“Indeed, prices probably are falling - gently. But I think there are enough differences in the US versus Australia dynamic between the US. We certainly shouldn’t assume there is going to be a crash but some combination of a general decline in prices and gradual growth of income (was expected).”
- Reserve Bank governor Glenn Stevens

I think he’s right. What I’m seeing is that house prices are slowly falling, but not by too much. It’s a ’soft landing’ rather than the bursting of the housing bubble. Prices do need to fall to bring them back in line with current income levels, and as Alex Brooks from domain.com.au points out, falling property prices can have a really positive impact:

“The value of owning a house is that it meets our need for security and shelter — it was never meant to be an “investment”. Rapidly rising property prices kill people’s dreams of housing security, so surely an unravelling of high prices is for the benefit of most people?”
- domain.com.au

If you’re buying and selling in the same market, falling property prices shouldn’t matter, and as I’ve argued elsewhere, they certainly shouldn’t put you off from buying a new home.

Anyway, some experts are frustrated by the ongoing negative news and opinions being expressed within the mainstream media.

“The property market is based on supply and demand fundamentals, such as property and employment growth, and these factors remain solid in many markets, including Brisbane. People need to remember that we are suffering from a financial crisis, not a property crisis.”
- Colleen Coyne

Some agents aren’t helping things either. I spoke with one Brisbane real estate agent recently who said that property sellers are telling her that a lot of other agents are really talking down the property market, and she’s becoming quite frustrated by this. I guess some agents feel that they need to talk down the price in order to get the sale, and to an extent that’s true. Some sellers are unrealistic about what they can achieve in the current market, and that needs to be talked through, but constant negative talk can be self-fulfilling.

Another real estate agent was telling me that he’s having no trouble selling appropriately priced homes and units. Yes, prices might be down on what they were last year, but as I’ve said elsewhere it’s still a good time to be buying and selling real estate:

1. Make sure you have a large deposit
2. Know the market.
3. Sell well.
4. Be in it for the long term.

Property prices go up and down, and that’s ok. Be smart about how you go about it, and you can do quite well. I work in the real estate industry, and my business is going absolutely ballistic at the moment. There are so many properties coming on to the market, and agents are getting really, really busy.

“In the past decade, the housing boom — including the welter of negative gearing — has seen their total debt double relative to their disposable income from 80% to almost 160%.

That is our great vulnerability. If Australia succumbs to the global recession, excessive household borrowing will be the greatest reason.

You may say, rather, that the root cause of the global crisis is greed and its ultimate transformation into fear. But it’s borrowing that facilitates greed and excessive levels of debt that generate so much fear when boom turns to bust.”

- “Homing in on the root of our woes”: The Age

“Leveraging” is what happens when you borrow a whole lot of money from your bank for the purpose of a house, with the hope that the value of that property will increase. When the price does rise, you use the equity in your home to buy more houses. Or a new boat.

Now imagine that going on right across Australia. Everything is well with the world, or so it seems.

But now, in 2008, we have hit the time for “deleveraging”. The banks have lost billions of dollars because of all that willy-nilly loanin’ they were doing, and they need to get their money back. Borrowers are forced to sell up, and when this happens on a major scale property prices are forced down. Banks are then left with homes that are not worth as much as they used to be, so they have to cut their credit by forcing more people to sell up in order to repay their mortgages, which in turn forces property prices down again. And the circle goes around.

Deleveraging by the banks has hit the USA hard, but it hasn’t yet kicked in for Australia. If it does, that’s when property prices will really start to fall. Fortunately the major banks in Australia are in a far stronger position than their American cousins, so we should be ok. However, it does mean that banks are unlikely to want to offer large mortgages in the current market, thereby limiting any possible real estate price surge.

At the personal level, deleveraging occurs when people realise they have to get rid of most or all of their debts. For real estate this means selling up and paying off the mortgage, leading to an abundance of homes on the market with the outcome being lower property prices. The sharp drop in interest rates over the past couple of months should help to minimise the amount of deleveraging by homeowners in Australia. With the monthly mortgage bill dropping, people might be able to get themselves through this tough financial time without having to sell the family home.

The end result: property prices will remain stagnant for a while yet.

