Property Hub - Investment Insights & Inspiration - Realty Talk: Property Bust or Bull Dust

Episode Date: August 27, 2022

As the nightly news and hysterical headlines continue to be dominated by doomsday real estate predictions, our anchor Bushy Martin this week sets out to demystify all of the current scaremongering.  If you want to know what’s really happening with interest rates and property prices and why, then get pen and paper ready as Bushy lays out the facts in his ‘no bull’ style and suggests what you can and need to be doing right now. RealtyTalk is your trusted voice in property investment and Australia’s most popular online property show.  RealtyTalk is brought to you by Realty, Australia’s leading search and social property distribution platform that helps investors like you beat the crowd, giving you the earliest access to property opportunities, listings, and insights. Check out Realty. RealtyTalk is hosted by top property investment expert, author, and founder of KnowHow Property, Bushy Martin. Find out how Bushy’s KnowHow team helps investors unlock freedom with finance and property here, and check out Bushy’s podcast Get Invested.  RealtyTalk is supported by BMT, a company that helps property investors save thousands of dollars each year by maximizing tax deductions from investment properties. Find out more. See omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by realty.com.au, connecting buyers, sellers and agents differently. Greetings and welcome to Realty Talk, your trusted voice for all things property. I'm Bushy Martin from Know How Property Finance. And this week, we've got another jam packed very special show for you to demystify all of the current scaremongering and to reveal what's really happening with interest rates and property prices. So let's start with a roundup of recent

news headlines. Terrifying signs for Aussie mortgage payers. Horror interest rate hike prediction. Mortgages increased by 60%. House prices crashing at record pace. Housing prices seen worse falls in 40 years. Warring graph shows Australia is screwed. House prices to crash by 30%. And this is just scratching the surface of the dodgy clickbait. Now, let's call it for what it is, fake news. And I'm going to prove this to you shortly. The sad thing is that if you hear something often enough, regardless of whether it's true or false, you start to believe it and it embeds in your psyche and what you think about is what you bring about. Unfortunately this housing hysteria becomes self-perpetuating and self-fulfilling. Media commentators put a negative

over-dramatized scary slant on everything to grab and maintain our attention which in turn attracts self-professed experts who are desperate to get media attention to pump up their struggling profiles and they'll say just about anything just to get exposure. So the fear-feeding frenzy self-perpetuates. And when it comes to housing, there's 25 million property experts in Australia because we all live in a home so we all think we're experts. Just about everyone's got an opinion on the subject. But as the famous basketballer Shark O'Neill once said, opinions are a bit like belly buttons. Just because everyone has one doesn't mean they're all that useful. So what's really happening? Are interest rates going to go through the roof and are property values really about to

crash around the country? Or are we just returning from the radical to the regular and from the nuts to the normal? Today, I'm going to give you a proper property price perspective. To do this, I'm going to answer your following three key questions. What's really happening with interest rates and property values? What does it really mean? And what can you do and need to be doing, if anything, about it? And as I answer these questions, I'm going to show you why we're not going to see property values crash, what it would actually take for a property to bust, and what do we expect to see with house prices in the foreseeable future? Now, to do this justice, we're going to dive into a lot of detail so that you can see the

entire picture in context. I'm going to draw on research and insights from reputable and proven property analysts and fellow property contrarians, including Simon Presley, Michael Yardney, Dr. Andrew Wilson, and Pete Worgen. So let's start by asking what the hysterical headlines from the so-called experts are trying to lead us to believe. The Fear Factory's false logic is trying to scare us that interest rates are rising rapidly through the roof, and that because we won't be able to afford the repayments, this will cause widespread mortgage stress and loan defaults and as a result, the property market bubble will burst, home values will crash and life as we know it will come to an end. Seriously. So let's start by breaking down

these dire predictions because from where I sit, this all has a distinct smell of lies, damn lies and statistics. The reality is that there's nothing more complicated than trying to understand property conditions, given that there are so many constantly changing, irrational and imperfect moving parts of the property puzzle. So when it comes to property, you really need to be careful about who you're listening to and where you get your information. Now back to the false claim that rapidly rising rates are going to crash property markets. Let's start by questioning, are interest rates rising through the roof to unaffordable levels? And the unequivocal answer is no. When you look at specific evidence rather than relying on rampant speculation. And to put the current

rate rises in context we need to take a walk back through recent history to see where interest rates have been tracking and why they're now rising and as I detailed on my recent episode on inflation interest rates and their impacts so if you haven't listened to that show it's worth revisiting to set the scene here's a quick summary of interest rate averages and movements. The RBA's official cash rate in Australia averaged about 3.88% in the three decades from 1990 until 2022, which equates to an average bank variable home loan rate of between 5.9 to about 6.4%. Now for the three years prior to COVID, the cash rate sat steady at the current level of just 1.85%. So the recent successive rise in rates of 1.75% from the historically low temporary emergency COVID

setting of near zero at just 0.1 percent since April has just taken us back to where we were in 2019. Now that isn't sounding like they've gone through the roof to me. But how much further are rates likely to rise and can we afford it? Well given the complex dynamic mix of variables from global macroeconomics down to local conditions that affect rate decisions this is actually anyone's best guess, including the RBAs. But if history is any indicator, the cash rates likely to rise to somewhere between about 2.5% to 3% over the next 12 months before plateauing and potentially actually coming down again. As our spending reduces, inflation falls back within the target 2% to 3% range, and the economy stabilises in the healthy incremental growth zone. And a

