Why Property Prices Won’t Fall by 40% - SEPTEMBER 2018
September 20, 2018 / Written by Rich Harvey
By Guest Blogger, Peter Koulizos, property lecturer and author www.thepropertyprofessor.com.au
A number of people have contacted me as they are concerned by some outrageous claims that were made on TV last weekend.
Sixty Minutes had a segment where there were a number of so called “experts” discussing a supposedly forthcoming crash in the property market. One of these experts, referred to as a data scientist, predicted that property prices would fall by 40% or more.
Now, you can imagine that many people would be worried about this because a drop in property prices of 40% would be catastrophic, not only for the property market but also for the Australian economy.
Some of you may remember that almost 10 years to the day, Sixty Minutes had a very similar segment when Associate Professor Steve Keen predicted that property prices would drop in Sydney by 40%, as a result of the Global Financial Crisis (GFC).
In one respect, I admire Steve Keen as he truly believed that property prices would fall so he sold his Sydney home. Unfortunately for him but fortunately for all Sydney property owners at the time, property prices increased by almost 100% in 10 years!
The good news is that there is no property crash on the horizon. For a property crash to occur in Australia in the current market, you would need three things to happen:
- Unemployment to be at record highs
- Interest rates to be around 10% or more.
- Banks stop lending money
If there was very high unemployment, many people would not be able to make the mortgage repayments as they wouldn’t have an income. Thankfully, unemployment is very low and all the forecasts that I have seen show that unemployment will remain at this level for a long time.
If either the RBA increased the cash rate and/or banks increased their mortgage rates significantly, there would be pain in the property market and property prices would fall. This is because many people could not afford to make their mortgage repayments as they would have increased markedly. I have checked the futures market and other interest rate forecasts and as far as I can see (15 years), no-one is predicting interest rates to go anywhere near this level.
Banks have not stopped lending money but it is much more difficult to borrow money as compared to even just six months ago. The tighter lending conditions have certainly had an effect on the property market with either property prices increasing well below their long term average or in the case of Melbourne and Sydney who have just experienced a property boom, prices are falling.
I hope you can all sleep well at night now being able to better understand why there is no property crash on the horizon and property prices won’t fall by of 40%. I am!