Regular readers won’t be surprised by the current property downturn as I’ve been talking about it for the 18 months… but you might be surprised by the pace of the property value drop compared with previous downturns.
As you all know, I reckon history can tell us a lot about current investment cycles and property is no different.
This chart from Morgan Stanley puts it all in perspective and their view is that we will drop faster and deeper than previous downward cycles.
The “property never goes down” myth
The chart also once and for all puts to rest the “property never goes down” myth. A myth perpetuated by property developers and promoters. When you delve into it, this myth is often based on the assumption that you never sell during a downturn and just hold on until the market rebounds (which it inevitably does) and retraces its losses. It’s a ridiculous assumption as you could apply that to any investment.
But, based on history, Morgan Stanley believes this downturn from peak to bottom could be as much as 20 per cent. Naturally it will be dependent on the size of future interest rate rises, employment levels and supply of housing stock.
Remember, property is all about demand and supply.
Speaking of demand and supply, rising interest rates are naturally reducing demand, while at the same time there is a big lift in supply according to SQM Research.
Total number of properties on capital city markets have all increased over the last month and for the year, except in Adelaide.
And new listings nationally rose 3.8 per cent over September, that’s another 73,461 properties on the market. Hobart and Canberra recorded the largest increase in new listings for the month.
Interestingly, property listings which have been on the market over 180 days rose by 9.2 per cent in September. Both Hobart and Sydney recorded a significant increase for the past 12 months.
So, more stock on the market and they are taking longer to sell.
The down or opportunity phase of the property cycle
Property expert Chris Gray explains what happens when the property cycle hits a downward trend:
As the property market hits the bottom of a cycle, prices don’t just plateau. They can go backwards, heralding the beginning of a new cycle.
If the preceding property boom was particularly long and solid, the slump phase may last a little longer. But you can be sure it won’t last forever and this is the time to jump in.
The media plays a huge role in every cycle, but nothing sells newspapers like doom and gloom! This leaves many people feeling that there is no doubt that the sky is about to fall in – even when faced with blatantly good opportunities.
Then the people who over committed at the top of the boom will start to struggle. Especially those who bought off-plan and are unable to settle, or people who simply over- extended themselves. At this stage many are forced to sell under pressure and get whatever they can. And so prices fall.
Taking advantage of a “fire sale”
These “fire sales” may not be pleasant to go through, but they create amazing deals for astute buyers who are willing to get out their cheque books in a downturn. Also, after much talk of falling prices, vendors who don’t have to sell hold their properties back, creating a lack of supply. This leads to buyers having to compete for what is on the market and this competition slowly pushes prices, and therefore confidence, up again.
A rise gaining momentum is triggered by many social and economic factors, but one of the most important is the Reserve Bank dropping interest rates. When the rates are low you can bet it’s a good time to buy. And this leads to the upturn phase.
You can read more from Chris on the property cycle here.