How low will prices go?

© Property Professor articles — www.thepropertyprofessor.net.au.
Reproduced with permission.

It is now four years since the Global Financial Crisis (GFC) hit Australia. All capital cities have experienced property price falls (see table below) and the question is being asked “How low will property prices go”?

Capital City / Decline in Home Values from their peak – Oct 2012 to Dec 2012
Sydney / -3.2%
Canberra / -4.2%
Adelaide / -5.1%
Perth / -5.8%
Melbourne / -8.4%
Darwin / -10.7%
Brisbane / -11.2%
Hobart / -13.9%
Australian Capitals / -5.7% (weighted average)
Source: RP Data

For us to forecast where property prices might go in the future, it is useful to first check what has happened in the past.

Below are some examples showing property price movements as a result of a catastrophic/financial event. The middle rows show price movements in the first four years from the beginning of the event. The last rows shows price movements in the second period of four years.

Event: World War 1
Change in property prices: 1914-1918 +4.3% pa
Change in property prices: 1918-1922 +8.2% pa

Event: Great Depression
Change in property prices: 1929-1933 -10.2% pa
Change in property prices: 1933-1937 +5.1% pa

Event: World War 2
Change in property prices: 1939-1943 +6.0% pa
Change in property prices: 1943-1947 0% pa

Event: Australian Recession
Change in property prices: 1990-1994 +2.4% pa
Change in property prices: 1994-1998 +4.00% pa

Event: GFC
Change in property prices: 2008-2012 +3.2% pa
Change in property prices: 2012-2016 ?

There are a few points to highlight:

• In most cases, property prices performed better in the second period of four years. This makes sense as the shock of the event has worn off and people are learning to deal with the situation.

• The reason why property prices didn’t move from 1943 to 1947 is that the government had placed restrictions on the price property could be sold for. Interestingly after this artificial halt on prices, property increased at 133% in the next 12 months!

• Property prices continued to increase even during the war years.

• The worst impact on property prices was as a result of the two financial disasters; the Great Depression (-10.2% pa), then the 1990’s recession (+2.4%).

As the GFC is a financial event, we should take particular note of price movements after the Great Depression and 1990’s recession. The second period of four years after both initial financial shocks show that property prices increased. In all likelihood, the same will happen after our most recent financial crisis.

In summary, what is clear to me is that Australian residential property prices will not drop over the next four years. History is a great teacher and the indication is that property prices eventually increase after the initial shock of a financial crisis has diminished.

The moral of the story is not to panic and sell property because you think prices will drop sharply. Just be patient as property prices will rise again in the not too distant future.

Happy House Hunting!

Written by Peter Koulizos, university lecturer, author and buyers advocate.

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