Is A Property Market Correction Looming?

The only constant is change and the market is the market because there is a constant stream of changes, large and small that affect how we all view it.

Now, we all know and understand that the changes that usually grabs all the headlines are commonly termed a “boom” or a “crash”. A crash almost always spells disaster for everyone, as values plummet, supers suffer etc. It’s fair to say, these are rare. But then, periodically, we have “corrections” where the value of a stock index declines by between 10 and 20% when compared to a recent (52 week) peak. The good news is that these corrections generally last only a few weeks or months, before returning prices to their longer-term trend. But here’s the point - even if you’re not an avid, daily observer of the ASX and other stock exchanges, chances are that their fluctuations like corrections for example, have a knock-on effect on aspects of your life.

And so we turn to property. And in Australia at the moment, there is discussion around the possible of a property market correction. Of course, in my position, I’m often asked my opinion on what I personally feel is on the horizon and I’m happy to share my thoughts.

Two factors that will help you determine if “correction” talk is correct

What is most likely to pre-empt a property market correction? Well, one answer is the presence of a property bubble. Investors understand that a “bubble” is a two-edged sword because on the one hand there appears to be growth in terms of value but also, bubbles are prone to bursting. So currently, are we experiencing a property bubble? Well, that depends on two factors:

1.???Inflation which is driven by interest rates and whether or not they will remain low. To speak plainly, indications are that they will remain low for the foreseeable future (18-24 months). If this is the case, we need not concern ourselves with talk of a correction.

2.???The construction sector – infrastructure spend has been enormous over the past few years as government investment in civic projects have been greenlit at near unprecedented levels with commercial and residential following in its wake to varying degrees depending on location.

One follows the other and if we also consider the effort and commitment that is being invested in the remediation of the Chinese trade agreement after and through a period of strain (and possibly uncertainty), it’s clear that the aim is to continue to trade strongly. Again, these factors and considerations point to stability which in turn, suggests that talks of a correction are at best unfounded and at worst, premature.

Have we reached the peak of the property market and what to do now?

Okay, we know that on the other side of a peak, is a dip and what goes up, must come down and so on and so forth. So, asking about whether the property market has reached “a” peak is a valid question because again, some will worry about an impending softening in the market – more sellers than buyers. But as always, it’s a supply and demand issue affected by the ongoing appetite for passive investments.

I can tell you that currently, I’m having trouble getting my hands on commercial and residential stock and we’re not seeing too much in the way of viable returns at the moment. In fact, most of my clients in this space are making acquisitions based predominantly on lifestyle choices as they take advantage of low interest rates. And on that very subject, I would say, why not explore those options as well as opportunities to take advantage of fixed versus variable rates through refinancing – the points differential can be significant and play in your favour.

But coming back to the question and answer that remains top of mind for many of us - will there be a correction? Well, we have seen a softening in subdivisions and big development sites, with valuers being quite cautious with their valuations, but that’s a smaller part of the larger picture. The big picture and the answer that I’m giving is that if interest rates remain stable (and they should) we will not see a correction.

Please feel free to share your comments in the comments section as well as any topics you’d like me to cover in one of my next market updates.

Allan Shenouda, has spent decades helping private and commercial entities achieve more growth and success during an impressive tenure in corporate banking. Now, as founder and director of respected brokerage, Bespoke Financial Advisory, his legacy of advising and acting on market opportunities for valued clients continues.