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We have all heard the saying ‘the straw that broke the camel’s back’. The early evidence would suggest that the straws are piling up on the Australian property market, which is finally responding and showing early signs of slowing down.
At the moment, a few creaks and cracks are visible from early statistics supporting the view that value growth is decelerating. But it may not be long before the changes completely flow through to the market place and property value growth stalls completely. We appear to be in the ‘creaking’ and ‘cracking’ phase right now.
There will be no references to popping or bubbles from me though. I do not believe we will have massive correction. I have ‘relative’ faith in our system of governance to be able to pull levers up and down, to both stimulate or restrict the flow of money into our property markets to appropriately influence values. We must still remain vigilant when we influence markets. If we do not make adjustments gradually there can be dire consequences. I also have faith that the many and powerful vested interests we have as a nation in preventing property values from tanking, will do everything they can to ensure that this does not happen. The reality is if anything is too big to fail, it is the property market. If the bottom was to drop out of the property market, we are all in trouble. Let’s be clear on that.
For those who worry that the property market will have a massive correction, just think about how hard you would work to ensure you keep your home and wealth in times of trouble, and now extend that out to a macro level. The most powerful institutions in our country, government and many of the largest businesses and thousands of SME’s, not to mention Mums and Dads have a lot to lose! It is estimated that one in three Australians work in an occupation that is directly or indirectly related to property. This means nearly all of us living in this country rely on a robust and stable property market. So, I guess really what I am saying is that I have faith in Australian’s as a collective group of people.
In my view, for a large correction to occur, it would most likely be driven by external factors such as other countries and economies whom we rely on to provide us with investment and trade. We are a capital importing country. What that means is we import more money than we export, and therefore we have a greater reliance on other countries in this area. Even our largest deposit taking institutions, the major banks, rely significantly on overseas investors to lend them capital that they lend to you to enable you to purchase a property.
This is why APRA announced yesterday that the major banks need to hold an additional $8 billion in capital to ensure that they are ‘unquestionably strong’. What this essentially means is that they want the major banks to have a larger cash buffer than they do at the moment, just in case the proverbial hits the fan.
Ultimately, big business or personal money management, when you remove the financial jargon and technical gumpf, requires all of us to have a significant cash buffer to protect us during changing or difficult circumstances. This allows us time to realign our financial position before we run out of money. People and businesses only ever go under when they ‘run out of money’ to pay their expenses.
A report in which the Property Council of Australia has surveyed 1,700 property professionals has predicted that property price growth is set to halve in the next 12 months. If this were to happen, it would not occur uniformly. Some properties will slow down by more than half, some will slow down by less than half and some will even decrease in value if the prediction comes to fruition.
The impact of APRA’s macro prudential regulatory changes will not affect each property or market equally. The key to property success, whether in a booming market or decelerating market, is selecting quality property, that is affordable to you, ensuring your finances are ‘unquestionably strong’ and that the purchase fits into your long-term plans. This way you can be assured of being able to ride out the various bumps, cracks and creaks that life throws at you as the property market and economy itself ebbs and flows through the different cycles.
All the best with your Property Planning.
David Johnston is the founder of Property Planning Australia and the author of ‘How to succeed with property to create your ideal lifestyle’ and ‘Property for life – using property to plan your financial future’.