Triggers to a crash – Michael Yardney

What needs to happen in the economy to cause dwelling prices to fall significantly? According to Michael Yardney there are 8 things that would need to happen and you will hear us talk about all 8 today.


Kevin:  Well, there is so much uncertainty in the market right now, isn’t there? People are concerned about a crash, and we’re hearing it about it. I have to say all the talk about a crash is always coming from people overseas who don’t really fully understand the Australian market. Also, what’s happening with Asians and they’re being discouraged from buying property here and how difficult it is for first-home buyers.
Let’s get a bit of a handle on what really is happening. Let’s get our feet on the ground here. What could possibly cause the market to crash? I’ve asked Michael Yardney from Metropole Property Strategists to address this for us.
Hi, Michael. Welcome to the show.
Michael:  Hi, Kevin. Thank you for having me.
Kevin:  Michael, what are the things that could cause the market to crash?
Michael:  Well, Kevin, it’s not as simple as some of the pessimists are thinking because for house prices to collapse… Now I’m not talking about the cyclical correction where things slow down, as they always will and they are to an extent now, but for property markets to crash, to collapse, people are going to have to be forced to sell their homes and there is going to be no one willing to buy them so that property values will drop substantially.
Now, there’s no doubt that some segments where property markets are losing ground – in particular, the new and the off-the-plan markets where you are right; as you said a moment again, foreign investors are having difficulty getting financed but so are local investors.
But in the general world, where most people who own properties are owner-occupiers, homeowners, many without a mortgage or with a little mortgage, they don’t just sell; they simply remain in their home waiting for things to pan out, Kevin.
So I don’t think people are going to outright sell their home and take a loss – unless you have some major shocks. Can we go through what those shocks could be?
Kevin:  Please, let’s do that.
Michael:  What could cause people to be so desperate that they’re forced to sell their home? Firstly, high unemployment. That could trigger a wave of forced sales. We know have our economy is doing reasonably well. Unemployment hasn’t gone up. In fact, there’s been considerable jobs growth.
A lot of the jobs being created currently are part-time jobs, but there are still significant jobs growth in Sidney and Melbourne, in particular – and in fact, in all our capital cities – and employment data is coming out positive, so I don’t think that’s going to happen.
Kevin, another thing that could force people to significantly get into mortgage stress and have to desperately sell their homes to cause property values to crash would be high interest rates where a raft of homeowners default. Kevin, it’s not on the radar of any of the economists or any of the banks.
Interest rates interestingly probably wouldn’t have to rise a lot, not to the 7% or 8% – or the 16% we had years ago. Just a 0.5% or 1% interest rate rise will stop this market dead, but it won’t cause people to sell out.
Kevin, a credit squeeze. In the old days we used to have that where people just couldn’t get financed but our banking system is underpinned by residential property lending – and the banks, the system, the government has a vested interest in keeping dwelling prices at least stable. The government, Kevin, doesn’t want the constituents to lose value.
The only people who want to seem to want it, Kevin, are the overseas people – or have you noticed a lot of those who have missed out on the market; they’re hoping that values will fall so that they can buy in cheaper.
Kevin:  Absolutely. Definitely.
Michael:  The next thing is a severe recession. That could cripple our economy. It could create unemployment. It could mean that people lose confidence, they default on their mortgages. But while we may well have a little recession one day – because we haven’t had one for years – it’s really, really unlikely in the foreseeable future. It’s not on the radar of the Reserve Bank or any economists of us having a severe recession that would cripple our economy.
Of course, an oversupply of property could create a fall in property values, and that could occur in a few isolated markets – the Melbourne high-rise market, particularly in the CBD; the Brisbane inner-city high-rise apartment market also is suffering from an oversupply – and suddenly a lack of purchasers being able to settle. But that’s a sub-segment of the market, Kevin; it’s not the whole market.
Our rising population has been one of the things that has driven our property markets, and population growth is slowing, but it’s not slowing so much that it’s going to cause a crash in the market. So I can’t see that being an issue.
Of course, the slowdown in foreign investment could well significantly affect certain sub-segments of the market, as we’ve already said. I guess another one could be changes in government legislation. It came up earlier this year with the concept that maybe negative gearing wouldn’t be allowed or superannuation funds couldn’t invest in property.
I don’t think that any of these things are on the medium-term radar. I can’t see a crash in the property markets in the foreseeable future.
Kevin:  Okay, Michael, what are the positives?
Michael:  Kevin, I see quite a few of them. Our population growth is robust, and that’s bringing new people in, plus we’re making more babies, so that combination of more people and basically a wealthy nation – our economy is healthy – is going to mean that these people are going to be able to, and want to, afford to buy properties.
We have a sound banking system, so it’s unlikely we’re going to have the problems of a lot of overseas countries had.
We have rising business confidence and rising consumer confidence. When businesses feel confident, they employ people, they buy inventory, and the economy moves on. When consumers feel confident, they make decisions like buying houses, buying cars, buying investments.
While we’re taking on more debt, we’ve actually got a healthy comfortable level of household debt because interest rates are low, so in general, we’re managing those well.
I guess the last thing is just our culture of homeownership. Kevin, 70% of us own or are paying off our home.
I see a lot of positives for the property market in general in the future, but of course, I can see a few little issues ahead that will give us some speedbumps to stop this strong rise we’ve been having.
Kevin:  So the bottom line, Michael?
Michael:  Well, for a number of years, property bubblers, doomsayers, property pessimists have been predicting that our housing market is going to crash. They have told us, “We’re denying the impending gloom, blinded by the consistent performance of our property markets.”
I think what I’ve just explained is that it’s unlikely for our property markets to collapse, but I do agree that in certain segments, they are going to correct. So it’s important to be vigilant, be aware what’s happening in the world economies that are affecting Australia, and take a strategic approach to investment and get good advice along the way.
Kevin:  Great advice. Thank you very much for your time, Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael:  My pleasure, Kevin.

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