However, there are a few conditions that you’ll need to meet before deciding to buy a new home:

1. Make sure you have a large deposit
If you’re buying real estate in the current market then you’ll need a large deposit, and make sure you can handle the repayments. If you’re already a homeowner then you should have built up some equity behind you. You could even downsize to shrink your current mortgage repayments if you have to. If your deposit is too small, your repayments could be high, and if you’re committing to anything over 25 per cent of the monthly budget to your mortgage repayments then you’re probably stretching yourself too far. Australia might be heading into a recession, and unemployment is expected to climb so don’t push your budget beyond what it can handle.

If you’re a first home buyer, then it might be worth waiting just a little to see if property prices are going to remain steady or drop further. If the only deposit you can put down is that $14,000 that Uncle Kevin gave you as an early Christmas present then you might want to reconsider. In fact, if prices are dropping then the big banks will be reluctant to provide you with the money you need.

2. Know the market.
This rule always applies regardless of market conditions, but at the moment you really, really need to know what property prices are doing in your area. If you’re prepared to take action as a buyer, you’ve got a lot of negotiating power, with a lot of properties to choose from and sellers desperate to make a sale. Some properties are spending 60 to 80 days on the market. If they’ve been priced too high, the seller may be willing to look at a lower price. However, you do need to know what’s going on so that you can pick up a bargain, not an overpriced lemon.

3. Sell well.
The problem with choosing to buy now is that you’ll generally need to sell your current property, and that can be a slow process (although I’m still hearing of properties selling in a matter of days of going on the market). With that in mind, choose an experienced real estate agent, and market your property well with professional photography, a floor plan and even a feature listing on the major real estate portals. If you want to sell, you have to give yourself the best opportunity to stand out from the crowd, so now is the time to spend a little more on top quality marketing services, not less. I’ve spoken with some of my real estate agent clients and they are reporting some quick sales when they’ve presented a professional marketing campaign.

4. Be in it for the long term.
With property prices shaky, now is not the time to speculate on property. A couple of years ago the old “slap ‘n’ dash” renovation was a genuine money earner, but now it’s looking vulnerable. However, if you’re looking to hold on to your home for several years, and not just 12 months, then any further slump in property values will probably be offset by a price rise somewhere down the line. And remember: a drop in property values is only actualised if you sell up.

So there you have have it. In my view, if you can’t meet all of the above conditions, then don’t buy, as you only risk getting yourself into a whole lot of trouble

Now some people might say that now is not the time to buy, and the arguments are certainly worth thinking about:

“But property prices have dropped, and they’re going to drop further!”
The value of your property may have dropped a little in recent months, but so has everyone’s property. The old cliche that “You’re buying and selling on the same market” is worth remembering. It’s called the property cycle, and basically you just need to get your head around the idea that property prices don’t always climb upward at 10 per cent a year. Prices go down, and prices go up, and that’s ok, so long as you can continue to make your mortgage repayments.

If prices drop further, then yes, you might be able to pick up a bargain in 2010. If you’re prepared to take that risk, then it might be worth waiting for a while, though you’ve got to remember that your current property would have also dropped in value.

“The economy is too unstable”
Yes, the economy is wobbly, but if you follow the conditions outlined above then you should be alright. Don’t overstretch yourself financially, and be well informed as to what’s going on in your area. If unemployment rises dramatically, then we may see a further drop in prices, likewise if a lot of retirees are forced to sell their home in order to downsize. But we won’t really know if that will happen until it kicks in.

This debate - to buy or not to buy - is also going on over at the domain.com.au blog. Some of the comments offer a pretty good reason to buy and not to buy, so there’s certainly a wide gamut of opinion out there. Has the Aussie property market hit rock bottom yet, or has it got further to fall? Again, some say yes, whilst others say no.

What do you think? Is now a good time for anyone to buy? Should first home buyers jump now, or wait?

When Prime Minister Kevin Rudd announced the new $14,000 First Home Owners Grant, their hopes were raised. Property prices have dropped slightly in 2008, and with interest rates coming down, property is as affordable now as it has been for quite a while. As a result of this, mortgage lenders have seen a huge increase in the number of first home buyers checking things out, and that’s great!

The problem, however, is that there is a risk that this boost for First Home Owners could push property prices up by more than the $14,000 grant, thereby making the grant obsolete. For those who get in early, it’ll be great. Act fast, and you’ll be set. Take your time, and you could miss out.

