10 events that could crash the housing market – Michael Yardney

We are experiencing many warnings of housing bubbles, crazy house prices and other alarms. So what needs to happen in the economy to cause dwelling prices to fall significantly is a question we ask Michael Yardney. He outlines the 10 things that will signal such an event.


Kevin:  Property prices go up and down, but the talk about a crash is something that really brings a lot of emotion. Prices will go up and down all the time, but what actually will cause property prices to crash? This is a question I want to pose of Michael Yardney from Metropole Property Strategists.
Hi, Michael.
Michael:  Hello, Kevin.
Kevin:  It’s highly emotive – isn’t it – when we talk about price crashes?
Michael:  That’s what one implies when you talk about a bubble, that it’s going to burst. Let’s be blunt that in the big capital cities, we actually haven’t had price crashes in the past, while we have in segmented markets, but it could happen, Kevin.
Kevin:  List out some of the events that could run us into that area.
Michael:  I guess it’s the things that have been leading us up to these high property prices that may change. One of the dangerous ones, I guess, is a halt to our rising population. Our property values are increasing because there are more of us. I’m not suggesting that it could happen, but that is one of the things that could cause property values to drop – if our population doesn’t keep growing at these very high rates.
Kevin:  Is it as simple as supply and demand, Michael?
Michael:  The demand side is related to household formation from our population growth, but also if there was a recession or, more likely, a depression where the entire country would have high unemployment and people defaulting on their mortgages.
Remember, if we’re talking about a crash, we’re not talking about the orderly slowing down of property values or slight drops; we’re talking about the fact that people can’t sell their homes and sell them at any price. That’s when property values freefall. That doesn’t usually happen because we’re underpinned by a whole lot of owner-occupiers, so we really need some significant events, Kevin.
Kevin:  What about overseas buyers, Michael?
Michael:  In certain segments of the market, overseas buyers make a big difference. If, for example, the Chinese and other Asian buyers stop buying, that definitely could affect their property markets.
The two most likely causes are the government’s actions making Asian investors feel unwelcome or some effects in their own hometown – like we saw way back in the 1980s when the Japanese were buying up Australian real estate and then all of a sudden, their economy faltered and it stopped them buying overseas. Again, we’re just talking about the possibilities. Both of those are possibilities but probably not probabilities.
Kevin:  Mixing up and all the talk about negative gearing, is that a danger for us?
Michael:  Clearly, the investor market is one of the things driving our general Australian property markets. In some locations, especially Sydney and Melbourne, investors make up a significant portion of purchasers. If negative gearing is taken away, it will have a definite short-term impact when a whole heap of purchasers are out of the market, and that could cause property values to drop significantly.
Kevin:  At a more local level, Michael, with councils, how much influence do they have on the market in terms of their approval for developers and so on?
Michael:  Council approvals are one of the reasons why property values are high. Ask any developer and he’ll tell you how hard it is to get a development approval for apartments, but even if you go through the new estates, how hard it is and how expensive it is to get the infrastructure in. Therefore, changes to building regulations, in a way that they actually free it up and make it easier and therefore, increase more supply, could be one of the factors, even though I think it’s unlikely to cause a property price drop.
Kevin:  What about unemployment, Michael?
Michael:  Unemployment or concern about your job – in other words, consumer confidence, really – is one of the big factors that affects people making big buying decisions. If you’re not certain about your job or if you haven’t got one and can’t keep a mortgage, that is one of the factors that can cause property prices to crash.
Kevin:  What about higher interest rates? How much of a lever are they really?
Michael:  I remember paying 18% or 19% in the late 1990s. I bet you do, as well, Kevin.
Kevin:  I do.
Michael:  It was for a really short period of time, but you don’t even need to get to those levels. We found in 2003 – it actually happened in 2010 and it happened in the 1990s, as well – just an interest rate rise of about 2% stops the property markets dead in their tracks. That is probably the most likely thing that is going to stop this property cycle a couple of years down the track.
Kevin:  I guess population is one thing. You mentioned that earlier, Michael. What about the aging population?
Michael:  Interestingly, currently pensioners are encouraged to hang onto their dwellings rather than downsize, but if these rules were changed, many dwellings would possibly come onto the market. People have talked about what the Baby Boomers are going to do, as well. That is one of the factors on the horizon that, if there are significant changes, may affect our property markets.
Kevin:  And superannuation?
Michael:  Clearly, one of the big drivers of investor purchasing in the last couple of years has been people buying their self-managed super funds. Interesting, not just Baby Boomers, but I’ve seen a lot of younger Gen X’s and Gen Y’s already getting into the property market through their self-managed super funds. If the government tinkers with those, that is another factor that could have a negative effect on property values.
Kevin:  A lot of things to consider there, Michael. Sum it up for us if you could
Michael:  They’re all possibilities, but if we talk about probabilities, the most likely thing to stop this property cycle will be rising interest rates or creditor squeezes in the way of macro prudential controls stopping investors in particular, but also home buyers, spending on properties.
I don’t see either of those happening in the near future, and they’re not likely to cause a crash, Kevin. I think it’s just going to slow the market down and property values will fall a little.
Kevin:  Thanks for that insight. Michael Yardney, thanks for your time.
Michael:  My pleasure.

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