January 27, 2016 by Dymphna 9 Comments

Fact-checking the fear


There’s a lot of fear out there right now… Let me fact check a few of them for you.

“Right now has got to be the worst time to buy property.”

Sometimes I swear I’ve got a sign on my head that says, “Please tell me why the property market is about to crash.”

For years now people have been telling me about the coming “crash”. Like Harry Dent and that “40% collapse” he trots out every few years.

(Any day now.)

But look, I’m not going to piddle in your pocket. These are challenging times. There are a lot of headwinds that the property market is facing, and there are a lot of nervous investors out there. I get that.

And 2016 came out of the starting blocks and fell flat on its face. Suddenly it was 2008 all over again. At least that was the go-to comparison.

(And I might point out that if you bought in 2008, you’ve probably done pretty nicely thank you very much.)

But let’s take a deep breath, take a step back, visualise a tranquil mountain lake, and consider what the down-side risks for property actually are.

Now I think the panic we’ve seen so far this year, at least when it comes to property, is the combination of some slow-burn and quick-burn factors.

And as a generalisation, I’d say the slow-burners are in property, while the quick-burns are in external factors.

So just to recap what our slow-burners are, the big one is still that tighter credit environment that the APRA changes have brought about.

Just for our new readers, mid last-year APRA announced that they were worried about how quickly the banks’ investor mortgage books were growing. They were lending too much, too quickly (at least relative to their capital bases).

So APRA wanted to slow things down a bit. The banks didn’t want to get on the wrong side of APRA, so they started making it tougher for investors (and eventually owner-occupiers as well.)

This took a few forms – higher interest rates, lower loan to valuation ratios, changes to how much they valued rent and income, as well as restrictions to how much they would lend.

Now obviously this is going to affect how quickly property prices can grow. There is no way that it can’t.

It’s holding down the buying power of the overall market. That means less pressure on prices.

The question though is does it mean falling prices, or prices growing less quickly than they used to, but still growing?

We’ll have to see, but my money is on the later. Many markets are undersupplied (even accounting for the boom in foreigner-focused apartments), and soon banks will be back in APRA’s good books (expect that in the middle of the year), and the restrictions will ease.

So this is a slow-burn story. It’s been a long time in the making and it will take a while to play out.

However the pointy end of those restrictions is being felt right now, just in time for the market to run smack into stock-market mayhem.

And so here we have our quick burn factors. And it’s quick in the sense that sentiment seemed to turn on a 10c piece over the Christmas break. The US Fed raised interest rates (a smidgen) for the first time in a long time (because, believe it or not, they think the economy is getting better), and one soft print of data out of China, and suddenly people are talking about the apocalypse.

There are some real concerns for the global outlook to be sure – think about the massive chiropractic adjustment falling oil prices have given the global economy – but how did January become a danger-zone?

Nothing but herd mentality.

And it’s interesting to think about what would happen to Australian property if there was some kind of monetary melt-down – a GFC 2.0.

It might not actually be all bad. Of course no one wins if there some disease-driven apocalypse, but if we’re only talking about a major stock-market correction, then it’s not clear to me that Australian property is in for a shellacking.

First up, the property market and the share market march to the beat of their own drums. Up to a point, stock market falls don’t translate to property market losses.

However, if it looks like a share-market meltdown might affect the real economy, we could well expect further interest rate cutss. There’s still about 1.50% room to move there. If the RBA had to cut a full percent, based on history, that would give property prices a big lift.

Property also still has, rightly or wrongly, the safe-haven status it picked up in the first years of this decade. At the height of the QE money printing experiment, there was a huge rally in the gold price – it was everyone’s disaster hedge. A lot of money flowed into property markets around the world as well – especially in mature economies like Australia and Canada. It was real and it was in fixed supply – unlike money.

Gold has since lost its shine – gold prices are still miles off the bubble highs. But not property. Property has been a consistent performer.

Now we could argue about whether property is actually a hedge, but if enough people think it is, it is.

And so I could see a scenario where some emerging market collapses, global share markets go into a free-fall panic, and we actually see a tonne of money heading towards Australian property.

It could be big news.

Now I’m not going to make that my central scenario, but the point is that global markets are complex. Fear in one doesn’t necessarily translate into disaster in another.

Its never so clear cut. So is it the worst time to buy property? Well, if fear is holding down vendor expectations, it could actually be the best time to buy property.

My point is that there are challenges and there are headwinds. These are probably the most challenging times for Aussie property since the GFC, no doubt about that.

But I’m not going to start flapping about just because there were a few headlines about stuff that may or may not have anything to do with me.

And I keep bringing it back to this point – if you’re investment strategy swings on whether the “market” rises or falls, you don’t have an investment strategy, you have a gambling problem.

You’re investing like an amateur. You don’t want to play that game. But there is a game above that one, where you’re manufacturing your own growth and your own opportunities.

And that game exists no matter what kind of market we’re in.

The only question is, are you ready to take your game to that level?