Some people have also been critical of the Federal Government’s increase of the FHOG. The Greens want “to ensure that any first home owners grants available for new houses are only for houses built with a high energy efficiency rating”. Professor Steve Keen is also critical of the Grant, saying they “added fuel to the speculative fire of finance”.

For details on the First Home Owners Grant, including how it applies to owners building a new home, check out the Housing Industry Association. To apply for a First Home Owners Grant, visit www.FirstHome.gov.au, and select the appropriate State.

This data is based on using an 1890 property selling for the modern inflation-adjusted equivalent of $100,000 US. Property values experienced mini-booms in the 1970s and 1980s, but it is the enormous spike in values that began in 1997 and finished in 2006 with a value of $200,000. Between 2006 and 2011, it is expected that prices will drop back close to 1997 values, a decrease in property values of 43.5 per cent. Note that it’s 2011 before American property values hit rock bottom.

Australian property values also climbed dramatically from about 1998 onwards. At the moment Brisbane’s median property value is about $450,000. If prices here were to drop by the same percentage as prices have dropped in the USA, then Brisbane’s median property value would be about $254,000 within 3 years. That would be massive, and in my view, impossible. Property prices have dropped in Australia, and they could drop further, but I just can’t see real estate prices going that low.

I’ve spoken before about the problem of rising sea levels and the potential for it to inundate Australian homes (see “Coastal homes still popular despite threat of rising sea levels” and “Warning labels recommended for coastal homes”). It is expected that sea levels could rise by up to 1 metre before the end of the century. However, new research has found that the Greenland ice sheet is melting faster than was first thought, and if that disappears it could add up to 6 metres to the global sea level. It might take anywhere between 100 and 1000 years for that worst case scenario to take place.

If you think insurance companies or the government will take care of you, think again. Coastal buildings are protected by insurance, but the land value is not, and it is the land value where the bulk of the property’s overall value sits. No land, no value.

What about the government? Yes, they have agreed to financially assist people affected elsewhere by buying back the homes (which is what they’ve done in Collingwood Park), but will they do that for the entire Aussie coastline? I doubt it.

What I expect to see is government assitance to build walls and levies to prevent rising sea levels from intruding onto property. The problem with this, at least in Queensland, is that climate change could also see an increase in cyclone activity, and if low-lying areas get hit hard then no wall may be high enough to keep the water out. May I present Exhibit A: New Orleans.

Do you live in a low-lying area close to the sea tidal river? Are you concerned by this? Or is all of this still too far off to even bother worrying about?

“Back in ‘87, the sharemarket was shunned, interest rates were cut significantly so cash was shunned, and investors decided to go into the property market.”
- Craig James in The Age

Further interest rate cuts are also a positive sign for the real estate industry. With every cut in the official interest rate, homes become that much more affordable as weekly repayments slide.

Then there’s the other side, with Professor Steve Keen suggesting that prices could drop by as much as 40%. Investors won’t be happy reading that, so they may stay away from property for now, or at least until things stabilise.

And with Australia going close to a recession, job stability is looking fragile so people won’t be keen to build on their mortgage by upgrading. Just thinking about it, this may lead to an increased demand for smaller properties as people seek to downsize (thereby shrinking their mortgage repayments).

According to Professor Steve Keen, Australia’s property market is set to drop. What we’ve seen in America has been bad, but what we might be about to see here could be nasty. But then you’ve got other people (especially real estate agents) saying that supply is still outstripping demand, and therefore property prices can only go up.

Given what has happened today on the Aussie stockmarket, I don’t think anyone really knows what’s going to happen to property prices in Australia. Demand for properties is high, the stockmarket is crashing, and interest rates are falling and will continue to drop. Each of these factors on their own would ordinarily have a very different impact on property prices. We could conceivably drop dramatically, remain steady with demand counterbalancing any possible drop, or a steady climb in values. To be honest, no one really knows what’s going on.

There’s just one problem, at least for NSW buyers.

The NSW Government initiated a land tax a few years ago that resulted in a lot of Sydney investors leaving the market and investing in south-east Queensland. Well, now Sydney is paying the price, and there are calls for the taxes to be cut in order to encourage more investors.

Elsewhere in Australia the signs are good for investing in real estate. It’s a buyer’s market at the moment, with property sales staying fairly slow as there’s not a lot available for this time of year. And with real estate prices seemingly at a low point in the property cycle, the future looks good for capital gains over the long term.