Property is a hot topic of conversation and has been for a while. From news outlets, to backyard barbeques, everyone seems to be talking property prices. There’s been much speculation about if and when a property crash will happen.
Fuelling the conversation is recent news that property prices in Melbourne and Sydney reached new highs in September1. The median house price in Sydney is now well over one million at $1,068,303 and in Melbourne it's now grown to $773,6692.
In a recent Oliver's Insights AMP Capital’s Chief Economist Dr Shane Oliver gave his insights into Australia’s property landscape. He answered the highly debated question as to whether or not a housing crash is likely.
Is a housing crash likely?
According to Shane, a housing crash is unlikely for four key reasons:
- Australia is not experiencing a generalised property over-supply.
- Interest rates are currently low.
- Lending standards remain high, unlike the deterioration that was seen in the US prior to the Global Financial Crisis.
- While property prices have surged 60% and 40% over the last four years in Sydney and Melbourne respectively, they’ve fallen in Perth to 2007 levels and have seen only moderate growth in the other capital cities.
To see a property crash (a generalised fall of 20% or more), one or more of the following would need to occur:
- A recession – much higher unemployment could cause debt servicing problems. However, according to Shane, this is an unlikely scenario.
- A surge in interest rates – Shane suggests rate hikes are unlikely until 2018. The RBA knows households are more sensitive to higher rates so it’s very unlikely rates will reach past highs.
- Property oversupply – this would require the current construction boom to continue for several years.
Considerations for property investors
In his update, Shane suggested that while a significant drop in prices remains unlikely, there are risks that property investors should consider:
- The surging supply of apartments and the continuing strength of the Sydney and Melbourne property markets pose an increasing risk. Average dwelling prices in these cities are likely to see another cyclical 5-10% price downswing around 2018, with unit prices in oversupplied areas likely to decline 15-20%.
- The combination of high house prices, huge gains in Sydney and Melbourne, low rental yields and a coming surge in the supply of apartments mean property investors need to be careful. Investors should consider focusing on undersupplied, less loved parts of the property market.
So, is investment in property still a good way to build wealth? Like all investments, the answer to this depends on your personal circumstances, what you want to achieve, how much risk you are willing to take and, of course, the property market.
There are some simple steps you can take to build wealth over the long term.
- Understand the difference between good debt and bad debt.
- Start saving—it’s never too late to save for rainy days and interest rate hikes. Use our savings calculator to see how much you could put aside.
- Help protect your ability to pay your expenses—consider taking out income protection insurance.
- Speak to your financial adviser. If you don’t have a financial adviser you can find one here or give us a call on 131 267.
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Renovating and reselling properties can be a good money-making exercise, or a very expensive one if you go in unprepared.