health or social issues to deal with.”
Chill pill is good medicine
Housing Industry Association economist Tim Reardon said most homeowners should not be overly concerned about a correction in housing prices, as the market was always cyclical over the long-term.
“It’s hard to see prices falling by 15% while we have a 1% rental vacancy and 3.5% unemployment,” he said.
“Even if we did, that would be the most significant fall since 2019 and the economy came through that with barely a blip.
“Falling prices are only a concern to a very small number of borrowers – those who have entered the market recently who have lost their job. Otherwise, it’s a reasonably novel issue for the wider economy.”
It’s always worth taking a long-term view when it comes to housing markets, experts say. Picture: Getty
On top of that, a reduction in home prices around the upper end of forecasts, of 15%, is barely half of the increase seen since the onset of the pandemic.
Mr North said the crystal ball was still too cloudy for any predictions to be taken as gospel.
“It could be that if interest rates go up and inflation gets under control, the RBA could bring rates down again,” he said.
“And if people started to get too worried about rising rates and falling values, could governments bring in programs like they did with COVID where they give people relief from their mortgage repayments? If those unnatural actions come in, then all bets are off.”
Property market fundamentals remain strong, but there will undoubtedly be a fall in prices. Picture: Getty
But the main thing to keep in mind is that for most people, property is purchased as a home – a place to live for many years –and there should be a long-term view on any capital appreciation.
“You have to have a five- to 10-year view,” Mr North said. “If you have a long-term view, property isn’t going to go away.
“Long term, if you want to find somewhere to live, the short-term price is less relevant. But if you’re looking at property from an investment perspective, you’ll get all het up about, ‘is it going to make me money next year?’.”