Given the pessimistic headlines about property, it’s understandable that people might think twice about buying real estate right now.
After five years of growth, property prices have now dropped 2.7% annually across the country, according to CoreLogic.
Auction clearance rates have fallen below 60%.
Some might be thinking that because property has performed well in recent years, it is inevitable that it will perform badly in coming years. They might conclude that the current weakness will extrapolate well into the future, seeing prices fall, say, 10%, 15% or 20%.
It is true that prices do reach a point where potential buyers find them unaffordable.
The market overreaches and has to correct, which is what we’re seeing right now. It is also true that borrowers are facing tighter lending restrictions, and there is a risk these will constrict further as a result of the banking royal commission. Many will revise their budgets downwards.
But not all booms are followed by a bust. I don’t believe the property market growth is a bubble about to burst.
The fundamentals that have supported house prices in centres such as Sydney and Melbourne in recent years remain: populations continue to increase, the national economy is still strong and our low interest rates aren’t expected to rise for another 18 months.
There is still substantial demand for housing in Australia. But we are not yet building enough new dwellings to meet this demand.
An undersupply of the type of housing necessary to meet the needs of Australians has persisted for well over a decade and will take a long time to change.
As long as this supply/demand mismatch continues, the downside risk for property prices is low. In fact, given these factors, I expect to see house prices start to increase again in the next 12 to 18 months.
So is that a reason to wait? No, it isn’t.
Property investment is about investing when you have the means to do so, rather than trying to time the market. Know that you’re playing a long game, and if you choose the right asset you’ll ride out any market fluctuations.
Now is a good time to buy. Slowing markets provide great opportunities.
There are still some terrific properties up for sale but the lower auction clearance rates show there are fewer people out there looking to buy. That means less competition and the chance to secure a blue-chip asset within your budget.
Those buying now might not see the value of their property rise over the next year or two but good-quality properties will show a decent return in the long run. They will do so because they’re assets that are in high demand but are relatively scarce.
Waiting to see what happens in this temperamental market will inevitably lead to missed opportunities. Eventually, the market will recognise that good-quality assets are at “must buy” levels and prices will rebound.
So homebuyers or investors who are keen to buy, and whose finances are robust enough to pass muster with the banks, should act now.
Those who lack my level of confidence in the market could future-proof themselves against further market downturns by focusing on quality, buying blue-chip properties with a consistent history of capital growth.