It’s all doom and gloom in the property press with some experts predicting a 40%-50% fall from their peak in residential property values in Melbourne and Sydney in the next 12 months.

Are we on the cusp of a property crash like the 1990’s ‘recession we had to have’, or is this just a pause after a strong rise and prices will soon stabilise and resume their upward trend?

There is no doubt that in the past six months there has been a ‘gear change’ in the Melbourne residential property market – fewer people attending open for inspections, fewer bidders (if any) at auctions, clearance rates well below 50% heading lower, and buyers getting choosy about the property they buy.

Domain recently reported that medium house prices in Melbourne decreased 3.9% in the September quarter and 3.2% annually. Given they had increased over 80% between 2009 to 2017, such a fall is considered as no big deal.

However ….

What the agents are saying...

The word from real estate agents is that in the past six months, in many areas (and depending on the quality of the property), residential property has fallen between 10% and 15% - and prices are still falling.

Drivers of Property Prices.

·                Credit.

Cheap and available credit was the biggest influence on property price rises over the past 9 years. The major Banks were eager to lend with no questions asked – remember ‘creative’ mortgage brokers, ‘liar loans’ and ‘low-doc loans’.

However, following the Royal Commission into Banking, the major Banks are now addressing their ‘duty of responsible lending’ which is clearly impacting on the availability of credit for property purchasers.

What the agents are saying...

Banks have significantly tightened their credit criteria, carefully scrutinising applicants’ income & spending, and are taking longer to process loan applications. This results in delayed approvals, people being refused loans or offered reduced amounts.

·                Buyer Sentiment   

Until this year, buyers were desperate to purchase property and clearly had a case of FOMO – the fear of missing out. They knew they would have to pay more if they waited - auction clearance rates were above 80%, sale prices exceeded reserve, and multiple bidders battled it out for the keys to each property.

What the agents are saying...

Buyers are now showing signs of FOOP – fear of over paying.
Buyers are holding back and watching to see how much lower prices will go. This can turn into a ‘price decline loop’ where sellers lower their prices to meet buyers, then buyers seek lower prices which cause vendors to lower prices again to meet them.

·         Tax Incentives – negative gearing.

Currently the Government provides tax incentives for investors to buy property and claim any loss against their taxable income. This has helped stimulate investor demand and inflate property prices.

If there is a change of Government next year, Labour’s policy is to only allow negative gearing for newly built property with existing arrangements grandfathered. With that change, investor demand for existing residences is expected to be reduced.

What the agents are saying...

Although you would think investors would be ‘getting set now’ by purchasing property to negatively gear, it seems they are holding back for lower prices.

·         Foreign Investment.

In recent years, Asian investors have pushed property prices up, particularly in the eastern suburbs of Melbourne. These buyers were responsible for increased demand and significant price increases.

Now the recent slow-down in China, currency restrictions in getting money out of China, higher transaction costs (stamp duty) and taxes on empty houses have combined to deter those people from the Australian property market.

What the agents are saying...

The demand from Asian buyers for properties under $3m. has greatly reduced. However there is still Asian demand for high end properties which are either land banked or used for the family to attend local schools.

So, what does it all mean for your clients – the vendors?

It all depends on the client property time horizon and the reason why they own property. There are two trains of thought.

If you believe that we are heading for the financial Armageddon similar to what we had in the early 90’s – interest rates at 18%, 10%+ unemployment, business and financiers collapse (remember Pyramid Building Society, State Bank of Victoria, Rothwells etc.) and property prices down by 50%     – then you should be worried.

However, if you can’t see that happening in Australia, then this period will likely be a correction with the turnaround happening when the key drivers of property prices mentioned above start to turn positive.

Melbourne still has strong population growth (125,000+ people annually) and unemployment is down to 4.25%. The Reserve Bank could reduce rates next year which at least would limit the rate pressure from offshore. Banks will eventually adjust to any new rules following the Royal Commission, and ease up on their credit requirements.

The duration and severity of the property price decline is difficult to predict. However my guess is it still has a way to go and some time to go.

How you can help your clients…

Reasons why someone sells a property are many and varied. However it is always best to get some professional advice from your financial planner, accountant or lawyer to ensure your decision is best for you.

Once the decision has been made to sell a property, I believe you should get on with the sale process, as the trend in residential property prices is down. When this trend will reverse is not yet known.