cash rate of 2.5% to 3% is still a long way below the 3.88% 30-year average. So again, does this sound like rates are skyrocketing to the stratosphere? Not from where I sit. This means that current average variable bank home loan rates will rise from their current level of around 3.2%, up to between 4.5% to 5% during the course of the next year or so, which is still about 1% to 1.5% below the long-term average. So are you still worried? The reason why there's so much fuss being made about rate rises is that we now have very short memories

due to our constant 24-7 deluge of digital distraction and negative noise on top of our very hectic, always active lives. And if we add to this in the shorter-term context, over the last 10 years, we've seen nothing but interest rates falling from a cash rate of about 4.75% down to the lowest level ever at 0.1% during COVID before rises commenced in May of this year. In effect, we've enjoyed an interest rate holiday for eight years, followed by an artificial COVID manufactured honeymoon for the last two years. So if we narrow

our memories to this short timeframe, recent right increases appear high. But if we look back to 1990, the cash rate was nearly 18 percent and between the mid 90s through to 2007 interest rates went up and down again between 7.75 percent and 4.25 percent so over this horizon today's cash rate movements look minuscule so if you look through a short-term microscope things currently look bad but if you step back and use a telescope you wonder what all the fuss is about we're still a long way below regular settings. Now, after a short break, we'll return to answer the bigger questions

of why is the RBA rising rates? What does it mean? And can we afford it? You're watching Realty Talk, your go-to place for all things property. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by KnowHow Property.

More than mortgage brokers, Bushy Martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs, tax, risk, and stress while increasing your capacity for growth. KnowHow has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less, and live your legacy. Want to know how to invest in your freedom, visit knowhowproperty.com.au. Welcome back. Now that we've got a clearer picture on where interest rates sit and that they're not actually rising through the roof but just returning to normal, let's now turn to the bigger questions of why is the RBA rising rates,

what does it mean and can we afford it? Because the answer to these questions will also have an indirect influence on property price movements and the answers to these questions are simple. Rates only rise when the economy is doing too well and growing too quickly. And the fact that rates are rising from a very low base is evidence that we're actually doing too well. So to calm the jets of rising demand at a time of low and restricted supply, increased home loan rates mean that many have less to spend on other things. So the demand and supply starts to equalise, prices start to stabilise and inflation falls back within the small growth target range. So looking at things this way, we're all actually doing extremely well financially and economically.

And rising rates are actually a backhanded compliment that things are going too well too quickly and the volume needs to be turned down. And given that we're now in good shape, the RBA now quite rightly considers that the massive levels of short-term monetary support through money printing, stimulus programs and the lowest ever interest rates offered during the pandemic

is actually no longer needed, given that the evident strength of the economy and the current inflationary growth pressures are now underway. In addition, the labour market's strong as employment's grown, workplace participation is at record high levels, and the jobless unemployment rate is at its lowest level in nearly 50 years. And despite media claims to the country that are doggedly holding on to the RBA Governor's throwaway line that was taken completely out of context, that the cash rate wouldn't move until 2024, the RBA has always and repeatedly made it clear that it'll only do the minimum that it has to do in order to keep inflation at bay and to return the cash rate to a more normal setting as soon as the artificial and

abnormal COVID threat has largely passed. And that time is well and truly now. So why are interest rates rising? Well, in simple terms, with a booming economy, interest rates are only rising to quell spending, reduce demand, calm inflation, and slow the economy down to a rate of steady sustainable growth, where demand, supply, inflation, unemployment, and wage growth are all at healthy levels and in a state of equilibrium without wild disruptors' wings either up or down. The next part of the question then is, can we afford rising interest rates? Now, before we answer this, we need to set the context because while there's been a lot of overblown talk in the media on our high debt levels, this disregards the fact that

property price rises of somewhere between 20 to 50% across the nation over the last two years have seen the total value of Australian homes rise by $2 trillion in the last two years. Now that's incredible growth and as a result total Australian property is now worth well over $10 trillion and importantly there's only $2 trillion of debt against this. So the ratio of home loans to total property value is only 20%. And it's also important to note that approximately 40% of the population are renters and so they're not directly affected by interest rates and of the remaining 60%, around half of homeowners have no debt at all. The homes are totally paid off,

so interest rates mean nothing to half of our homeowners. And according to RBA figures, only around one third of all households have home loans. So yes, mortgage repayments are increasing for the 30% of home borrowers, but rates are only getting back to where they were prior to the pandemic, and the remaining 70% of property owners aren't affected by raising rates at all. So now that we have a proper perspective on the relatively low portion of property owners that are affected by home loan interest rates, let's consider if they can afford rising rate repayments. And based on the RBA's own intensive and extensive research that was reported in a recent speech by the Reserve Bank Deputy Governor Michelle Bullock, the answer is a resounding yes, because the vast majority of Australian households are in a very good financial position. And this is for three main reasons. Firstly, the majority of us have never been wealthier, have never had so much in savings, nor been so far ahead on our home loan repayments. Secondly,

higher bank lending standards and significant increases in loan servicing buffers mean that recent borrowers have been stress tested at interest rates two and a half to three percent higher before their loans are even approved, which means that the affordability of higher rate repayments have already been built in. Thirdly, significant across-the-board house price increases of between 20% to 50% plus over recent years have strongly improved our equity positions and lowered loan-to-valuation ratio risks. To substantiate this, Michelle and the RBA team have pulled together a lot of research, which is all publicly available if you're interested, but here's a couple of highlights. Hardworking Aussie families have put an additional

