We see many people from all different walks of life in our business. We see many investors buying properties, we see overseas investors coming into our market, we see people re-financing, we see many people coming to us to borrow for that dream renovation. The only category that has sadly dried up is young first home buyers. The reasons are self-evident in the Sydney and Melbourne housing markets.We see many people from all different walks of life in our business. We see many investors buying properties, we see overseas investors coming into our market, we see people re-financing, we see many people coming to us to borrow for that dream renovation. The only category that has sadly dried up is young first home buyers. The reasons are self-evident in the Sydney and Melbourne housing markets.
Undeniably, there’s a property bubble in Sydney and Melbourne. The problem is we won’t see it until it bursts.
How do I know? Because I remember the last one.
I was a banker in the 1980’s and I saw exuberance in the housing market rise to stupid levels. This was exasperated by the stock market crash of 1987. This crash led to investors having little or no confidence in the equity markets and them directing their money to the housing market.
Obviously, the housing market burst when real interest rates got to above 21%. A side effect of those high interest rates was double digit inflation and more significantly a double digit unemployment rate.
But before the crash in prices – and people often overlook this important fact – there was a lull. There was stagnation in house prices. Why? Because no one could afford to buy a house with interest rates so high and homeowners were reluctant to sell.
The crash came when people – who already had a mortgage – were laid off from their jobs and thus were unable to keep up with their mortgage payments.
But the recovery was relatively swift.
A few other fun facts from the 1991 recession – when the RBA cash rate was 17% – that people often forget are:
- The cash rate had been high for at least 5 years. Indeed in 1986, a year prior to the stock market crash, the cash rate was as high as 15.5%.
- The cash rate was actually reduced between Nov 1987 and Feb 1988 to 13.5%.
- When the fast money went from equities to housing, the cash rate was increased quickly to 17%. It hit that rate in June 1989. That rate was maintained for a period of 9 months. Then it was gradually reduced to 9.5%.
By 1994, the economy was growing again. The recession was behind us. There was a slight dip for a few months before it began its world record growth period. Un-ended to this day.
When rates were high, property was difficult to sell. There was no such thing as auction clearance rates as people just didn’t bother auctioning their properties.
There was a lot of pain. Unquestionably. But that recession was like a bush fire. It was devastating at the time but it allowed fresh businesses and fresh ideas to flourish. We’re probably overdue for one now.
Why do I say this? Let me explain.
I started by saying that there is an over exuberance in the housing market. When housing fails to perform its primary function – provide shelter to the population – or worse, the primary function of housing is redefined (to that of an investment) we need to look at what we’ve been doing and do things differently.
There’s a house in my street that had a for sale sign on it for over a year. It was sold 12 months earlier to a non-resident Chinese investor. I met the bloke once. He paid a fortune for it and then spent the next nine months renovating it. He then promptly put it up for sale with a price tag which was $1.2M above what he paid for it.
There were two problems with this strategy. First, the comparative prices in the neighbourhood meant that he was overcharging by at least $1M. Second, his renovations didn’t add any value to the house.
Consequently, he was overwhelmed with bids at the original price of the house. He has now rented the property out at a 1.7% yield.
While I’ll be the first to admit that this is not the norm in the Sydney housing market (or in my street – as six other properties sold within two weeks of listing), it is an example of the unrealistic expectations that people have from this type of investment.
There is now an expectation in the market of double digit percentage growth fueled on the demand side by the fear of missing out – and with 80% plus clearance rates it looks like a normalization of the market is years away.
But just as it happened in 1991, a bubble can burst suddenly. Buyers lose confidence and sit on their hands. Sellers get desperate and reduce their asking price. So, when will this occur?
If only I knew the answer to that question. I just know (from what has transpired economically in the past) that it will happen. It may not play out like it did in 1991 and the cause of the bubble bursting maybe something other than unemployment, but as sure as there is a wild white rabbit digging a hole in my nature strip each night, the property bubble will burst and there will be pain. But after the pain there will be a recovery…and so the cycle goes on.