Following predictions that property prices in Melbourne and Sydney will continue to fall for the foreseeable future, many prospective home buyers are putting off purchases in the hope of landing the house they want at a much cheaper price.
To many, it may sound like a prudent way of saving some cash, but property experts have warned that it could backfire.
The recent drop in demand has predominantly been felt in Sydney and Melbourne, where realestate.com.au data shows it has dropped respectively by 22.5% and 6.1% year-on-year
Douglas Driscoll, CEO of Sydney-based real estate group Starr Partners, believes the diminished demand is the manifestation of people adopting a “wait-and-see attitude” to buying in response to what he describes as sensationalist “fear mongering”.
“I’ve seen certain reputable commentators – and I use that term loosely – talking about prices going back to 2011 levels and I look at that and think to myself, ‘that’s roughly a 75% drop (from 2017-peak levels). Can you really believe that the property prices are going to come back 75%?’” he says.
“I’m not a gambling man but, if I was, I would say that it’s not inconceivable that prices could come back another 10%. But I find it difficult to see them dropping further than that. We’ve got to look at the market and see that there’s still a lot going in its favour.”
According to Driscoll, the doomsday analysts are increasingly convincing people that they could save thousands of dollars on their purchase by refraining from buying and waiting for prices to drop. Driscoll, however, argues that it’s a risky strategy as any potential savings on housing prices could be eclipsed by future rate increases.
“Even if prices did drop another 10%, how long might that take? Based on the current rate, which I don’t see changing anytime soon, it might take another year-and-a-half or two years,” says Driscoll.
“At some point in the not too distant future, we’re going to start to see rates increase. So yes, property prices may come back a little bit more, but you may wait a year-and-a-half or two years until we see the bottom of the market, by which point, there may not be the same level of choice, money may not be as readily available based on the findings of the banking royal commission and guess what, if it is available, it’s going to be more expensive as rates will have increased by then.”
In fact, some rates have already begun to increase.
While the Reserve Bank of Australia recently announced it would hold the official cash rate at 1.5%, smaller banks have already raised mortgage rates in responses to increased funding costs – and the big four banks are expected to follow hot on their heels.
The spike in funding costs will also likely be compounded by the ongoing royal banking commission, which is expected to impose tighter lending restrictions on banks.
Whether or not future housing price decreases will be outweighed by rate hikes, realestate.com.au’s Chief Economist Nerida Conisbee believes the high propensity for housing prices to increase over the long term means that people usually earn money from their property regardless of whether they buy during an upward or downward market trend. What’s more, she adds, people usually struggle to predict when exactly the market will bottom out.
“People who hold for long periods of time generally do pretty well whenever they buy in the market cycle. Even if you look at people who bought right before the global financial crisis, they’ve ended up, 10 years later, doing really well,” she says.
“Of course, if you want to buy and sell within two years, you might be better off waiting because prices will continue to fall.”
Ultimately, Conisbee says, buyers should let their personal financial circumstances dictate the timing of their purchase, not fickle, short-term market fluctuations.
“Any time is a good time to buy if you find the right property,” she says. “You shouldn’t rush out and buy because you think it’s a good time to buy. You should buy if you find a good property that fits your purpose.”