$260 billion into savings since the onset of the pandemic. We're still spending less than we were prior to the pandemic. Among families with variable rate owner-occupied home loans, around half have accumulated enough prepayments to service their current loan repayments for almost two years or more, and borrowers with the most debt have the highest savings buffers. This combination means that the share of home loans in negative equity, where the loan balance is higher than the value of the house, was only around 0.1% in May of this year, which is way down from the two and a quarter percent that was in place prior to the pandemic. So while some house prices in some areas have started softening in recent months, as they always do, which I'll

explain later, home values across the board would have to fall a long way for negative equity to cause property values to crash. And RBA modelling shows that a decline in housing prices of 10% would raise the share of balances in negative equity to just 0.4%. It's also important to note that the share of fixed rate borrowers doubled from 20% at the start of 2020 to a peak of nearly 40% earlier this year. In other words, the number of people on fixed rates doubled over that time. This means that the majority of fixed rate home loans aren't due to expire and roll off to high rates over the next two years,

with the highest concentration of fixed rates loans due to expire in late 2023. So in summary, how are we placed to handle increased rate increases? As you've heard, the majority of Aussies are in a good position. A lot of us have savings buffers. Most households have substantial increased equity

in their homes and investment properties from Strong. value rises. And the bank's 2.5% to 3% loan servicing buffers in recent years have built in the affordability of interest rate increases. In addition, much of home loan debt is held by high-income households that actually have the ability to service their debt, and many borrowers are already making repayments well above what's required and are months, if not years, ahead of their repayments. And finally, the high majority of home loan borrowers who are on very low fixed rate loans have time to prepare themselves for higher interest rate repayments. So in simple terms, our economy is in great shape and booming, which is exactly the reason why interest rates

are rising. So rather than being criticised, castigated and crucified in the press, Reserve Bank Board and Governor Philip Lowe should actually be celebrated and applauded for the incredible job they've done to navigate us through a very complex, constantly changing and very challenging period, using the very limited historic rearview mirror information and the limited tools at their disposal, which has actually still positioned Australia and our economy as the envy of the rest of the world. And given the strength of our growing economy, personal wealth and generally strong position, we need to take confidence from the fact that we're in good shape and in very good shape so soon after the pandemic. These responsible increased interest rate

decisions are also building in an improved insurance policy into our economy so that if Australia and our economy are hit by other unexpected shocks in the future, which I'm sure they will be, we've actually then got the safety net and ammunition left in the barrel to accommodate them by reducing rates when and if necessary to weather future storms. On the strength of all this we can now be confident that we can accommodate interest rate rises as they return to normal without major financial impacts or widespread and dramatic flow-on effects for property values. After a short break, we'll return to question the central thesis of the media's current claims that interest rate rises will create a financial crisis and that property markets will fall

through the floor. So stay with us for more here on Realty Talk. Property deductions can save you thousands of dollars each year to make sure you maximise deductions, you need to work with the most experienced quantity surveyor in the country. BMT Tax Depreciation is the leading specialist in the industry. They've completed over 700,000 tax deduction schedules for residential investment and commercial properties Australia-wide. BMT guarantee to find double your fee in the first full financial year deductions. Call BMT on 1300 728 726 today for an obligation free quote. Welcome back to Realty Talk special show on what's really happening with interest rates and property conditions. Now that we've dispelled fears about the impact of interest rates returning

to normal, let's return to the media's current claims that rapid interest rate rises will create a financial crisis and that property markets around the country will fall through the floor. The first thing I want to pick up on here is that there's actually no such thing as a property market. The term's an oxymoron with an emphasis on the moron. A market's a place where buyers and sellers can transact and exchange the same goods where you can compare apples with apples. But unlike share markets where everyone has instant access to the same information on like shares that can be traded at the press of a button comparing properties is like comparing an apple with every other known fruit and vegetable because every property in every street in every suburb

is different to the other 10.8 million properties that are spread across the 15,353 suburbs right around Australia and because homes are a tangible need asset that we require for shelter safety and security property decisions are often driven by our emotions needs and desires not by rational logical thought processes so throwing a simple convenient blanket over very different things leads to mistaken signs and misleading conclusions joining the dots when the dots don't exist are more like a random collection of unique dashes asterisks full stops exclamation marks question marks and over 10 million other symbols in different shapes colors and locations it's like trying to simplify and make sense of riddles wrapped in mysteries

embedded in enigmas you just can't simplify complex dynamic and differing variables down to a homogenized simple model and then make meaningful conclusions. Yet, this is exactly what a lot of uninformed commentators and nightly newsreaders like to do. It maintains our fascination and fear without really meaning anything. And this then leads to the next related layer of error. Trying to use a single indicator to read complex and constantly changing tea leaves. In the case of property, the main metric that's relied on is historic median house prices. So in the case of houses, median home value and price figures are used to try and capture all shapes, sizes, colours and locations of homes. So median house prices are aggregated

regardless of whether a home has one, two, three, four or more bedrooms, one, two or more living areas, one, two or more bathrooms, none, one, two or more car parking spaces, carports or garages. Then we have small blocks, large blocks, and we have different designs, layouts, materials, ages. The list of variants is endless.

