Sydney and Melbourne prices could fall by up to 20% – Graham Cooke

Current and prospective property owners in Sydney and Melbourne should prepare for a big drop in housing value, according to Graham Cooke from Finder.  He joins us to explain what is behind this alarming prediction.
Kevin:   Well there have been some alarming reports recently about the potential for house prices to plummet, by some are saying as much as up to $200,000.00. This is a release from, and joining me to quote from that is Graham Cooke from Finder.
Kevin:   Graham, they’re pretty serious dire predictions. How much weight do you put behind that?
Graham:   This is something that’s been interesting in our surveys of recent months, but trends towards the percentages increasing. So we started to ask our economists how low prices were going to go a couple of months ago, and they started saying things like 8 or 9%, and then we started asking more specifically what they think about units versus houses, and we started to get slightly higher numbers.
Graham:   But this month following ANZ’s opinion that we’re gonna see 15 to 20% drops in prices, we decided to ask economists whether they agree with that statement. Quite a high percentage, over 70% of them came in agreeing with it. And this is the first time I’ve seen the big 2-0, the 20% as a number for forecast in property pricing.
Graham:   The reason that number is important, is because most banks in Australia, as you know, will require a 20% deposit for the lend, so there’s 80% of the cost of the house is what you’re borrowing from the bank. But if you do theoretically purchase a house with 20% deposit, and then the price goes down by 20% in a set period of time, you of course are in the potential situation there to be in negative equity.
Graham:   And that’s why this number is so-
Kevin:   Alarming.
Graham:   Alarming, yeah, yeah, yeah. And obviously you’ll need to price against slightly more than that, because you’ll have paid some of the mortgage off by that time, but negative equity is the real worry, because if you have … If you’re in that situation, that means you’re locked in the property that you’re living, and you’re not really gonna be able to sell, and you’re not gonna be able to refinance the mortgage, so it’s gonna trap you into that deal.
Kevin:   It might be very difficult for the banks too, because I would imagine they would be very nervous if we did actually see a 20% fall, given the fact that there would be a lot of property owners who don’t actually have 20% equity in their property. So is it likely that the banks would start to recall some of these loans?
Graham:   It’s all going to be interesting to see what happens in that space. If you look at Ireland for example, we eventually saw property prices there of more than 50% between and peak and the bottom of the market.
Kevin:   Where was that, Graham? Sorry I missed that.
Graham:   In Ireland-
Kevin:   In Ireland.
Graham:   Yeah, we saw property prices drop more than 50%, so there was a whole lot of people in negative equity; in fact, there’s a lot of people who are still in negative equity in Ireland now, eight or nine years after the drop. It takes a lot of time to recover from this, but what we did see is banks don’t want people to default.
Graham:   In Ireland, they started to go out of their way to try and restructure debt to help home owners somehow start paying back that mortgage, rather than repossessing houses. So I do expect banks here to try and find some way around it.
Kevin:   I’m not familiar with the Ireland system; is it similar to America with non-recourse loans?
Graham:   No, no, no, it’s more similar to here. You can’t just hand them the keys and walk away. So they were trying to do whatever they could to get … Especially the big banks, just to help customers pay back those loans over time.
Graham:   What was interesting though, is you did see a lot of development properties in Ireland that were not sellable, that ended up going at very, very low prices to x developers actually. So the people who funded the boom, and to a degree, caused the issue, who had funds aside when property prices hit rock bottom, purchase those properties at rock bottom, and then just sat and waited for them to go up, which led to a lot of unoccupied buildings in Ireland, and that actually led to a housing crises in Dublin, with people protesting on the streets because they don’t have anywhere to live.
Graham:   But that’s a very long, dark road that we don’t necessarily need to be looking into going here. But that’s where this started in Ireland as well. So 20% at the moment, we don’t want to see it get anymore than that.
Kevin:   Yeah, talking in percentage terms, but if you translate that into dollars, which you’ve done in your release, Sydney Houses, the median price of $970,000.00 represented a drop of $145 to almost $200,000.00 dollars.
Graham:   Yeah.
Kevin:   So the higher the median, obviously, the higher the drop. I mean, obviously here we’re talking about Sydney and Melbourne; do you see this translating through to the regions as well?
Graham:   To a degree, but not as extreme. I mean we saw the property prices in Sydney particularly increase quite dramatically over recent years, and in Melbourne increase dramatically, but not to the same degree as in Sydney. So because of those stiff turns, they’ll probably be the ones that are affected most severely.
Graham:   But really, nobody knows what’s gonna happen here. It’s just a case of wait and see. Everybody was expecting more of a soft landing with property prices, and now the forecasts are getting more and more concerning as we plow on forward; prices keep decreasing as clearance rates keep falling, so really nobody knows where the bottom of the well lies in this particular situation. We’ll just have to wait and see.
Kevin:   Yeah, certainly, a very uncertain mood to go into Christmas with, isn’t it? Because the market will effectively come to a bit of a halt for about four to six weeks, and here we are left with this awful thought that prices may drop. It would be even more concerning for those who are locked into a off the plan purchase, too.
Graham:   Oh, yeah. Yeah. That’s something that people after the GFC in Ireland learned to maybe steer clear of purchasing off the plan, because you’re just stuck into the situation. Also what potentially could make this worse, is post-royal commission. You’re seeing banks declaring they’re gonna be having stricter lending conditions moving forward.
Graham:   Now this is good overall, because you don’t want people to be borrowing that aren’t gonna be able to pay it back, and it’s good for the stability of the market, but our economists were also agreeing with the view that in the short-term, it could have a negative effect on the economy, stricter borrowing conditions leading to less people being able to purchase homes, which could push these numbers down even further.
Kevin:   Yeah, I think we’ve gotta mention here too, that the research we’re talking about in this release is based on comments from some very talented economists and people who do keep a very close eye on the market, and just repeat once again that it was about a 70% response from those, saying that there will be some form of drop. I think the percentages were 5 to 7.5%, about 30% of them saying that’s what it would be.
Kevin:   And from there it went up 10%, I think said about 10% and so on. So yeah, Graham, thank you for joining us. Thank you for that insight, and we’ll follow this with great interest. When is the next survey due?
Graham:   Because there’s no RBA cash decision in January, we get a month off of this cycle of surveys. Everybody gets a break. And then February is the next survey, so at the end of … Very end of January, beginning of February, we’ll have the next information; that’s gonna be really interesting with this long gap over Christmas, to see what people are saying then.
Kevin:   Let’s see if you can come up with position story, first, to go into Christmas with, Graham, if you can.
Graham:   Yeah, that’d be good. See you Kevin.

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