Sydney and Melbourne Property Have Now Had Their Biggest Price Falls In Decades. What Next For Our Two Biggest Property Markets?
Concerned that the Sydney and Melbourne Property Markets have now had their biggest price drops in decades? Unsure what that means for the future? Then this is for you…
Well, the results are in and they’re not pretty. The Sydney property market has now had its biggest price fall in decades. The Melbourne market has just hit the same record territory with it having the biggest price fall in decades. What does this all mean?
Hi, I’m Niro from Investment Rise, and I’ve been investing now for 17 years. Back at the end of 2015, early 2016, I came out and said that if you want to invest for capital growth over the coming few years, you should avoid the Sydney and Melbourne markets.
Now mind you, at the time prices were still rising. In fact, in 2016 they rose steeply again because we had two rate cuts, so I copped a lot of criticism online for that. But I stuck to what I believed in because based on the capital growth criteria that we apply, that we use to help clients find areas that have got good scope for capital growth potential over the coming few years, and a criteria that I developed personally over 17 years, it looked very obvious that the boom was over and it was just a matter of time.
Yet despite that, there are a lot of people who said I didn’t know what I was talking about, and that Sydney and Melbourne never fell in price, right? They were our two biggest markets, and those markets never fell. Unfortunately a lot of people who told me that hadn’t done their homework. They hadn’t looked through history. Back in 2004, the unit market in Sydney fell by 20%, so we’ve seen this before. So the question is what does it mean going forwards?
Okay, well there are really three options. Number one, if as we expect the Reserve Bank of Australia follow through and drops interest rates even further, will that create a bounce in prices? Will prices start to rise as a result of the interest rate drop? Well, I don’t believe so, and here’s why. Normally and in the past if you look over the last several decades, whenever our Sydney and Melbourne property markets, when they fall in price, it’s often because rates have risen, and so therefore, people can’t afford as high a mortgage, okay?
For example, let’s just say interest rates are 5% for argument’s sake, and you have a mortgage of say $600,000, the interest costs on $600,000 mortgage at 5% is about $30,000, okay? But let’s just say interest rates rise to 6% over a course of a year to keep our numbers easy, well now 6% of $600,000 is $36,000, okay? So, it costs more for the same mortgage, and not everybody can afford that, which is what starts to take the steam out of the market.
But interest rates are record lows. Okay, yes, some of the banks have sneakily increased interest rates, but generally speaking we’re still at record lows. So, the reasons for the decline in prices is different this time to what it’s been previously. The reason here has been because of lending restrictions being tightened, being imposed on investors, okay? So, it’s harder for people to borrow money. We’ve seen a lot of demand from overseas fall away due to different regulations, and we have a massive over supply in the market at the moment, okay, and we can see this by the fact that vacancy rates in many areas of Sydney and Melbourne are at record highs, which means it’s getting harder and harder for investors to get their properties rented out, and they’re often having to drop rents to back where they were in 2011 and 2012 in some cases.
So the reasons for the price fall are different, even though a rate drop, what it will do more than likely is it will stop the bleeding in the market. It will probably curtail prices dropping, at least slow the price drop, but it’s not going to have the impact of increasing prices because banks are still being very tight in how they apply their lending restrictions. It’s hard to borrow money, okay?
So, I don’t think you’re going to see a bounce. So then, are we going to see the blood on the streets? Are we going to see the absolute property crash that so many of these doomsday people are talking about? Well mind you, many of these guys were also talking about property prices going through the floor and property prices are crashing, back in 2011, 2012. Yeah, I know that sounds ridiculous, right? Because we know that after 2012, that’s when the prices went crazy. We’ve had our biggest price boom in history in our two biggest markets.
But, these guys are saying the same thing back then. How do I know? Because I bought in Sydney in 2011, and at the time, certain so called property experts called me completely crazy. They said Sydney had been flat since 2003, you don’t go and buy in Sydney now, the prices are going to drop, okay? Good thing I didn’t listen to them, right?