Yet every one of these gets lumped under the description of a home and report it on as a homogeneous market when it's actually nothing of the kind. And when you then aggregate medium property prices at the suburb, region, state or national level, the numbers become even more misconstrued and meaningless. In this fashion, as Michael Yardney is famous for saying,

a median value is a bit like burning one hand by putting it in a bucket of boiling water while getting frostbitten on your other hand as you plunge it into a bucket of ice and then concluding that overall, you're okay. The number of sales and the median value are not truly representative and can totally distort what's actually going on.

And this is not even taking into account the variables in house size, configuration and location. For example, the differing appeal between a bed-sit, a family home and a McMansion greatly affect property price decisions, but they're all lumped together as houses. Let me give you another quick example of the danger of relying on medium property price movements over time aggregated over a large area. A couple of years ago, before COVID,

the capital growth based on medium price movements for houses across Adelaide was just under 6%. Yet there were areas in the eastern suburbs where they're experiencing in excess of 18% value growth on an ongoing sustainable basis. What I hope all this demonstrates is that trying to draw similarities between very different things and then using a single measure to track changes and draw conclusions is at best meaningless and misleading and at worst downright dangerous because oversimplification and overgeneralization makes this convenient for us to try and comprehend but can lead to very wrong conclusions. So when you hear that median Sydney property prices are falling by two percent per month while Adelaide is up one percent per month and that overall

property prices across the nation have dropped by half a percent you need to read this with a huge grain of salt because at the micro level or individual property level what's really happening can be completely different. They may provide a very general indication of the direction of a trend but you'll need to dig a lot deeper to understand what's really happening on the ground and here lies one of property's greatest opportunities because of the stampeding herd are reacting to news headlines or report property market movements at the city, state or national level

and they're responding accordingly, you can be sure that at the micro-local level, there's still bound to be good opportunities for quality properties where you can swim against the tide of popular opinion to continue to do well with your property values and growth. As always, the devil's in the detail,

not in the broad assumptions. So it's fair to say that I get annoyed and frustrated with a constant media talk of property markets that don't actually exist and median prices that again don't tell the true story. It's just another example of the old lies, damn lies and statistics. As I've already alluded to, given the complex and dynamic list of constantly changing variables associated with property, which is more combinations than a Rubik's Cube and is a bit like trying to read and predict the weather, simplifying property down to just a few metrics and measures has the potential to lead you down the garden path, particularly when you're trying

to predict the future. And all of this discussion flows through to the dangerous reliance on what I like to call the indicator of the hour. So discussing property markets that don't exist using large area meaningless median prices is not much better than misleading. And this flows through to the current indicator of the hour assumptions that rapidly rising interest rates are going to cause property markets to crash. Just because the response to COVID led to artificial manufactured dramatic drops in interest rates to their lowest levels ever, and property prices have risen since then sharply across the nation by 20 to 50% or more, where the rising tide has actually floated all ships, resulting in the second biggest property boom in the 230-year history of our

nation, this doesn't mean that one directly caused the other. There are many other factors at play. But this is the conclusion that median commentators have made. So now that interest rates are rising quickly, they automatically conclude that property prices are going to plummet. A very dangerous oversimplification and misreading of what's actually happening that conveniently ignores other influences on property price movements. For one thing, history shows that it's not the cost of credit that has a big influence on property prices, but access to credit that influences home values. A quick reflection on what happened in 2017-18 when median property values dropped in Sydney and Melbourne revealed that the bank credit squeeze

with multiple limitations on the ability to secure loans at all, with caps on investors, dropping loan limits, the retraction in interest-only loans, and a much bigger focus on living expenses, all significantly reduced property buyers' ability to secure credit and median property values softened. So it's clear that it's not just the cost of credit allow interest rates that impacts on property prices. It's also important that we look back in history at other times when interest rates have gone up

to see what impact they've had on property prices because rates have gone up all the time. It's just that they haven't gone up in this country for about 11 years and people have forgotten. So Simon Presley's presented a heap of evidence that clearly demonstrates that in the six-year window between 2002 and 2008, the standard variable rate home loan started at 6.5% and went up 22 times over that period to end at 9.5%. And during that six-year period, six out of eight capital cities saw their medium house price at

least double, while among our other 200 individual regional towns and cities, they did even better on this. So while interest rates rose multiple times by a total of 3% over that time, Australian property prices enjoyed a boom. So clearly, interest rate rises don't automatically result in property price falls. Yet, it never ceases to amaze me that whenever there's something topical that's going to have an impact on property prices, if that indicator of the hour is something that's not going to have a positive influence, the property pessimists and the self-proclaimed experts all jump on the bandwagon of that one thing they blow it out of proportion because that one thing isn't going to have a positive influence and therefore prices are all going to

