The Australian property market has continued to soften coming into 2019 with declines led by Sydney and Melbourne where prices reached unsustainable levels in the boom times. As for other major cities in Australia, they are probably a bit better placed – either they didn’t have a boom, and therefore probably won’t have a bust or in the case of Perth and Darwin, the bust has already happened.
So what is the outlook from now?
Several headwinds are likely to continue to drag on the market, which includes:
- Restricted credit with tighter borrowing conditions – people cannot borrow as much anymore but on the positive side, APRA has lifted restrictions on investment lending and credit conditions should ease now the Royal Commission is over.
- Oversupply in the apartment market and city fringes – it will take some time for supply to work through the system and it’s prudent to avoid the apartment market, particularly as issues with build quality manifest themselves in the years ahead.
- Restrictions on foreign investment – this is unlikely to return previous levels that peaked in 2015 given the higher stamp duty costs and restricted credit for overseas buyers, as well as tighter capital controls by the Chinese government preventing funds leaving the mainland.
- Uncertainty ahead of the Federal election – this is being exacerbated by changes put forward by the Federal Labor Opposition to increase capital gains tax and restrict negative gearing, either way, this will pass.
Will there be a crash?
While things may seem delicately balanced, on the current outlook, a crash is unlikely. Nevertheless, a weak housing market is going to be negative for the economy. The decline in housing construction will soften employment and the fall in home prices will make Australians feel less wealthy and decide to spend less.
However, interest rates should remain low and accommodative for some time keeping mortgage payments affordable and delinquencies under control. Furthermore, the massive investment underway in infrastructure projects will dampen the impacts of a decline in housing construction employment. The key thing to watch will be employment – so far it has remained robust, but if it goes the other way, things will get very painful.
Where to from here?
A home is a place to live, what it is worth is just a number that fluctuates over time, so there is no need to worry, provided you do not have too much debt. Those seeking to upgrade or enter the market for the first time will see the price declines should be welcome news. Investors who entered at the top of the market may find it tough going in the coming years, but if you have bought in the right area, long term fundamentals will see you through the cycle.
Its difficult to see a catalyst for a reversal of the trend any time soon, but that is no reason to panic.
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.