Australia’s house prices are expected to begin declining in 2017 according to a new report from economic forecaster BIS Shrapnel. In today’s show Michael Yardney, from Metropole Property Strategists, gives us his take on that situation.

Transcript:

Kevin:  According to a report by economic forecaster BIS Shrapnel, Australia’s house prices are expected to begin declining by 2017. It’s a fascinating report. I want to get an insight into this.
Joining me to discuss that, Michael Yardney from Metropole Property Strategists. Michael, you’ve seen that report. What’s your take on that?
Michael:  Well, BIS Shrapnel has got a good track record of predicting markets, I guess, as good as anyone else. Sometimes they get it right, sometimes they get it wrong. But I think this time, the claim that this cycle will end in 18 months to two years is pretty spot on.
Kevin:  What’s the trigger behind this, Michael?
Michael:  Well, let’s maybe talk about what’s going to be ahead, and then we can see what’s going to cause it. I think this next year or so, we’re going to have some interesting times economically in the world. Recently, Greece has had its financial problems, and then China has. The world is having some economic challenges, which will impact on Australia.
Some people are even suggesting Australia is going to need one or two months of recession where our economy slows down in response to that. What that means is interest rates are going to remain low and probably drop one more time.
In that context, I believe that our property markets are going to continue doing well, driven by lowish interest rates, but there will be some challenges with some consumer confidence, just with all the bad news happening.
But what will eventually finish this cycle – like every other cycle – is when interest rates go up, and that will happen when eventually, after all the bad times, the good times start occurring and our economy starts to pick up and our property markets go up even further. So, there are some good times ahead before the markets ease.
Kevin:  Michael, I’m going to ask you before we conclude our chat here today to take a long-term view for me and tell me what you think is likely to happen in the future, but I’d just like to know how we can prepare ourselves for a market slowdown if it’s ahead.
Michael:  The market is made up of multiple submarkets and multiple states, so when eventually things slow down, different segments will be affected differently. As interest rates go up, I believe that the first-home buyers will have their challenges. It’s likely with some economic challenges that regional and smaller areas and areas not underpinned by multiple pillars of the economy are going to have their challenges.
One way to prepare is owning the right properties in markets that are going to still remain strong. Avoid first-home owner markets. Avoid second-rate properties, which end up having challenges when the markets turn. Avoid regional areas. And really be careful of off the plan because one of the things in the BIS Shrapnel report is that in the future, they see an oversupply of the inner CBD apartments that are being built, in particular for the overseas investors.
Correct asset allocation is number one, Kevin.
Kevin:  Number two?
Michael:  I wouldn’t speculate, and definitely, don’t over commit financially. Like every other property cycle, this one is going to leave some investors who bought near the peak financially embarrassed.
The problem is currently our markets are strong, enticing a whole lot of new people into the markets. Therefore, be cautious of what you’re buying and make sure you have substantial financial buffers to see you through. In other words, have a line of credit or an offset account, so that if the market slows or the rents don’t go up as much or more, particularly, if interest rates go up, you can cope with it.
Kevin:  Excellent. Correct asset selection, don’t over speculate, and that financial buffer, Michael, that’s fairly important, isn’t it? I’ve heard you talk about that before.
Michael:  Well, it is. What tends to happen is that people budget and push themselves to their limits with today’s interest rate, but could you cope if interest rates go up a percent or two? Fortunately, the banks are protecting us. No one likes it when the banks say no, but more banks today are actually factoring that in to make sure that you can weather the storms ahead, because this too shall pass.
Kevin:  This too shall pass. I’ve heard you say that before, too.
Michael, just in closing – another minute or so – could you just get the crystal ball out, and what’s ahead?
Michael:  Well, I believe that this next financial year, 2015/2016, we’ll see much the same as what happened in the last year. Melbourne and Sydney will be the leading property markets, but Brisbane is also going to catch up a bit. Melbourne and Sydney won’t grow as much, but will have single digit capital growth.
I think that Perth is still going to have a year of flattened, slightly falling property values. Adelaide is going to be steady as she goes, probably going along with inflation. The smaller markets like Tasmania, Darwin, and Canberra, there’s nothing really behind them to drive strong capital growth at the moment, Kevin.
Kevin:  Michael, always good talking to you. Thank you for your insight there. Michael Yardney from Metropole Property Strategists. Of course, you can catch up with Michael’s blog, just the address there, Michael?
Michael:  PropertyUpdate.com.au, and we now have an app that you can get on the iTunes or the Google store to get daily blogs, as well.