collapse but what they never do is step back and take a balanced assessment and question well if that one thing isn't going to have a positive influence currently what are all of the other things that now and always have had a positive influence so if the one thing is negative and in the current case it's rising interest rates they conclude that if the cost of repayments goes up and borrowing capacity comes down then the non-existent property market median prices have to fall and yet again this is a massive oversimplification that totally ignores all of the variable factors that combine to influence property price movements. The reality is that home values are driven by a complex combination of drivers that revolve around the major elements

of demand supply and sentiment and I don't just mean the simple definition of demand and supply that a lot of commentators focus on many just define supply as the total number of residential properties and demand is restricted to population numbers but this is also meeting the mark also missing the mark shall I say because there's much more to demand supply and sentiment than this yes they're part of the equation but there are many other lift and drag factors that affect property values in different areas at different times for different reasons. Simon Presley from Propertyology has captured these extremely well. On the demand side at the local and regional level, they include things like new infrastructure, major projects, industry and

employment diversity, income levels, affordability, immigration, population, births and deaths, regional transference and lifestyle amenity attractiveness. On the supply side, they include things like rezoning, gentrification, land releases, building approval levels, property taxes, government incentives and the availability of credit. Then comes the often forgotten but increasingly important sentiment influences. Sentiment includes political stability, job security, government policies, interest rates and the growing influence of the media. And it's fair to say that the current media focus and scare tactics in relation to perceptions of property price falls are creating an increasingly self-fulfilling crisis of confidence that's

resulting in softening property price expectations for both sellers and buyers. And these influences can exert a dragging or lifting influence on property values. Potential dragging influences include affordability, inflation, rising interest rates, tighter bank credit assessment policies, skilled labour shortages, political rhetoric, and property pessimist media commentary. Potential lifting influences include overseas migration, wage growth, rising rental incomes, home equity increases, home operators, lifestyle buyers, investors, international tourism, household savings levels, infrastructure project spending, building approval limits, and construction material supply constraints. And they all need to be considered at what I like to call the macro, mid-cro and micro level. And these all vary in a very fragmented, out-of-sync way by location. So one area can be experiencing growth,

while another can be experiencing plateauing property prices. Because history again demonstrates that each and every area moves through a spring-like cycle that resembles an S-curve formation that spans over an 8-15 year period, where a location will experience a 2-5 year period of strong growth after which property values will often come back 5 to 10 percent before flatlining for a further five to eight years before the area goes through its next growth spike. So property values follow a repeated peak and plateau step-like cycle over the long term and I stress that each area is generally in different parts of the cycle than others and when I say area I'm talking about

precincts, neighbourhoods and maybe suburbs but definitely not regions, states and nations. The real takeaway here is that property is complex, dynamic, and local, and you need to be very careful about where you get your information and who you listen to. For my money, you need to turn to proven property market analysts like Simon Presley, Dr. Andrew Wilson, Michael Yardney, and Pete Wardgen. They're independent professionals who've been active in property themselves and studied property market history for decades, not just minutes or hours. and they're good communicators of evidence-based facts, not speculative fiction or opinions. We'll now take another short break and after which we're going to dive into

what's really happening in property at the moment and the foreseeable future. So stay with us on your trusted voice for all things property here on Realty Talk. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by KnowHow Property. More than mortgage brokers,

Bushy Martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs, tax, risk and stress while increasing your capacity for growth. KnowHow has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom?

Visit knowhowproperty.com.au. Welcome back to Realty Talk. We're doing a special deep dive on what's really happening with interest rates and property prices, as opposed to the mainstream media's gloom and doom fake news predictions. Now that we better understand the machinations of property price movements and the complex interaction of their many moving parts, In simple terms, property dynamics are currently shifting back from the artificial COVID radical back to the regular, and from the nuts, back to normal property conditions.

So if property is returning to normal, let's summarise what normal actually looks like. Firstly, bank home loan interest rates are in the mid-fours to high 5% range, noting that current variable home loan rates are around the low 3% mark. Secondly, annual property capital growth is close to the long-term 25-year average of about 6.8% nationally, in a band between 5% to 8%. Now, this compares with a recent capital growth spike of between 20% to 50% over the last 12 to 18 months. And thirdly, every location is at a different fragmented stage of the 8 to 15 year S-curve peak and plateau growth cycle, based on varying mixes and intensities of demand, supply, sentiment, lift and drag drivers. Compare this to the very unusual and unprecedented period of post-COVID growth, where the rising tide has floated all property ships. The COVID response actually threw petrol on the fire for Australian property.

