What Would It Take for the Aussie Property Market to Crash?

According to a few recent reports in the media, Australia is heading toward a crash in the property market, not unlike the US property market crash that caused the GFC in 2008. If you’re a long-term follower of the property market, then this news shouldn’t come as a surprise: economists and researchers have been warning us of an impending housing market crash since 2002, yet the market continues to show no sign of slowing down.

The fact is, a crash in the Australian property market is very unlikely; never mind a crash that would see property prices decline by between 30 and 50 percent like they did in the US in 2008. If anything, the market is more likely to soften, particularly in the immediate few months as the property market enters its usual winter downturn, than it is likely to crash.

We decided to investigate the kinds of conditions you would need to see if the property market were to experience any kind of crash closely mirroring the property market crashes in the US, Spain and Ireland.

1. Housing Supply Would Have to Outweigh Demand

A key underlying factor in America’s housing market crash was that, between 2000 and 2008, new-home construction increased by 23 percent, in a market where housing was not in short supply. When buyer demand for new properties decreased — in response interest rates returning to their pre-dot-com market crash levels — the property market was left with an oversupply of homes and too few buyers.

Australia is in the throes of a real housing supply crisis, particularly in Sydney and Melbourne, where demand is far outpacing supply. Although an average of 158,00 new dwellings are built each year, there’s still a deficiency of 100,000 dwellings nationally, which is keeping housing prices at record highs.

2. Interest Rates Would Need to Rise Significantly

The US Federal Reserve raised interest rates 17 times over a two-year period, taking them from 1 percent to 5.75 percent; just half a percent lower than they were prior to the dot-com market crash in 2000. Combined with an oversupply of housing, sub-prime mortgage lending was allowed to run rampant between 2001 and 2008, when the global economy finally collapsed.

The Reserve Bank of Australia meets 11 times a year. In order to experience similar market conditions as the US did, the RBA would need to consistently raise interest rates significant amounts almost every time they met. But even when interest rates reached peaked at 18 percent in 1990, house prices still remained steady, though the number of property sales dropped significantly.

3. Unemployment Would have to Rise Significantly

When unemployment reached its peak of 11 percent in 1992, and the RBA dropped interest rates to a low of 5.75 percent, the median house price in Sydney peaked at $183,000, for the first time since the recession and continued that trend upward. (Even during the height of the 1990s recession, property prices only declined an average of $4,750, while some cities, such as Brisbane, Canberra and Darwin, recorded upward trends in house prices during the same period.)

Although Australia’s unemployment rate has just risen 0.2 percent to 6 percent, it’s still significantly lower than what would be considered alarmingly high — around the 10 or 11 percent mark. Furthermore, our interest rates continue to remain low — at the time of writing, 2 percent — which is where they’re expected to stay, given the current unemployment rate.

It’s therefore unlikely that there will be a significant upswing in the number of people unable to service their home loans, due to unemployment or a sudden increase in living costs due to a significant interest rate rise.

4. Property Investors Can Negatively Gear their Investments

Australian property investors, unlike their American counterparts, are able to negatively gear their investment properties, allowing them to offset any rental losses against their personal taxable income. In addition, since 1999, when it was introduced by the Howard government, investors receive a 50 percent CGT discount, significantly increasing the profit they make on the sale of an investment property. This has helped keep the property market stable, while also contributing to the steady growth in property prices since the mid-to-late 1990’s.

5. Australian Mortgage Holders Remain Financially Liable, Even If They Default  

In the US, there’s almost little to no incentive for mortgagors to meet their loan repayments when they find themselves in financial stress and unable to service their loan. And once the lender seizes the home, it’s the lender — usually the bank — who has to wear the shortfall between the sale price and the value of the loan. That’s certainly not the case here in Australia. If a home is seized by a lender and the sale price doesn’t meet the value of the loan, the mortgagor continues to remain liable for the shortfall.

Australian property prices may be high, but our rates of mortgage defaults are low — delinquency rates across Australia have been declining steadily since 2013, when they peaked at 1.45 percent, to a low of 0.99 percent in March 2015. Compare that to the US delinquency rate, which fell to 5.54 percent in 2015, the lowest it had been since 2008 (the rate peaked at 10.1 percent in 2010).

In Short, The Australian Property Market May Soften, But It’s Not Likely to Crash Anytime Soon

What’s more likely to occur is a softening of the property market here. This is very different to a US-style crash, where housing prices had 30-50 percent wiped off their value. If the market softens (which is already happening in certain areas of Australia where the demand for housing exploded, for example, those townships affected by the mining boom) there is likely to be a reduction in property values by about 5 to 10 percent, which is customary in such circumstances.

There are, however, some other factors that could affect the property market, particularly property values, which relates to negative gearing and possible changes to the capital gains tax (CGT), which the Labor and Coalition parties are currently arguing about.

To learn more about buying and selling property in Australia, subscribe to our website to receive access to our free educational info, including our guide, What You Really Need to Know about Selling Your Property. This guide will take you through each step in the often confusing and stressful sales process, with helpful tips by industry experts along the way.