What happens next to the Australian real estate market?
In my prediction last month for Wealthi, I wrote “we are moving into a real estate market where people will shift from the fear of missing out to the fear of paying too much. When the front page of the newspaper starts telling you how bad interest rate rises will be, its time to start shopping for bargains…”
These monthly predictions are for Premium Wealthi Research Subscribers only. However I’m making this month’s prediction free for all my subscribers to read here.
Many of the predictions we’ve made in recent months are now coming to fruition. There seems to be a sense of gloom rising in the real estate market, everyone is waiting for things to come back. Everyone is sure and certain that the party is over.
Don’t trust the front page of the newspaper
I’ve learnt from my experience that when everyone is certain of an outcome in markets, you can expect almost the opposite to happen. I do think that the real estate market will stop growing. In fact, it already has. Prices have come down in the past few months, demand is slower, sellers are nervous.
But I just don’t think we’ll see the massive price falls everyone is expecting. There are many people in the market waiting for a 15-20% fall so they can get in. In some markets that will probably happen.
Certain segments where people have borrowed too much money to buy McMansions (large homes in outer suburbs) will see a big correction. Places in Western Sydney and Northern Sydney are vulnerable because high price growth has been fueled by cheap debt and little income growth.
But the lower end of the market is still hot. Builders are struggling to make ends meet, I estimate 90% of the building industry is losing money. Nobody wants to build when they can justify waiting. Materials are extremely expensive and hard to come by. Staff shortages make things worse.
So when the cost of building a house rises, that provides support to entry level house prices. The markets which I think will do well (and probably keep rising) are outer Melbourne, Canberra and maybe even places like Perth and Adelaide where there is more supply of affordable housing.
If you have a large mortgage its time to think about interest rates rising by around 1-1.5% in the next couple of years. If you’re an owner occupier with too much debt and little income security, or work/business isn’t doing well, its time to think about a plan B.
But if your mortgage is against an investment property, you’ll be OK because rents are likely to rise. Pick a good property manager. The market will slow down in the next few months, but if you have the opportunity to buy or grow your portfolio, this will be a great opportunity.
Straw hats in winter
I remember purchasing property 14 years ago when I first entered the market and everyone was giving me excuses about how a collapse was immenent. The market slowed for a little while, but then it bounced and bounced and bounced again. There is never a perfect time.
The newspapers will continue to print scary headlines, the RBA will keep moving rates higher (because they are hopeless at predicting the future) and in a few months economic growth will slow down. Inflation will be less of a problem. Central banks and governments will panic again that perhaps interest rate rises are hurting the economy and we’ll be back to square one again.
Real estate slowdowns usually last about 1-2 years, we’re probably 3-6 months into this one. So spend the rest of the year finding opportunity while everyone else is in panic mode.
In my June prediction note, I’ll share with you my top areas in each market. If you haven’t already, subscribe to Wealthi Research here.
In this publication, I’ll be covering new invsestment topics next month, most likely on the stock market which looks very vulnerable and likely for more falls.