Why Australia’s property price gloom shouldn’t spell doom

Heavy monthly falls in home values are dominating headlines, but here’s why real estate will always be in demand.

Are you worried about home values plummeting as mortgage interest rates surge, the recent property price boom unwinds and a global inflation spike piles pressure onto household budgets?

There’s certainly some gloom being pedalled right now, and prices in some capital cities are sinking quickly as a string of rate rises take the shine off real estate.

However, there are several reasons to remain positive about the longer-term outlook for property and perhaps even spot a potential bargain.

DOWN BUT NOT OUT

Major banks’ economists have tipped real estate prices to drop 15-20 per cent by the end of next year, and some commentators have tipped a 30 per cent fall.

Those forecasts take me back to April 2020, when there was panic selling and predictions property prices would drop 30 per cent because of the pandemic. They didn’t, and instead home values surged more than 35 per cent over the next two years as demand for real estate surged.

Real estate remains a great building block for wealth and financial security.

While property prices nationally have already dropped several per cent from their peak, some suburbs have suffered 15-20 per cent price falls. Meanwhile, other capitals such as Perth and Adelaide remain almost at record highs, and experts say heavy falls in the eastern states are unlikely to reach them.

Each city and region moves in a different price cycle, so don’t assume that what’s happening in one will happen in all of them.

DEMAND WILL RISE

Aussie real estate has proven its resilience many times. Since 2000 we’ve witnessed wars, a pandemic, stockmarket collapses and a global financial crisis, yet home prices are much higher than two decades ago.

Home values reflect supply and demand, and the need for housing keeps growing. Australia requires hundreds of thousands of extra workers to fill job shortages, and increased immigration will bring them in — but they will need a home.

Prices rose in 2020 and 2021 despite virtually zero immigration amid Covid restrictions, so they seem unlikely to plunge permanently as migration lifts.

RATE PAIN WILL PASS

Homebuyers and owners are being smashed by monthly rate rises right now, but that cannot go on forever, and soon rates will plateau and potentially fall from next year.

It will be a new, more expensive, normal for mortgage repayments. But remember the emergency low-rate settings of the past few years were abnormal as governments tried to limit the pandemic’s financial pain.

BARGAIN HUNTERS

The great Australian dream of home ownership remains strong, even if shaken by current events.

Prices will drop to a level that makes owning much more attractive than renting, and that could happen quickly amid today’s surge in rental costs. These are being driven by booming demand that has seen rental properties leased in record quick times, according to realestate.com.au.

When it makes financial sense to buy real estate, and mortgage rates stabilise to give borrowers clarity around loans, we will see bargain hunters bounce back into markets and once again propel prices higher.

The stability, security and tax-free benefits of owning a home make real estate too difficult to resist forever.

Originally published as Why Australia’s property price gloom shouldn’t spell doom