Will Australian house prices crash in 2013 as predicted by another US property guru?
Many Australians’ belief in Real Estate as the best investment would be shocked that a US real estate expert is predicting Australia’s real estate prices could half over the next couple of years.
Jordan Wirsz, a respected US real estate adviser says Australia is heading towards a major property price cut because we did not get a correction in the last global recession, but we will have to cop it sweet as the current global economic downturn spreads to China, as this will eventually land in Australia.
Mr Wirsz pointed to many of the problems I have been talking about for years: artificially low interest rates, high loan-to-value lending practices, overinflated property prices [made worse by push selling of investment property and negative gearing schemes], unrealistic vendor expectations on house prices, and Australia’s large number of second mortgages.
In my view it is true that many gullible Australians have been sold on two things:
- The truism that prices will always rise. This is true over the long term, but we have yet to see a short term to mid term housing price drop in Australia.
- Buy as much home as you can afford. When rates were the lowest in out history people were sticking to this mantra of “affordability”, instead of on value . Land prices were then pumped up to reflect this “how much a week can you afford?”, not what is this land really worth.
So is Mr Wirsz right. If we go by other US experts predicting doom for Australian house prices, then you may think no. Whist we have seen a slight housing market retreat in values of about 4% in 2011, we have not seen anything like the predictions that Australia’s house prices would fall 40% because it was overpriced compared to overseas markets.
The paradigm is that nobody ever believes house prices can go down but those who have bought at the top of the market are going to be sorely disappointed.
As an aside, I once had a discussion about this “prices will always rise” and advised a friend real estate investment specialist that whilst he was right assume that real estate prices would always rise in the long term, that prices falls in the near term to mid term, and that could wipe out his clients financially.
He did not listen. He bought a property six years ago “on a discounted value”. That property is still worth 20% less than he paid for it today. In fact it is un-saleable at 20% less. If Mr Wirsz is correct, than he will be in trouble himself in 2013.
Australia’s Housing Market problem
The big problem I see is that about a third of rental homes in Australia are owned by mum and dad investors, so if they see a big drop in asset values coming, they may be tempted to bail out. If they have equity in those investments. Most would have bought at the top of the market [2003 to 2006].
Many of these investments are tied to the collateral of the family home [a big mistake I believe]. So if they lose one they could lose everything.
So this is the main reason that many will hang on to their investment till the market improves. They have to. Selling at a loss will be too hard a pill to swallow.
Will the Banks refinance property investors if Housing values shrink?
The dark horse here is the banks, and whether they will approve refinancing of the properties when they fall due for renewal or rollover, if they see a big plunge in valuations happening, or even coming.
In the past, many real estate investments in Australia were over sold and over priced, and financed only on the basis of the property investors own equity in their homes. So if both property values fall below 20%, then they could be in trouble, and have to sell their investment, if not their homes as well.
My view is that homes in capital cities will continue to fall gradually, but not at the rates that have been predicted [up to 60% price falls in Capital Cities]. As long as wages keep rising, and jobs are aplenty then there is little reason to see how our house prices would fall to the levels that Mr Wirsz says.
Land Prices are too high. On this I agree with Jordan Wirsz
One thing a do believe is that land prices will fall more than house prices. Land has been overpriced by developers, and they then have paid too much for development land. I believe with Government collusion for the last ten years, who have got a lot of revenue from land prices. This has pushed up the prices of established homes.
Conclusion: Real estate. Is it time to buy or sell?
How much is real estate worth? A small quiz
- What you think its worth?
- What a vendor thinks its worth?
- What a real estate agent says its worth?
- What somebody else is prepared to buy it for?
If you picked 4, I believe you are right. That price has been too much in Australia for the last ten years because people have been conned into believing that affordability was the only guideline to pricing real estate.
If you are considering buying property, you should make sure of the value, and allow discount from there in your offer. Otherwise you could be buying a debt that is underwater for years to come. I have no doubt that you will eventually see prices rise, but that may be after you have sold it.
At the end of the day, we all have to live somewhere and buying a home as a home, makes perfect sense over the long term. Buying a home as an investment in this market may not make much sense at all.
And buying land as an investment would be like buying an orange with all the juice already sucked out of it.
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Rick Adlam [HomeMate] has been working in the homebuilding since 1985 as a new home consultant with Iconic builder AV Jennings. He has also worked in home design consultancy with Dixon Homes, VillaWorld, Galaxy Homes, Merlin Homes, Simonds Homes, Award Homes and Orbit Homes. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers
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