15 Sep Chicken Littles And The Property Market
Do you know any Chicken Littles?
You know the ones who are continually looking at the glass half empty telling everyone that the “The Sky Is Falling In!”
We are seeing a lot of people predicting that the Australian property market will collapse. They will spout statistics about how house prices are way too high, that we are the most in debt country in the world and that if interest rates go up people won’t be able to own their own homes.
They argue that it is best to sit on the sidelines and wait for the “inevitable” doom and gloom to arrive.
So Where Do I Think Property Prices Are Going?
As I have stated before and I will state again, I have no idea what investment markets will do in the future.
I don’t have a crystal ball and neither does anyone else. If someone is making these claims, they are at best guessing, at worst straight lying.
I do believe Australians as a whole have overconfidence in the property market. We are the only country in the world which has never experienced a real property crash. We have watched prices go up and up and Australians assume this will continue.
But if you are waiting for property prices to reduce before getting into the market, I think you are going to be waiting for a long time.
Personally, I think property prices will continue to increase in value; however, they may not grow as quickly as they have in the past.
I don’t think we will see properties in Sydney and Melbourne to continue to increase in value by 10% per annum as they have done over the last ten years.
However, I do not doubt that prices will continue to go up, simply based on inflation and wage growth. It would not surprise me that in 30 years’ time that entry-level property prices would be more than $1 million.
Sound unrealistic? If an entry level house today is worth $300,000 (which I know a lot of you reading this would think is a bargain) if house prices only rise by 4% it would be worth $973,000 in 30 years’ time.
Take into account as well that an employee currently on $40,000 per annum will have a salary of $100,000 in 30 years’ time if their wage continues to increase with inflation (3%).
I’m sure when the Sydney median house price broke $100,000 back in 1986 (Source: Macquarie University) Sydneysiders would have thought they wouldn’t go any higher. As of June 2017, the median Sydney house price is sitting just under $1.2 million (Source: Domain).
Cities Will Go Up, Cities Will Go Down
To give an accurate prediction of what the whole Australian property market will do going forward is close to impossible. There will be regions which will grow at ridiculous rates and regions which will reduce in value.
There will be factors that will impact prices which with proper research you may be able to use to your advantage. Factors which may determine property prices include employment, demographics, infrastructure and supply and demand.
However, a lot of it will come down to luck as well.
The Perth Example
You would have heard people on the TV questioning the benefits of increasing property prices. They argue that it would be more beneficial for prices to drop!
To counter that argument, I would point to the property market in Perth.
In November 2013 the median price of Perth (metropolitan) was $570,000. In July 2017 it has dropped to $512,500 (Source: Landgate).
The main reason there has been a reduction in property prices in Perth is due to the end of the mining boom. Employment in the mining in Western Australia has significantly reduced and as a result, people living in Perth are not earning as much as they were.
I have a few friends who live in or originate from Perth. None of them are excited that property prices have decreased. None of them are excited about higher unemployment and lower incomes. None of them are excited that the properties purchased three to five years ago are now worth less today.
And there has been no evidence whatsoever that lower property prices have helped first home buyers in Perth get into the market. If incomes are low and unemployment is high, how can people afford a home?
I Take Two Lessons From This
First, the growth in property prices, or lack thereof, is heavily linked to the local economy.
While people are employed and incomes are increasing, property prices will continue to rise. But when the economy collapses, property prices will go down with them.
You can see this in the United States, especially in Detroit where property prices collapsed after the collapse of the car manufacturing industry.
Don’t hope for property prices to decrease. If they do, you will have much more significant problems than trying to purchase a home.
Secondly, increasing property prices are the greater good for Australia. Rising property prices positively impact much more people than those who are negatively impacted.
The majority of people still own a home and they do not want the value of their home to reduce. That doesn’t take into account those who own investment properties as well.
So What Do We Say To The Chicken Littles?
Personally, I don’t listen to the Chicken Littles of this world. They are always in fear and scared to take action.
They don’t know how to solve their problems, so they make up excuses to justify their lack of effort. Then they find other Chicken Littles to reinforce their viewpoint.
Can property prices crash in Australia? Yes, that is a possibility.
But we cannot control the market. We can only control our actions.
If property prices go up, what are you going to do?
If prices go down, what are you going to do?
At the end of the day, I still firmly believe that property prices will be higher in 30 years than where they are today.
I still firmly believe that owning your own home will be more beneficial to you over the long term than renting.
I still firmly believe that owning your own home is one of the key pillars of Mastering Your Money.
No Chicken Little is going to change that.
Speak to an expert about strategies to owning your first home.
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