money printing record low interest rates massive stimulus packages and no travel I mean what else were we to do but buy upsize see change and invest in property so all we're now seeing is the stimulus petrol burning out as it always would and the bellows of low interest rates have reduced the oxygen supply as rates now return to normal and the artificial COVID induced burst of property flames now dying back to the normal slow burn embers We've effectively seen anywhere between four to eight years of property capital growth brought forward in the space of just 12 to 18 months. So understandably, B-grade locations and B-grade properties are likely to come back in value before flatlining for an extended period of time,

unless they're in areas that are going to experience new growth drivers in the form of committed new infrastructure, technology, rezoning, new industry and employment diversity, and strong and growing income demographics, accompanied by limited new housing supply in tightly held locations with good lifestyle amenity attractions and great school catchments. Using another analogy,

the pandemic period has caused property prices to perform nationally like a compressed spring. And what happens when you let a compressed spring go? It very quickly extends way beyond normal and then comes back a bit before oscillating into a state of equilibrium so if average annual capital growth nationally has been 6.8 percent and property prices have risen by 20 to 50 percent across the nation over the last 12 to 18 months and b-grade locations of properties now come back by five to ten percent in the short to medium term

as we expect them to as they follow the s-curve cycle of growth then we're still 15 to 40 percent in front. So what's all the fuss about? To me, a predicted property bust is looking much more like bulldust. So what does all this really mean? Will the so-called property markets crash and prices plummet by 30% or more? Again, to put some context around this, let's take a quick walk through the recent history of property price movements to see how accurate they've been. and we don't need to look back very far. Just over two years ago when COVID first hit Australia, we closed our international borders

and all of the so-called experts predicted that property prices would not only decline by 20 to 30%, but it'd be the single biggest decline in real estate that this country's ever seen. Why? Because we no longer had any population growth. That was the indicator of the hour

and it didn't happen. If we then fast forward a few months, the indicator of the hour shifted to JobKeeper. When that stopped, no one was going to be able to afford to pay their mortgage and the entire property market was going to crash. It didn't happen. About six months later, the property pessimist doomsday topic shifted onto the new indicator of the hour, which was the loan repayments deferral scheme. As soon as everyone was going to start paying their mortgage again, they wouldn't be able to afford it. Everyone would default and property prices were forecast to crash. Strangely enough, it didn't happen.

Now, can you hear a bit of a pattern developing here? The reality is that in the 40 odd years that I've been involved in property, there hasn't been a year that's passed by when there hasn't been some doomsday prediction that the property market was going to crash. It never has. And about the only thing I admire about the growing crowd of property pessimists is that they don't give up despite never getting it right. And I strongly believe that they're going to be wrong again this time. Now, I'm not saying that property prices don't soften and fall. They do, and they will, especially for B-grade locations and B-grade properties as they follow the normally expected drawback in prices by 5% to 10% as they come off their growth spike stage of the S-curve cycle of

growth before they then plateau for a period in readiness for the next growth uptick. This is both normal and expected. Let's now turn to the question of why I don't believe that broad-scale property markets are going to crash with price falls of 30% or more. And again, I'm going to start by looking back at the history of property price movements. Now, the past isn't necessarily a predictor of the future, but it certainly contains clues and it leaves lessons. And in this regard, Michael Yardney has uncovered that since the Australian Bureau of Statistics started tracking figures over 42 years ago, the Australian property market, and remember there isn't one, has seen property prices go up by 540%. Melbourne has been the strongest city with annual capital

growth of about 8% per annum compounding. Sydney and Brisbane have experienced a little bit less annual growth at around 7%. And during this time, we've experienced wars, recessions, dot-com crashes, GFCs. We've had high interest rates as well as low interest rates. We've had multiple governments and a constant succession of natural disasters. But despite all of this, property prices have continued to increase in Australia, which in fact has been occurring way back since Federation, where property values have kept rising due to a host of reasons that I've already mentioned, but they don't rise continuously in a straight line as there are periods when the property values in different locations go up, come back slightly and then flatline as they

follow the different stages of the S-curve peak and plateau growth cycle. So now let's turn our attention to the history of actual property price falls that have been experienced across Australia to see if anywhere has experienced value falls in the order of magnitude that the negative Nellies and Neds are predicting for this year of 30% or more. Property analyst Dr Andrew Wilson has done some great research on this if we go back in time when we look at the record falls over a year in house prices the highest national annual fall from december quarter to december quarter recorded in the modern era since 1987 which is over the last 35 years was 5.5 percent which occurred in 2018 which was actually experiencing very similar circumstances

to our current conditions at that time there was also a very sustained media fear campaign which affected sentiment and consumer confidence and sidelined a lot of buyers and sellers on a state basis their highest annual fall over a calendar year we've seen was 9.9 in sydney and that was also in 2018 when we turned to peak to trough declines in housing values which runs from the peak of the market cycle until it finally bottoms out the record peak to trough on a capital city basis was between June 2017 and June 2019 which is a two-year period where Sydney median house prices fell by a total of 18.2% so this averages out of around 9% per year. Melbourne's record peak to trough decline was between March 2018 and June 2019 which resulted in a 14.1%

decline. When we look at the other major capitals, Brisbane's record peak to trough decline was 7% between June 2010 and September 2011. And over a similar period, Adelaide's record decline in median house prices from peak to trough was just 4.5%. While for Perth, its record peak to trough decline was 8.4% between December 2008 and March 2009. So clearly, these numbers are nowhere near the scale of the 30% fall doomsday forecast. And it's important to note that with the exception of 2018, when medium values dropped five and a half percent, the conditions are very different at the moment. During previous times, we had credit squeezes, recessions, GFCs, and a host of other economic challenges. And this is very different to our current situation where the

economy is actually booming. Households are in the strongest financial shape they've been in for decades we've never been wealthier unemployment is at nearly 48 year lows wages are on the rise we have a strong shortage of housing supply and our international borders are opening up to allow the floodgates to open to return to in excess of 200,000 skilled migrants a year to live and work in what has proven to be the best and safest country in the world so there's a lot of positive housing uplift drivers at play and few dragging deterrents So, as I've said many times before, what we learn from history is that we don't learn from history. In fact, we now completely ignore history because we're drowned in a deluge of negative news.

