Inflation is soaring, interest rates are rising and rumors of a recession in Australia and around the world are peaking. The real estate market has softened after the highs of 2021 and is expected to decline further in the coming months.
Fear and uncertainty is great. But with the massive forecasting errors made by banks and the Reserve Bank (RBA) in recent years, many are wondering how accurate these predictions really are.
At the start of the Covid pandemic in 2020, forecasters predicted a 20 percent drop in property values in Australia. Based on the Australian real estate market of $7.71 trillion, this would equate to an Australian real estate depreciation of more than $1.54 trillion.
But instead, real estate values rose to $9.95 trillion through the end of 2021, reflecting a total increase in real estate values of more than $2.24 trillion. This reflects a forecast error of more than $3.78 trillion. How did they get it so wrong?
The state of the market today
The property market across the country has softened, with national house prices falling an average of 4.4 percent from the top of the market at the end of 2021, with some markets such as Sydney falling even further by 7.4 percent from the top of the market. the top of the market.
Banks and forecasters expect further declines, with ANZ recently releasing a report forecasting a further 20 percent fall in property prices before markets recover. If this happens, it would be the biggest downturn ever recorded in Australia.
These current and potential declines are largely driven by interest rates rising at a record 2.25 percent over the past five months to combat the current inflationary crisis. These rate hikes have added $733 to the monthly repayments on Australia’s average mortgage of $622,076.
The experts predict that rates will rise further in the coming months, adding to the pain for mortgage holders and putting further pressure on the real estate market.
What drives real estate prices
There are many factors that drive real estate prices, supply and demand form the basis, but these are influenced by what is going on in the economy, wage growth, interest rates, unemployment, family savings, inflation, and so on.
But over time, ‘sentiment’ is the single factor most strongly associated with movements in real estate prices. It may seem a little odd that our feelings are the main driver of what’s going on in the $6 trillion Australian housing market.
And here’s the thing, our feelings can change pretty quickly.
At the start of Covid, many Aussies were afraid of how things would turn out. In between panic buying toilet paper and hand sanitizer, we kept ourselves busy imagining how the world could end, and anxiety levels were insanely high.
But the world did not end. And the real estate market didn’t crash, in fact it went in the opposite direction, with real estate prices rising at the fastest pace through the end of 2021.
The forecasters are often wrong.
Over the years I have heard many predictions about the mythical real estate market crash in Australia. But during all the economic cycles of the past few decades, it just hasn’t happened.
Buy smart and earn money?
Here’s the thing – properties that were good properties 12 months ago while the real estate market was hot are still good properties.
Good features were good value back then. Good properties will be good value on the other side of this current market turbulence. And in my opinion, good qualities are a good value these days.
The predictions may be correct and the real estate market will weaken further in the coming months before recovering. If you buy a home today, you may look back a year from now and see that you could have bought it for a little cheaper if you had bought a few months earlier or a few months later.
But maybe they’re wrong again, and by waiting you missed the opportunity to make your next smart move.
Anyway, in my opinion it is highly unlikely that you will regret your purchase in 10 years time because by then the current real estate market’s wobble will be a distant memory.
If you buy today, it is crucial that you plan wisely.
You need to make sure you’re ready for interest rate hikes. You must be prepared for economic uncertainty. And you need to be confident that the home you are buying is one that will perform well in the future.
It is critical that you can afford your property and live the lifestyle you want in the short term so that you can keep your property until you get the profit you are looking for.
This means that your planning has to be rock solid.
Any time you buy a property, or make other major investments, you need to make sure it fits well with the other things that happen to your money.
First, make clear what your income and expenses are and what you have left. Then think ahead about what might change with your income or expenses, something especially important if you have changing costs around things like childcare or school fees, or bigger expenses or financial obligations coming up.
This gives you a baseline where you can see what the future is likely to look like if you continue to do exactly what you are doing today. You can then see how your property fits so you can comfortably afford your mortgage payments and ongoing cost of ownership.
As interest rates rise, make sure you can still pay your mortgage payments when rates rise — something that’s good practice regardless of whether rates rise or fall.
Assuming it all fits, you should buy a good home. I don’t have a crystal ball, but what strikes me in the current real estate market is that not all suburbs are affected equally.
Today, I see premium properties in premium suburbs holding their value better than others, and recent data confirms that the top end of the real estate market is still growing while other areas are declining. Choosing a good home in a good neighborhood means that even if the market continues to fall, you will be less affected.
This planning and the decisions you make here can be complicated, but the value to you in getting them right will be measured in hundreds of thousands or even millions of dollars – think about getting good professional advice to help you get the best choices and get the most out of your investment.
In Australia we love real estate. We like to buy it. We love to own it. And we like to talk about it. Everyone has an opinion about real estate and everyone thinks they are an expert. But the reality is that no one really knows where the real estate market is headed.
But we do know one thing: we live in a good country with a strong economy, where real estate is in high demand. There is money to be made by those who play smart, and doing it right means you will come out of this current period of disruption in a stronger position than you are now.
Ben Nash is a financial expert commentator, podcaster, financial advisor, and founder of Pivot Wealth, the host of the podcast How to Be Successful with Money, and author of the Amazon Best Selling Book ‘Get Unstuck’
Ben has just launched a series of free online money education events to help you get on the first financial foot. You can view all the details and reserve your place here
Disclaimer: The information in this article is of a general nature and does not take into account your personal goals, financial situation or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it, and seek professional advice from a financial professional if necessary.