Why first-home buyers shouldn’t be hoping for a property price crash
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It’s no surprise first home buyers facing the prospect of record high house prices may be feeling optimistic after a week of commentators predicting a price crash.
But while Australia’s leading economists consider the prospect of such a crash to be “outrageous” and unlikely to happen, even if such a crash did eventuate it might not be quite what first-timers had in mind.
Here are five things that would happen if the property market dropped 50 per cent.
Difficulties getting a mortgage
Though many first-home buyers would think lower house prices would make it easier to buy, it might not be the case, BIS Shrapnel senior manager residential Angie Zigomanis warns.
“Banks would get a lot more conservative with what they’re lending, or they might not lend at all,” he said.
Those with a large deposit may still be able to get on the ladder, but it’s likely they’re few and far between.
“First home buyers are usually at the margins, they’ve had to borrow 85 per cent to 90 per cent-plus and any tightening of market will hurt those people the most,” Mr Zigomanis said.
SQM Research managing director Louis Christopher said an aggressive restriction in lending across the board, even with very low rates from the Reserve Bank, would be likely.
“There has been some testing done, which found the banks could comfortable withstand a 20 per cent decline, but there hasn’t been testing at 50 per cent,” he said.
“Lending facilities to first home buyers may well be restricted if a crash happened.”
One of the largest costs faced by first-home buyers when they are saving for a deposit is rent.
After construction tightens, there would be a chance that rents would be on the rise with fewer new properties available for rental, Mr Christopher said.
“When we look back at the global financial crisis and the US cities that experienced this type of price decline, there was actually a rise in rents post-GFC,” Mr Christopher said.
“Rents accelerated in late 2009 to 2010 as a result of a major undersupply of new housing, due to low dwelling prices that meant they couldn’t be developed below cost,” he said.
In a downturn in Melbourne and Sydney there would be a “medium-to -longer-term risk” of such a rent hike occurring.
“It would be two to three years after the initial crash,” Mr Christopher said.
Domain Group chief economist Andrew Wilson said there would be no reason investors wouldn’t continue to make money out of their tenants, and even less incentive to sell if they faced negative equity.
“Transaction costs are very high in this country, it’ll cost $100,000 just to sell,” Dr Wilson said.
“Why would they sell? They’ll just continue renting it out and tenants will pay,” he said.
Fewer homes for sale
If property prices crashed, there would also be very limited choice on the market for buyers.
“Australians will do anything to hang on to their house and there’s no reason for them to sell unless they face unemployment,” Dr Wilson said.
While some states in the US provided non-recourse loans, where those whose homes were worth less than the mortgage could sell it and walk away owing nothing, in Australia home owners are required to pay back any extra leftover after selling.
Mr Zigomanis said for those facing transaction costs, there will also be less upgrading and downsizing activity.
“Through most downturns people just sit and wait for it to pass,” he said.
One of the first things to happen would be a slowdown in apartment development and housing construction as the ability to make a profit dwindled, Mr Zigomanis said.
While property that is now in the pipeline would probably come to fruition, there would be a standstill of new development.
“Development freezes as no one can profitably develop, it could become a problem as people have bought sites and cannot justify building,” Mr Zigomanis said.
Any oversupply being seen in capital-city markets would begin to balance out, and undersupplied markets would probably become even tighter.
One of the more damaging spin-off results of house prices plummeting would be a rise in unemployment as a result of the industries that are fuelled by the housing market.
“People waiting to get a home [when prices drop] can’t if they don’t have jobs,” Mr Zigomanis said.
Many of these jobs are related to the housing industry, such as real estate agents, financial services and developers.
Secondary to these jobs are tradespeople who work on renovations and home improvements, as well as discretionary spending on retail, including white goods, that are heavily influenced by housing profitability.
“People will spend money on renovations when their employment is secure, they feel comfortable taking on more debt,” Mr Christopher said.
“In a major downturn the reality is that job security would be very bad. There would be a flow-on effect to other sectors, you would see a big drop-off in construction services, which would effect employment,” he said.
This could cause the Reserve Bank to aggressively cut rates, which Mr Christopher said they would do before a 50 per cent decline occurred.