Investors to feel the pinch in property overshoot

by Miklos Bolza16 Jun 2017
The Australian property market is now in an overshoot which could lead to a changing environment for investors in the future.

Michael Matusik, property analyst and founder of Matusik Property Insights, told Australian Broker that while we should be entering a downturn, the national property market has continued upwards and now awaits a correction in the future.

The downturn comes because of long-term 50 to 75-year market cycles as well as short-term “pulses” that impact how property moves, he said.

“We’re at the peak of the long-term cycle, so the next long period of time will be harder. I’m not saying there won’t be price growth but it won’t be a flood that lifts every ship.”

Today’s short-term pulses include drivers such as the need to house more people in urban areas, he added.

Matusik said the correction had already hit with prices in certain markets. One reason for this downwards swing is that Australian property is highly expensive when it comes to returns offered to investors.

“Price growth isn’t necessarily there and looking forward, it’s just not going to be as easy as it once was,” he said. “If you bought a property 10 or 15 years ago, you could simply wait seven or 10 years and it’d double in value. I reckon you’d be very naïve to think that will apply generically moving forward.”

In Sydney, property values would not reach $2m in ten years because people would not be able to afford the price, Matusik said. Furthermore in areas such as Southeast Queensland, people were paying prices that “did not make economic sense”.

“One of the reasons is that people are still living on credit. However, credit is losing its impact. Traditionally, if you’d borrow $1 and it would generate between 50 and 75 cents,” he said. “In the western world, it’s now about 25 to 30 cents.”

This was detracting from the upside of providing that debt, Matusik said. For instance, when someone buys a residential property for $500,000 and rents it out for 4% gross rental yield, the owner will sell it assuming the price or the rent has gone up.

“If I go through the last 25 years, rents don’t keep up anything like those prices. So you’re expecting that if you’re going to make a price gain, somebody’s going to buy the property off you for 3% or 2.5% yield in five to ten years.”

With yields so low, it was important to ask what was propping up the investor market.

“It doesn’t make sense,” Matusik said.

With the overshoot driven by low interest rates, the influx of foreign buyers, and government intervention such as first home buyer grants, the market was being pushed further than it would go normally without a correction.

“As a result of that, it’s a good time for many owners of property to try and sell.”

However, around 85% of Australians “don’t give a brass razoo” about this outside of what they can borrow against their house, Matusik said. That is, unless they had some other specific goal such as downsizing, moving interstate, etc.

“For investors, now is the time to buy something that is best for long-term. There are some offers coming through because of this overshoot – the Brisbane inner city apartment market is an example of this – where you can buy at really good value.”

If a crash occurs instead of a correction, it would be by accident and not stealth, he said.

“It’s likely to come from debt with the RBA holding a low cash rate and people borrowing more and more money. However this would be in concert with something that happens overseas such as if we saw an economic downturn or geopolitical change in China.

“Then in concert with this type of shock, something would happen with a major financial institution. This doesn’t have to be the big four banks but it can be something else in the world like Fannie Mae in the US before the GFC.”

These events would reset the cost of money and were not outside the realm of possibility, he said.

Related stories:

Average FHB age stable for two decades

Loan commitments at 23-month low

Annual Australian house prices jump 7.7%