Should property investors be worried about prices falling and the market slowing down?

Should we be worried about prices falling and the market slowing down recently in property? DG Institute Founder and CEO, Dominique Grubisa explains what property investors should expect from a cooling market and how to take advantage of the opportunities that come with it. 

When I travel around the country I get a real feel for market sentiment, and I speak with a lot of experts at our events, and one of those experts is Tim Lawless from CoreLogic. So he’s the head of research for property data in the Asia Pacific region, and as an analyst he looks at very, very granular data about what it means for market and we regularly have him on our stage.

So I’m always attuned to what Tim has to say about the property market. He’s the go to guy for property in Australia, and I’m not just talking about moms and dads, for government, for institutions, for sophisticated investors. They all look to his analytics and data, and I caught up with him on our last tour and asked him about the market because the most burning question people have is, when do I get in? Has it hit bottom? Is it going to just crash?

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There are people out there in the media saying it’s going to drop 40%. That tends to start people panicking. Don’t panic. Tim’s data and all the research and all the chief economists at all the institutions weigh in on this as well, and the general consensus is that our market had been flat for a long time. So it’s played catch up.

Instead of having steady growth over time, we have no growth and then we caught up. So we’re back on trend where we always should have been, and markets don’t just go up, and up, and up, and up, and up forever. That would be a bad thing. We don’t want that. That’s when you get bubbles, you get booms and then you get crashes.

What we’re seeing now is a market that’s caught up and then a market that’s been slowed down intentionally and responsibly by our governments, and by the Reserve Bank and the powers that be, that want to control our economy because it’s no good for us if markets just peak and go through the roof and then crash and burn. So they’re always watching growth.

Now they’ve got very low interest rates. Interest rates mean, the price of money. When money is cheap then people can borrow and they all get their hands on credit. They flood into the property market, that’s just the way it works.

Normally, the Reserve Bank when they saw a property boom they’d raise interest rates. But, they’ve decided not to do that this time, because they’ve got a balancing act of lots of economic forces going on. What they’ve said is, “We will control property but we’ll do it through APRA.” So that’s the Australian Prudential Regulation Authority. They control how banks and how credit is provided in Australia, and what they’ve done with APRA is they’ve tightened all their guidelines. They’ve said to banks, of all your loan books that you’re lending out, your pot of money that you’re lending out to residential investors, what we would ask is that that only be 30% of that money lent to investors, and 70% has to go to owner occupiers.

Banks had vetted over 50%, 60% in some cases. So they have really had to cut down lending to investors, and what that has meant is that the market has naturally cooled. Are the fundamentals going wrong and spiraling out of control? Have we made false assumptions? Are people all just selling up and running for the exits? No, it’s just a normal market cycle, and some cooling being put on it by the powers that be, for the greater good of the economy, and to keep property prices steady, so that it is better off for everyone. So definitely not heading for the exits, definitely not crashing and burning. In fact, a perfect opportunity for you, because in market cycles, the smart money always gets in when the market cools down.

What happened? George Soros, really famous investor once put it a little better than that, more eloquently. He said, “When my taxi driver tells me to buy shares I know it’s time to get out of the stock market.” And it’s the same sort of thing, the successful investors get in when everybody else is scared, and when everybody else has a head of steam and they are all buying, buying, buying, they tend to stand on the sidelines, the smart money.

What’s going to happen now?

1) Now is the time that those in the know are coming into the market.

2) Now is the time you’re going to get heaps of opportunity, because what’s happening is those investors who had those loans that are now not available because banks have had to cut their loan books down, because of APRA to 30% of their money going to investors, they’re going to be a lot more choosy.

3) Now those investor loans are only for five years. So the Reserve Bank has said that there are billions, over sixty billion of those loans, dollars worth, due for refinancing that now won’t qualify with harsher standards.

There are going to be people who will need to refinance their loans and who won’t be able to, who will be looking to sell. And that is an opportunity, that’s filling a need in the market.