After another quick break, we'll conclude with what's actually likely to happen with property prices around the nation over the next 12 months. I'll have a look at what it would actually take for property prices to crash. And most importantly, what, if anything, can you do and do you need to be doing about it? So, stay tuned for more here on Realty Talk. property depreciation is the natural wear and tear of a building and its assets property investors can claim depreciation as a tax deduction each financial year depreciation is a non-cash deduction this means you don't need to spend any money in order to claim it on average bmt tax depreciation find residential investors almost nine thousand dollars in first full financial

year deductions. Call BMT on 1300 728 726 today for an obligation free quote. Welcome back to Realty Talk. Now that you've got a proper understanding of what has actually happened in the past and how varying property conditions operate around the country, let's bring it all together to consider what's actually likely to happen with property prices around the nation over the next 12 months, what it would actually take for property prices to crash, and most importantly, what, if anything, can you do and need to be doing about it? Starting with the future of property price movements, I'm going to focus on what reputable property analysts believe is actually going to happen with property prices over the next year.

And to capture this, I'm going to share the recent well-researched forecasts offered by Dr. Andrew Wilson from My Housing Market for his 2022 to 23 forecasts. He believes that we will certainly continue to experience a media-fueled crisis of confidence evolving that will create self-fulfilling negative property sentiment, despite very strong property and economic fundamentals, similar to what was experienced in 2018-19, but this trend will tend to be short-lived. In his view, opening of the borders to increasing numbers of school migrants and students will put additional pressure on rents in an undersupplied market. Skyrocketing rents and extremely low vacancy rates will attract more investors back into the market and our full employment economy

will maintain pressure on rising wages which has already started to occur. So projecting forward in the short to medium term Dr Wilson predicts that it's likely that Melbourne and Sydney will record around about six percent falls in their median house prices over the course of the next year which will still be well ahead of where they were three years ago. Is Sydney still up 30 percent and Melbourne up 20% on where prices were in 2020. Now, it's important to reinforce that there's not one Melbourne or one Sydney property market. High-end, high-priced properties that led the boom

are now leading prices down. And it's also going to be some issues in the lower-end properties where wages haven't gone up as much as house prices have. So overall, while Sydney and Melbourne is likely to drop around 6%, some locations, sectors and property profiles will drop more while others, like the sweet spot affordable properties that attract first home buyers and investors, are actually likely to hold steady. Brisbane's on track to record a 11% increase in the median house price this year, Adelaide's projected to be up 12%, and Perth, which is

enjoying quite a sustained revival in its property price growth, is likely to be 9% higher. And applying a weighted average to all of these major capitals, Dr Wilson projects that the median national price house price will be just above the line with growth of around about one percent over this year so this is obviously miles short of the 30 percent price falls predicted by hordes of hysterical headlines and if history is any indicator of the future I'd definitely be leaning towards Dr Wilson's projections far more than I would the mainstream media and with all the positives that I mentioned in terms of demand over supply, eventually the media generated fear factor sentiment will lose its edge as it always does. Now it's important to stress that given the

continuously changing and wide ranging dynamic variables affecting property values, that even educated guesstimates are still just that. So I suggest you plan for the worst and then expect the best and you'll come out in good shape regardless. Let me now tackle the question of property prices from another angle. What would it actually take for property values to crash? For property to bust, like the headlines are suggesting, we need a huge majority of people to have to sell their properties at almost any price, with nobody there to buy them, so they virtually have to give them away. And for that to happen, there'd need to be mass unemployment, along with significant drops in wages and significant increases in interest rates,

resulting in very large numbers of home loan borrowers not affording to make their home loan repayments and defaulting on their loans leading to widespread forced mortgagee or bank in possession sales. But sellers become biased. They're not going to give it away because everyone's got to live somewhere else.

And housing is a fundamental need. We all need a roof over our head. And we'd rather eke out an existence on a diet of toast and two middle noodles than be forced to sell our homes and be out on the street. So, as I outlined earlier, with Australians being wealthier than they've ever been, employment at its lowest level for five decades

and wages on the rise, and only about a third of households having a home loan with half of homes owned outright, this is extremely unlikely to happen. So, given everything we've covered today and the strong position that the vast majority of us are in, what does a return to normal conditions with interest rates increasing back to regular levels, alongside an expected softening and

plateauing of property prices in some locations and property types, what, if anything, can and should you consider doing about it? For most of us, it'll be business as usual. Just get on and enjoy your life, but make sure you stop watching, listening to and reading the mainstream media and be careful and selective about where and who you get your information from before you make any decisions. If you're worried about cost of living increases and home loan repayment increases as interest rates return to normal levels, do yourself a favour and reduce your costs firstly by negotiating with your existing bank to reduce your rates because the banks are also experiencing drops in home loan business and are keen to retain good customers, with many of them actually

