Property never goes backwards (or does it?)

The statement “property never goes backwards” has been on the tip of many Australian tongues for the best part of 30 years but that premise is in the process of being tested.

A question that we are regularly asked is “whether now is a good time to buy an investment property?”. Generally, when that question is posed, it is a reference to an Australian residential property.

Australian residential property has been a strong asset class for the last 30 years but now there appear to be some storm clouds circling. To understand the residential property outlook, let us first consider what caused the residential property boom.

Anyone who had a mortgage in the early 90s will be quick to tell you about the 17% interest rates (or worse) that they were paying on their mortgage at that time. Fast forward to today and if you are paying more than 4%, you are not paying enough attention to your finances.

This almost unabated fall in interest rates constituted a critical tailwind for residential Australian property over the past 25-30 years.

That same early 90s borrower will also explain how difficult it was to get a loan in those days. The deposit that was required, the family income that was allowed to be included in the affordability analysis, the fact that virtually all loans required repayments of both principal and interest. Over the next 25 years credit availability steadily loosened until such time as no deposit, interest only loans, based on every conceivable cracker of family income, and low-ball estimates of family expenses, became increasingly common.

This easy credit, which has only recently come into clear focus, was also a critical tailwind for Australian residential property.

While these were two of the most important tailwinds there were others. Government policy, such as negative gearing, helped fuel the fire and so did high levels of immigration. With the Labor party promising to wind back negative gearing if they take office, and with the public appetite for perpetually high immigration seeming to wane, some of these other tailwinds also appear to be challenged.

So crucially, a number of the tailwinds that fuelled residential property growth over the past 30 years appear as though they might be turning into headwinds. Credit availability is on the slide, interest rates will rise in the coming years off an incredibly low base (short term movements aside), negative gearing will remain in the sights of Government policy makers, the level of immigration is likely to come under pressure and Australia already has the highest household debt in the world (186% debt to disposable income).

This brings us back to the question “is now a good time to buy a residential property?” For all the above reasons we do not believe so. Of course, a falling market can bring with it opportunity, however, prices are unlikely to adjust quickly, and any downturn is far more likely to be ‘death by a thousand cuts’ rather than something ‘short and sharp’.

Of course, Australian residential property is a diverse asset class, and there will be some pockets that will fare better than others, but with a long list of headwinds, highly questionable starting valuations, and a nation of heavily indebted buyers, the better regions are more likely to be characterised as ‘less bad’ than good.

So, for those pondering whether to leverage up to buy a residential Australian property (or a second or third Australian residential property), we would suggest that they should hasten with extreme caution.