So, the fact of the matter is these doomsday experts have been talking about property crashes forever and a day, okay? And yet the fact of the matter is, we haven’t had a property crash in Sydney or Melbourne for decades. So, are we going to have a property crash? Well, let’s think about it this way, what could cause property prices to crash? Number one, people can’t afford their mortgages anymore, which means interest rates go through the roof and at the moment the Reserve Bank of Australia has actually completely changed tactics, now they’re talking about dropping interest rates. So, that’s unlikely.
Or, number two, all of us lose our jobs and we can’t afford our mortgages either because the governments decide to take all the jobs and move them into regional Australia. Highly unlikely. If there’s a global economic catastrophe, potentially, depending on what you think about Mr. Donald Trump and co. But if we take those factors out, because those factors affect the whole globe, they affect all of us, they affect every single aspect of our economy, okay? So if something like that was to happen, it’ll affect the share market, the property market. It would affect everything absolutely, all right, there’s no doubt about it.
But if we take those factors away because I believe they’re quite unlikely, will the property market crash based on its current economic factors, just based on the current state of play? I don’t believe so. I think what you’re going to see happen is what happened at the end of 2003, the previous property boom where prices fell, yes they fell 20%, prices may fall even more this time, but then they’re going to hit a plateau, and they’re just going to level out for quite some time, okay?
So, it’s going to be bad news for people waiting for prices to fall further, because it’s going to sit there and just level out. At the same time, people buying in those two markets hoping to get capital gain out of the coming few years are also going to be disappointed because prices are going to stay flat for quite some time, all right? However, eventually, and when I’m talking probably, certainly five years, maybe 10 years or longer, no one’s got a crystal ball here, but eventually when all the oversupply is mopped up, and because Sydney and Melbourne still have a growing population, we’ll eventually see prices start to rise again, but it will take some time, okay?
So, I’m not expecting personally any real price growth, where are we, we’re in 2019 right now. I’m not expecting any kind of significant price growth until after 2025, okay, if not even later than that, because I believe that that’s how long it’s going to take for the oversupply to be mopped up. Mind you, there are another couple of factors here that we have to consider.
As I said, the Reserve Bank of Australia is planning on reducing interest rates based on their last couple of reports. However, interest rates can’t stay that low forever. Eventually they do need to rise. What happens when rates rise, okay? I expect it will be a very slow rise, but as interest rates rise it means that affordability is going to be tougher, so prices can’t rise. So we’ve got to wait for rates to rise again, and then fall before we can start to see property prices rise again in our two biggest markets, okay?
Secondly, we have this very real possibility of a Labor party coming into government, and this is not a political thing at all, but they are talking about playing with negative gearing. Their whole aim in playing with negative gearing is to make property prices even more affordable in Sydney and Melbourne, okay, that’s their whole aim and that’s what they’ve been very open in saying.
So, when someone’s trying to make property prices more affordable, translation, trying to bring property prices down. You don’t get capital growth in a market where people are trying to bring prices down. Now, I expect that eventually that’s all going to level out, but over the next few years I do expect eventually prices are going to stay where they are, a slight decline, no there’s going to be no crash, but neither do I think you’re going to get any real capital growth for a number of years in our two biggest markets.
So, hold on if you can.
If you bought at the wrong time, like I know there are people who bought out in Liverpool in the western suburbs of Sydney whose prices have dropped 24% or more since their peak, okay, and some people have got caught up in that, which means their homes, if they were to sell today, especially after agents’ costs and everything else, will be worth less than their mortgage on their home. It’s a scary position to be in.
So yes, many of us are going to have to tighten our belts from a property perspective, but no I don’t believe there’s going to be a crash, neither do I believe there’s going to be any capital growth. Both sides of the fence are going to be arguing. Both sides of the fence are going to be unhappy. Those who want prices to fall will find they’re not going to fall as much as they want them to. People who want prices to rise will find they’re not getting the price rises, but eventually we’ll level out and Sydney and Melbourne will continue to be our two most expensive cities going forwards.
But as I said, I’m not expecting any capital growth until 2025. Hope you enjoyed this video, and if you’d like to know more about investing or a proven plan to invest, especially in these confusing times, then head on over to https://niroclass.com, I’ll have a link below this video. Check it out, it’s a free 30 minute video that you can watch, no opt-in, none of that required, enjoy the video, chat to you soon. Bye for now.
January 27, 2021
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