A Property Market Crash Looms

• Tweet

For once in my life I can say that I picked the crash. Not the stock market of course, but one that the average person probably cares more about, Jessica Simpson and Nick Lachey announced their marriage was over.

For a time, it was a match made in (marketing) heaven, a teeny-bopper princess and her boy band-member prince – they even spawned a reality television show.

Sure there were rumors about Nick getting frisky with strippers in Vegas, and Jessica wasn’t exactly the type of wife that would have the meat and three veg on the table by the time Nick finished miming school. But was I the only one who saw trouble brewing by the end of the second series?

Right now the Australian property market is having its own Jessica and Nick moment – but we’re still in the honeymoon phase.

Fuelling the fire

In logic that even Jessica could understand, economists from the OECD came out with a report this week that poured some cold water over an already shaky property market.

According to their research, Australian property prices are overvalued by a massive 52 per cent.

Fuelling the mother of all booms was sustained historically low interest rates, and more importantly, the willingness of borrowers to gorge on cheap cash.

The report outlined that household debt had skyrocketed from 49 per cent of income in 1990 to 143 per cent in 2004.

Let’s forget the forensic analysis and the complicated economic theory. It’s simple. Today people have historically high rates of debt, at a time when interest rates are at historical lows.

A matter of time

When (not if) interest rates rise, many people will be left with a debt hangover that two Aspros and a greasy brekkie won’t fix.

Faced with the facts you’d expect property experts – like real estate agents, bank economists and real estate developers – to be getting a little cautious.

If they are, they’re not telling us. Most market experts are predicting a ‘soft landing’, or ‘modest growth’ in the next few years. In fact, according to Enzo Raimondo, chief of the Real Estate Institute of Victoria, prices have already ‘bottomed out’.

Their analysis is actually forecasting modest price increases in property over the next few years.

When I questioned Raimondo about the fact that historically every boom has never failed to produce a subsequent bust and that studies suggested the bigger the rise the bigger the fall, he said: “This time it’s different.”

Vested interests

The problem is that many of these pros are acting like Jessica and Nick’s publicists, who have a vested interest in ensuring that they don’t go the way of Britney and Kevin, thus ensuring there’s a new season of Newlyweds to help pay off their Visa bill.

However not everyone involved with the property industry has their blinkers on.

“Aussie” John, founder and chief of the Aussie group issued property investors with a blunt warning last month: “Get out of the real estate market now.”

The danger zone

The people with the most to lose are those caught up investing in property at the top of the boom. Many of these investors followed the property passport to riches; they borrowed lots of cash to make a loss, in order to claim a tax deduction.

Today many are experiencing what’s known as ‘negative equity’ – the value of their property is less than their outstanding loan.

Throughout the property boom investors climbed over themselves to get a slice of the action, pushing investment borrowing to record levels and first home ownership to record lows.

Now that things have slowed the Real Estate Institute of Victoria issued a press release advising first home buyers that “now is the time to buy” a property in the eighth most expensive city in the world.

Take note

It’s important to remember these guys are in the business of selling houses, not investment advice.

High cost carries a high risk right now. In fact, now is the time to take heed of historically low rental yields. Save your pennies in a high-interest savings account and wait for increasing interest rates to bring house prices to more affordable levels.

When this will happen I have no idea. Instead of self-serving forecasts designed to persuade people to buy more property, let’s look at a real-life example.

In the 1980s Japan went through a similar housing boom to the one we have just experienced. The result was a 40 per cent drop in values and a bust that lasted 14 years.

As Jessica and Nick will tell you, sometimes it pays to take your time when entering into life-changing decisions. More often than not it’s the fools who rush in.

Tread your own path!

Photo: http://www.flickr.com/photos/pagedooley/4052874486/

Follow @scottpape on Twitter

No related posts.