Speculation of an Australian house price crash has reached fever pitch with dire predictions of a 40% slump over the next 12 months. That was the central theme of an edition of the well-respected 60 Minutes current affairs programme which aired this month. This follows 11 straight months of house price declines according to property data publisher CoreLogic Inc, and the two biggest cities Sydney and Melbourne posting their first annual house price declines since 2012.
The current Australian market is being likened to the US in 2007. Australia seems to have been behind the curve tightening lending rules after the credit crises of 10 years ago, possibly because the economy was largely insulated from the effects by the global commodity boom of 2008 onwards. The 60 minutes piece stated that mortgage “borrowing power”, or the amount a typical borrow can achieve given any given set of circumstances, was down as much as 40% compared to a year ago. Furthermore, out of the 3.5 million residential owner-occupied mortgage holders across the country, as many as 1 million are struggling with cashflow. All this as restrictions on foreign investment, long seen as a significant driver of property prices, start to bite with foreign investment falling by two-thirds between 2015/16 and 2016/17.
A fall of 40% in 12 months is however at the most extreme end of the predictions. While most commentators agree property is overvalued, the consensus is for far more modest falls of up to 5% in the major cities, which are seen as most overvalued, and potentially less elsewhere. The Australian economy continues to perform well with recent figures showing an annual growth rate of 3.4%, comfortably above most other developed countries. Ever closer business and cultural ties to the developing economies of Asia, especially China, seem set to see this trend continue. Perhaps most importantly, the population of Australia is predicted to grow from 25 million to nearly 40 million by 2050. While Australia is clearly a huge country with no shortage of land, the popularity of costal areas and established cities means land prices in these areas are unlikely to suffer through expansion elsewhere.
Anyone who lived through the boom and subsequent bust in the UK property market will know that dire predictions were very much part of the build-up. This has a lot to do with the fact they’re a very a useful tool for journalists and economists hoping to create headlines and boost careers. As such the actual fall in prices was far less dramatic than the vast majority of predictions. So, while a slowdown in the Australian property market is clearly underway and a correction seems likely, an outright crash of 40% in 12 months is probably more journalistic fantasy than reality. Either way the market is certainly worth keeping a close eye on.