Crash, bang, wallop, Australian property prices under pressure – or are they?

by Mark Benson on February 7, 2012

in Property in Australia

Crash, bang, wallop, Australian property prices under pressure - or are they?

Last night’s surprise decision by the Reserve Bank of Australia to leave interest rates unchanged caught many economists offguard. The general consensus of opinion had been a reduction from 4.25% to 4% as a means of supporting the economy from potential outside influences. However, while news that the Reserve Bank of Australia decided against a reduction in base rates does on the face of it imply a stronger than expected economy how will it impact upon the Australian housing market?

Should we expect a crash in Australian property prices?

While there is no doubt that Australian property prices have performed better than the vast majority of their developed country counterparts there are some who believe that prices are artificially high in some areas of the country. One issue that is coming to the fore is a very fact that in some ways Australia is seen as a “safe haven” in these troubled times which can lead to artificially strong support for various areas of the economy and the country.

That is not to say that Australian property has been pursued to levels which are unsustainable in the longer term but the general economic situation and outside interest from investors has given support to the overall economy. So where does this leave property values?

Is last year’s 4.8% reduction in house prices a precursor to a crash?

Opinion is most definitely split upon the short to medium-term outlook for Australian property prices and it is not difficult to see why. On one hand you have the economic situation in Australia better than the vast majority of developed countries while on the other hand you have concerns about the European situation, European finance, China and worldwide credit facilities.

Buckle up, the crash is on the way!

Those who believe that a property crash in Australia would be unexpected are pointing towards the unemployment figures and the fact that historically unemployment has fallen before property prices. However, only a few years ago we saw the worldwide economy fall dramatically after mortgage issues in America spread right across the world economy and worldwide banking system.

In many ways the situation in America saw house prices fall and then unemployment fall as a direct consequence of mortgage issues. Despite the fact that the vast amount of Americans rent their properties, there had been a significant increase in property purchases as the market continued to move higher and higher to levels which were unsustainable. Once the bubble burst and the banks quickly realised that property values held against mortgage arrangements were unbalanced we saw a number of properties very quickly flood onto the market.

This situation led to a credit crunch where effectively all areas of the financial industry were impacted meaning that businesses and individuals were unable to refinance their debts and many were forced to sell up their main assets, the vast majority of which related to housing stock.

Buckle up for a bumpy ride but no crash!

Those who believe that the Australian property market will avoid a dramatic property crash have not discounted the possibility whereby inflation will outstrip property price increases over the next 10 years or so which will effectively see the real value of property fall. This mild reduction in relative property prices is in many cases a “silent crash” but the effects and the headline grabbing titles would be very much subdued.

There is no doubt that hysteria with regards to the words “property crash” can lead to a difficult situation becoming even worse. It is possible to scare people into a situation where literally it is a case of “the last person out to knock off the lights” with properties pouring onto the market and sellers forced to take ridiculous prices thereby devaluing the market as a whole. So if the authorities are able to maintain a calmness going forward and look to bring inflation under control in the short, medium and longer term then even a relative reduction in the real value of property would not be a disaster.

Would you pay up for Australian property?

The question as to whether you would pay up for Australian property is at this moment in time something of a no-brainer because while the Australian economy is set to grow by 3% in 2012, there are still many outside issues which could affect the short to medium term performance of the economy. There are few investors who would bet significant money chasing property prices in Australia, even though some see this as a safe haven at the moment, when credit issues in Europe are still very much headline news.

It is naive to suggest that issues outside of Australia will not have an impact upon the Australian economy because the worldwide economy is now more intertwined than ever before. The Australian government is also well aware that the natural resources sector has played a major role in economic growth in the short to medium term although if China were to experience problems or perhaps India was to take its foot off the pedal of growth this would have an impact upon the worldwide economy and Australia.

Caution is still the watchword

While talk of a potential crash in the Australian property market is most certainly overdone it is sometimes helpful to see the argument from both points of view. True, unemployment will play a major role in any further pressure upon the Australian economy and Australian housing market, but as we saw in America in some circumstances property price reductions can lead to increased unemployment as easy as unemployment can lead to property price reductions.

The very fact that the Reserve Bank of Australia decided to leave base rates unchanged yesterday gives them more scope for reductions in the short to medium term if the overall global economic outlook was to take a down turn. So far the Australian government and the Reserve Bank of Australia have played their cards perfectly and while there are short-term issues to consider they still appear to be focused on the medium to long-term outlook and prospects for the country.

Therefore, it is no surprise that the number of expats looking to move to Australia has remained relatively high even in these troubled economic times.

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