There’s someone close to me who suffers from chronic anxiety. He displays one of the many symptoms when he receives a modicum of news with a slight negative inflection. In his mind it’s the worst news ever. As a mental health professional once told him “there are the first nine steps between one and ten that you have chosen to ignore”.
On one occasion, he was sent for a blood test for a rash on his back. In his mind it was Kaposi’s Sarcoma and he was convinced that HIV would soon follow. This, despite being celibate for the previous 12 months and having come nowhere near any contaminated blood (via, syringes, transfusions, cuts etc). After he received an innocuous diagnosis he realised he’d been lying on a lawn a few weeks prior and the rash may have been from some lawn coming in contact with his skin.
On another occasion, a motor mechanic told him he needed new brake pads for his 3 year-old car and he called me for a lease on a new car. He said he was “over the problems that this piece of shit car was causing [him]”. After asking what problems his 3 year-old Mercedes was causing him – annual servicing, oil top ups and tyre changes after vigorous driving oh, and his new iPhone not working with the Bluetooth in the car (because he hadn’t paired it) – I talked him down from the ledge (euphemistically speaking).
Obviously, he knew nothing about a car’s make-up but he’d convinced himself a $170,000 finely tuned car was “a piece of shit!”.
It’s a little like the headlines these days about the housing market. After being inundated with a constant volley of bad news, we can all be forgiven for thinking that an economic tsunami has arrived.
Via these articles we have been warning of a correction in the housing market for a few years now (here and here) and that’s what we’re seeing unfolding. For the media to portray it as some kind of gotcha story and scare the crap out of many home owners is just irresponsible. Perhaps even fake news – now that sounds like a phrase coined by a naughty six year old. Like my anxious friend, they (the media) have chosen to ignore the steps between 1 and 10 and dialled panic symptoms from the property cycle up to 11.
I’m not going to start eviscerating the morons in the media pushing this particular barrow but allow me to make a bold statement.
Now that we’re here, I don’t know to what extent the housing market will correct. I just don’t…and neither does anyone else. But I suspect it’s not going to be the doom and gloom most are predicting (at least not immediately).
However, what I will predict is this. As sure as mother nature made little green apples the housing market cycle will continue. What does that mean?
It means that when this correction is over (it may take a few months or years) the housing market will eventually recover. Why?
Because that’s what it’s done in the past (more on that below) and the reasons for the housing market booming in the first place – more demand than supply – will eventually return.
More importantly, housing is (or should be treated as) a long-term investment for most people. Not the quick flip investment that it’s become.
So, let’s all calm down and stop reading the headlines about auction clearance rates – they’re largely inaccurate. Many real estate agents are not reporting those properties which have been withdrawn from scheduled auctions. This probably means the real auction clearance rates are lower than reported and we don’t know yet how far they will fall. But eventually they will rise again.
Another way to look at it is this…It’s been a seller’s market now for around 4-5 years. That has changed. Now, buyers have more choice and there’s not as much pressure to bid on every home because you may miss out – yes folks FOMO has been relegated to history. For now.
The market boom has been great for people like myself who through sheer luck have accumulated tremendous equity in our own homes. To pretend that we’ve worked hard to achieve this is being disingenuous. But we’ll take it.
In contrast, it has been a nightmare for many younger and other people who have been watching this horror unfold from the sidelines. We have addressed this in previous articles.
Once, a six-figure salary meant you had a secure future in Sydney and Melbourne. Now many are looking elsewhere. This social upheaval will not end well for those two cities but at least the market is now correcting. Let’s just hope it corrects enough for enough of these people to get on-board (if that’s what they desire).
We have had too many home visits with couples who are heart-broken to hear that they will not be able to get a home loan because the loans they’re seeking are just too big for them to service. I’m not naïve to think this will change for everyone and we will continue to deliver bad news to most of those people. But there will be some who will qualify if the market swings back by 10-15%.
I have no desire for people to lose money but if you’ve made 100% plus on your investment then you should be ok for a temporary fall of 15% or slightly more.
If you are a borrower who has maxed their borrowings as a result of revaluing your property portfolio and borrowing against that new value for investment purposes, it’s time to take stock and perhaps reconsider that strategy.
Whatever you do though don’t panic. The market is not going to hell in a hand basket it’s just the natural gyrations of the economic cycle. It will eventually bounce back.
Just don’t listen to those pesky, bad news, doom and gloom journalists they have to write an article each week or more often to fill space.
As touched on above a good and reliable measure of what’s going to happen is to look to the past.
What happened previously when there was a correction? As the chart above shows the Sydney housing market usually has a boom as is evident by the 40-61% rise from 2000 to 2003. Then there was a small correction of around 6-9% due mainly to oversupply of housing and increases in interest rates. This was followed by the GFC interruptions (initially down but then people were spooked away from other traditional investments like equities and bonds) and then up with a vengeance leading into the most recent boom in prices. Or just ignore all that and look at the trend of the black and blue lines. If you extend these lines back to post WWII you will see a very similar trend. So why do people think it’s different this time?
Right now, the massive increase in prices, the regulatory (artificial) controls and a surplus of housing stock means the most recent boom has ended. But the infrastructure spend in this city – which has been 80 years in the making – will mean that the bust should not be as prolonged as the last one. Of course, this is predicated on the economy continuing to improve and unemployment continuing to fall – thereby increasing real wages.
So, what can the authorities do? Governments can reduce immigration (they won’t, as this would probably cause a recession), they can wind back regulatory curbs (they already have and will continue to do so), they can make tax changes (it will be a brave government that does that when the boom has ended), etc.
At the end of the day none of that matters as much as demand. That will only return when the price allows for it to flourish again. Why do I think this way? Well, look at what effect stamp duty has had. None whatsoever. Buyers see it as a cost of doing business and so any other regulatory charges or curbs will be viewed similarly.
It’s a good thing my anxious friend (remember him from the start of the article) already has a house otherwise there would not be enough anti-anxiety medication for him to take.