Guess What? Nobody Really Loses Out When the Market Softens

Although the Australian property market is not about to crash — certainly not in the way the American market crashed in 2008 — it will experience what’s called a ‘price correction’, where the market softens and property values return to a more sustainable level, which occurs in every property cycle. Contrary to popular opinion, a soft market does not mean that people stop buying and selling property altogether — which would actually result in a depression. No, a soft market just means there are fewer buyers.

Isn’t Fewer Buyers a Bad Thing?

It’s true that more buyers means higher property prices — a basic tenet of supply and demand — but just because there are fewer buyers doesn’t necessarily mean a substantial decrease in property values. In a soft market, there are typically fewer buyers, yes, but there are also fewer sellers, as all those vendors who don’t really want to sell their home unless they get an offer they can’t refuse, tend to stay put.

If you’re planning to buy and sell at the same time, then it’s usually smarter to do so in a softer market than a hard one. If you buy in a hard market — that is, where buyer demand outpaces supply — you’re likely to spend more on your property than you would do in a soft market. The only reason people buy in a hard market is because there’s some other driving force that makes it an attractive option — low interest rates, for example.

And the Winners in a Soft Market Are… Buyers and Sellers?

Most people who sell in a hard market, but don’t have to buy right away, end up renting until the market cools a little bit, and then they buy. If you didn’t sell when the market peaked, selling while it’s on its way down is the next best time, as you’ll capture some of those cashed-up buyers who sold when the market was hot, giving you time to find somewhere to buy, as well.

If you’re planning to buy and sell at the same time, a soft market is the time to do it. Generally, property values go backward by about 5-10 percent in a soft market (7.5 percent is the figure predicted for 2016; in 2012, prices fell by 7.4 percent), so buying and selling at the same time is much of a muchness. Selling in a soft market, however, and then waiting for more properties to come on the market when it picks up again is a mistake.

So Who Loses in a Soft Market, Then?

No one really loses in a soft market, given that it’s a normal response to high growth in property values. In fact, a softening market in regions where price growth outpaced income by substantial amount often provides much needed relief to people who had been locked out of the market, or unable to keep up with soaring rents (when fewer people can afford to buy, the demand on rentals increases — that’s in addition to people who rent until the market slows down), neither of which are healthy for the economy.

Besides, unless you bought your home in a hard market, even with a 7.5 percent reduction in property values (the figure economists are anticipating for capital cities such as Sydney and Melbourne), a property purchased in 2011 would still enjoy an increase in value of approximately 5.8 percent per annum, based on the Residential Property Price Index (RPPI) — equating to a far greater gain than estimated loss.

Before You Sell in a Soft Market

Always do your research. If you don’t have to sell, then don’t. If you’re in a capital city or major area that’s close to sought-after amenities and you can afford to wait until the market bounces back, do. Otherwise, if you have to sell, then ensure you research your local area thoroughly.

To keep reading about the property market, including the likelihood it may crash or how negative gearing can impact it, continue to read our blog. Alternatively, subscribe to our website to receive access to our free education guide about buying and selling in Australia titled, What You Really Need to Know about Selling Your Property.