Remember in early 2020, when media headlines were awash with ‘doom and gloom’ predictions about Australian property prices?

A number of predictions, forecasts and financial modelling papers were released, and the information contained within them was not good news.

Recession

No matter which way you sliced it, property prices were set to crash – some predictions suggested they could fall by as much as 20-30%.

Actually – that also sounds a bit like today, doesn’t it?

So what happened next?

Well, the property market didn’t collapse – did it?

The value of almost every property in Australia increased considerably, some by as much as 30% and over $2 trillion was added to the total value of the residential property market  in 2021 last year alone!

Sure this is partly because credit had never been cheaper, which has made the prospect of home ownership far more affordable than it had been in a long time.

And of course, the various government stimulus packages and bank support helped us get through.

No one wanted the property market to collapse

If property prices didn’t crash, what were all of these predictions about, then?

First of all, it’s important to understand that some of these forecasts were not coming from “dodgy” sources.

No, in fact, it was the opposite: research reports and studies were being released at that time by all sorts of reputable industry groups and organisations, from economists and major banks to the Reserve Bank of Australia.

But just because a prediction, forecast or economic modelling report is coming from a well-known or trusted source, that doesn’t mean they’re always going to be right.

Many economists, research firms and experts are “wrong” every day.

What they are doing is taking a set of data and then they’re using their expertise and analysis to make a forecast, which is really nothing more than an exposition about what could happen.

Nothing is ever set in stone, especially not when it comes to real estate.

Here are a few “the sky is falling” property predictions that didn’t eventuate…

  • 32% decline:  CBA, warned back in May 2020 that Australia risked experiencing a 32 per cent fall in house prices, in a worst-case scenario of a prolonged economic downturn. But instead, property values rose strongly in almost all parts of Australia.
  • 40% price crash: When the Reserve Bank of Australia did some financial modelling of what could happen under a worst-case economic scenario, they modelled the impact on households if prices fell 40%. The media went crazy with this headline only a couple of years ago which led many people to worry that a big crash was coming.
  • Revised by half: After previously expecting a 10% fall in national house prices between April 2020 and June 2021, Westpac chief economist Bill Evans revised his forecast to just a 5% fall, owing to several capital cities proving to be more resilient. But again there was no fall in property values
  • We were told unemployment would rise to double-digit figures because of Covid, yet it fell to historically low levels
  • Remember how the property pessimists were worried that we would fall off a fiscal cliff due to the many deferred home loan after banks gave temporary relief to borrowers impacted by COVID-19, allowing them to defer of payments for a period of time. That didn’t eventuate – did it?

These are just some of the examples of property predictions that haven’t come true in the last 2 years alone.

What happened to that other cliff?

Another example of financial “experts” getting it wrong related to JobKeeper and all of the other financial boosts the government provided, which either ended or were wound back around September 2020.

Many predicted we would fall off an economic cliff and the economy would be decimated come September 30th 2020.

Forecast

Well, we didn’t fall off that cliff, just like we didn’t fall off the cliff that so many nervous Nellys suggested would happen when a number of investors’ interest-only loans reverted to principal and interest.

All of this said, there’s no denying that 2020 was a very confusing time – one that has tested the resolve of even the most experienced of investors.

And they’re at it again, aren’t they?

Again we are in “interesting times” –  booming inflation, rising interest rates, worry about our economic stability and the media is once again full of pessimistic predictions, some from the same people who made the ones I’ve just quoted.

The banks are predicting property values might fall 10% to 15% in 2023 and someone prominent commentator is suggesting a 30% fall in Australia’s housing markets is on the cards.

When that feeling of uncertainty enters the picture, I think it’s really important to focus on the facts.

This way, you can work to remove the emotion from the equation and think critically about what you really want to achieve with your investments.

So what are the facts?

1. Fact is…. a fall of this magnitude has never happened before.

Not during the recession of the 1990s, not during the Global financial crisis, not during the credit squeeze in 2017- 18.

In fact the largest fall in the “overall” Australian property market experienced was 9.9% over 18 months between December 2017 and June 2019.

Sure selected segments of the property market have significantly fallen in value for a period of time, but the “Australian property market” as a whole has never experienced that kind of fall.

And considering the current state of the economy, our financial health and undersupplied nature of our housing markets, there’s no credible reason to suggest a fall of this magnitude should happen now.

 

House Price Growth Since 1990

Sure we have entered the correction phase of the property cycle in some locations, but property values are still increasing in other locations – we’re in a multispeed property market, but this is more normal than the type of market we experienced last year were almost all properties increased in value at the same time.

So while property prices will correct in some locations, and already have at the more expensive end of the market, there will not be a property “crash” as some commentators are predicting.

For house prices to “crash”, you need to have forced sellers and nobody there to buy their properties.

This only happens at times of high unemployment, but currently, anybody who wants a job to help to get a job and with rising wages, it’s unlikely that we will see many distressed sellers forced to sell.

Sure some recent buyers will find high mortgage costs a financial challenge, but there is likely to be little mortgage stress in Australia as 50% of homeowners have no mortgage on their home at all and most of the other homeowners – those who bought more than a year or two ago – will have substantial equity in their properties and are months in advance of their mortgage payments.

And we know from the recent Covid experience that the banks don’t want to take over your home in mortgage holders’ default.

They will do whatever they can to help, including extending mortgage terms or giving mortgage repayment holidays.

2. The average Australian is wealthier than ever

Over the Covid lockdowns, Aussie households have socked away some $230 billion in excess savings, leading to a massive war chest of cash and deposits.

Not only does the average Australian have significant savings, surging property prices means many homeowners have 30% more equity in their homes than they had 2 years ago.

In fact, ABS data show Australians are now wealthier than ever.

 

Household Wealth And Liabilities

3. No sign of mortgage stress for the majority of borrowers

There has been a lot of talk about the risk of mortgage stress, but there is little evidence of this.

There are very few loan defaults as this recent chart from the RBA shows

 

Banks Non Performing Assets DomesticSure some first homeowners have overextended themselves and some investors have borrowed too much on the wrong properties but, in general, the percentage of borrowers in “real trouble” is low.

In reality, half of all homeowners have no mortgage at all.

And those who do have a mortgage are well ahead in their mortgage repayments – it is estimated that a total of $1.37 billion is sitting in offset or redraw accounts




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