sweetening the deal by offering cash payment incentives you put the pressure on of anywhere between $2,000 to $5,000 for you to stay with them on top of a reduced rate. Then once you've done that, reach out to a good mortgage broker to further restructure and reduce your costs as our know-how finance team is saving an additional $400 up to $1,200 or more a month just by refinancing to another lender who's hungry for new business. Now, I'm going to challenge you on this because it's likely that you won't consider doing this until it's too late because with every rate increase your borrowing capacity drops considerably. So if you leave it much longer you won't be able to refinance and you'll be left paying the bank's loyalty tax because unfortunately

the longer that you're with the bank the less likely they are to look after you and you'll be stuck paying much higher repayments than they offer brand new customers. And if you're worried about the hassle and headache of the whole changing banks process, good brokers will do most of the heavy lifting for you and can actually organise the paperwork and all of the signing digitally without you needing to meet anyone or leave the comfort of your home. So you've actually got no excuse. And if you don't move quickly, you've got no one to blame but yourself. So challenge on, prove me wrong. When it comes to the property side and potential property prices softening or flatlining, it's important to remember that your property price and value

is only important at three key times, when you buy, when you refinance, and when you sell. The rest of the time, as long as you can afford to make your loan repayments, property value is actually irrelevant. So just keep enjoying your life and ignore the news. Now, I want to dig a little deeper on the first two of these important property price times. Firstly, when you go to buy a property, we're moving into a more of a buyer's market. So now's a much better time to have more time to negotiate better terms on your property purchase

while the spooks, sams and sallies sit on the sidelines. Remember, it's never a question of when to buy a property because the best time is always now if you can. But the real question, if you're serious about securing a quality property, it's going to weather the inevitable storm of fluctuating price growth over a long time is where to buy. So it's never when, but always where. And it's always about A-grade quality

properties in A-grade quality locations. By looking beyond your backyard and becoming borderless to secure the highest quality unique scarcity home with the high owner-occupied appeal and a popular tightly held lifestyle area, it's about to enjoy the positive change growth drivers of new infrastructure or rezoning, new industries and employment diversity, supported by strong and growing income demographics, you're giving yourself a property price protection insurance policy and optimising your opportunity to grow your wealth. The key here is a flight to quality, which is always important, but is going to become even more so, as only about 5% of properties qualify as an investment grade with unoccupied appeal. And regardless of whether you're an

investor or an owner-occupier, this is the type of property you need to be buying to reduce your risk and to optimise your opportunity. And as I've said recently, you currently have a very small decreasing window of opportunity to secure properties while you still have the capacity before ongoing interest rate rises drop your buying capacity to a level where you're no longer able to buy. And while everyone else is sitting scared on the sidelines or on the fear fence, as they listen to the ongoing deluge of hysterical headlines. For investors, rental yields are rising strongly, vacancy levels are at historically low levels,

and with overseas migrants starting to flood back in over the next couple of years, creating increased demand with limited supply, there will again be significant upward price pressure on property. So don't dally, do. The second time that property price is important is when you need to refinance. because you need the bank to value your property as high as possible. Firstly, in order to be able

to refinance, because the bank needs to value the property high enough for your loan to fall within their loan to valuation or LVR limits. And secondly, because in the current lending environment, the lower the loan to valuation ratio, the better the rate a bank is going to give you, because lenders are now offering much lower rates for low LVR loans. And again, I strongly urge you to do this sooner rather than later, because as property values soften and pull back following the recent boom, the higher your loan to valuation ratio climbs, the higher the interest rate you're going to pay. So again, don't delay, do it today. So before I close, let me summarise and reinforce the key points that we've gone into a lot of detail today. Despite all of the media doom and

gloom, property conditions are just returning from nuts to normal and from radical to regular. Interest rates are not rising through the roof and property prices aren't going to crash or fall through the floor. Talk of a property bust are all bulldust. We're simply returning to normal property and finance conditions now that the COVID-induced honeymoon period's over. Increasing interest rates are actually a backhanded compliment that our economy is going too well and the vast majority of Aussie households are in a good financial position to afford increased repayments without stress. Property prices for some B-grade properties and some B-grade areas will soften as the COVID-induced petrol on the fire property burns out and the resulting

compressed spring of unprecedented property price growth that's been three to eight times higher than normal now returns to regular. But ignore commentary on property market movements based on medium house prices because aggregating this data into regional, state or national indicators of the hour is almost meaningless and generally misleading as every property in every street in every suburb is different to every other of the 10.8 million properties spread across 15,353 suburbs and locations. Increasing interest rates don't directly correlate with property price reductions because property values are driven by a complex array of dynamic variables spread across demand, supply and sentiment factors

alongside a multitude of property value drag and lift influences. Stop listening to news headlines, be careful where you source your information, refinance now if you need to reduce your costs and take advantage of the quickly disappearing window of opportunity to buy quality property now while you still can before the next upswing kicks in as a flood of school migrants drives up demand.

And to get your weekly property reality check, make sure you subscribe to Realty Talk via our website and on your favourite podcast player, where you're only going to hear from qualified, trusted experts. That's more food for thought. I'm Bushy Martin from KnowHow Property Finance. Remember to always get invested

and on behalf of Kevin Turner and myself and the entire Realty Talk team, we look forward to seeing you again next week. Miss something in this week's show or want to catch up on past shows? Do it anytime at realty.com.au where we connect buyers, sellers and agents differently.