Sydney home prices are nearly 10 per cent off their peak, Melbourne is down 6 per cent. (ABC News: Ian Cutmore)
Most of us have, at some time in our lives, kept waking up at 4 or 5 in the morning, tossing and turning, with knots in the stomach, unable to return to sleep.
I’ve had a few of those mornings lately. It wasn’t something I ate the night before, but something I committed to buy a few weeks earlier.
That something was a house. In Sydney. Still one of the most expensive property markets in the world.
Yes, I’ve caved. After years of writing about housing risks, I have taken on the ultimate one with a mortgage that will take the majority of my remaining working life to pay off.
It may be the worst decision I’ve ever made, or it may be one of the best. I don’t know, and that uncertainty has contributed to the worry.
I didn’t really want to pen this article, but after writing about why Gen Y shouldn’t buy back in 2016 I felt I owed the audience an explanation of what’s changed for me since. And I emphasise the phrase “for me”.
Why buy now when house prices will probably fall further?
As those of you not living under a rock know, Sydney is in the midst of its worst housing downturn in modern history. Melbourne is a few months behind, but likely to record similar peak-to-trough falls.
At this stage, there’s no sign of the price declines ending, so it must be either brave or foolish to buy now — I can think of plenty of people on Twitter who are going to read this and helpfully inform me it’s the latter.
But there’s a third option … practical. Let me explain why.
Like many people in their mid-30s, I have now been renting for 15 years. Think about it, that’s half the length of a mortgage spent paying landlords, much of that time off-lease, not knowing for sure if you’d still be there in six weeks’ time.
After a decade of full-time work I’ve built up a reasonable amount of savings with my partner.
Sydney’s house price falls over the past year have turned those savings into a 20 per cent deposit for a good house in an area we like living in.
Even with the much tighter lending criteria, we comfortably qualified for a loan to cover the rest.
Those tougher criteria mean that, unlike in the past, borrowers are being tested to make sure that they can still pay the loan (and their other bills) even if interest rates rise considerably from current levels.
A mortgage can feel like a prison when it could take your entire working life to pay off. (ABC News: Alistair Kroie)
Not that this seems likely — there has been a small rise in rates from higher global borrowing costs, and that might continue, but the Reserve Bank looks increasingly likely to be on hold for the next year or more and may even cut official rates again.
So — barring personal catastrophes such as job loss, serious illness or death — we should be safe enough in keeping up with, and hopefully getting well ahead of, repayments.
The plan is to live in this house for a decade or more.
If you are in this fortunate position, now is not necessarily the worst time to buy (it is certainly better than this time last year).
Figures from SQM Research show there is more stock on the market in Sydney now than at any time in the past five or six years.
The lending restrictions ensure there are fewer buyers, very few investors and almost no overseas purchasers competing against you.
Name your price and let the vendor sweat. If they need to sell and you’re the only offer then you’re the one setting the price.
Sydney-based buyers’ agent Nick Viner recently told me that, from his observations of the market, if the peak-to-trough fall ends up being 15 per cent then the market is almost there already.
“You don’t know when the bottom is until it starts rising again and, when you buy in a rising market, you are far more pressured to accept compromises,” he said.
“If you buy in this market, you will have plenty of time to make your decision and select the best-quality property you can find within your budget.”
Obviously, it’s no surprise that someone who makes their living from people buying properties says now is a great time to buy.
But, while the property price indices may fall further, they are made up of thousands of transactions — if you have bargained harder than others then you may have already captured some future falls in the index.
An individual property can sell for a lot more or less than what the general market is doing around it depending on a range of factors, from how desirable it is, to how many interested buyers there are, how good the marketing campaign is or whether a couple of other houses are selling on the same street that month.
Also, if it’s your home, not an investment, and you’re happy living there and can afford it, why would you care what it’s worth at any given point in time?
There is more stock on the market in Sydney, but fewer buyers: name your price and let the vendor sweat. (AAP Image: Dave Hunt – file photo)
Not the time for excessive risk-taking
That doesn’t mean buying now is for everyone — it never is.
Even if the property markets that are falling are near the bottom of those declines — and there aren’t too many analysts who think that’s the case — the consensus is that there won’t be a dramatic bounce-back in prices.
If you are a prospective investor or a home owner who expects to see capital gains, most experts agree now is not yet the time to buy.
There are more risks in the housing market and economy than there have been for many years.
Household debt is extremely high and even a small rise in interest rates will put a lot of people under pressure, forcing many to sell and others to dramatically cut back their spending.
Forced sales will see even more stock on the market and prices fall further. Reduced consumer spending could trigger retail and services job losses that could put even more people into financial stress.
That’s not to mention the risk that a declining residential construction sector results in further unemployment increases and mortgage defaults.
You don’t have to be an economist to see the clear risk of a downward spiral where reduced spending leads to job losses, which leads to mortgage defaults, which lowers home prices, leading to even more spending restraint and defaults.
The Irish housing crash is a textbook case study of this.
However, Australia isn’t Ireland. It isn’t part of a monetary union that left it with rates and a currency way too low during a once-in-a-lifetime economic boom, and then way too high in the bust on the other side.
The Reserve Bank has already effectively said it will do whatever it takes to prop up the economy — even printing money — if Australia looks like heading into recession.
The danger is that the Reserve Bank may not have enough ammunition left if the downturn is particularly severe and driven by global factors beyond its control.
A worsening US-China trade war, dramatic international rate rises or another global financial crisis are three plausible threats that could hit Australia when our central bank and Federal Government have relatively little left to fight back with, unlike 2008 when the budget was in surplus and the cash rate was 7.25 per cent.
Think long-term and plan cautiously
What does all that mean for Gen Ys thinking of taking advantage of falling prices to jump into the housing market?
It means thinking carefully about how secure your employment is, and whether you’d have the capacity to maintain repayments for several months if you did have to look for a new job.
Unless your employment is extremely secure, are you borrowing an amount where you can afford the repayments even if you had to take a lower-paid job?
If you’re a younger Gen Y, can you be patient for another year or two to take advantage of further price falls?
Most analysts are predicting that prices will fall at least another 5-10 per cent in Sydney and Melbourne — then again, not much more than a year ago most of the same analysts were predicting that home prices in Sydney and Melbourne would still be rising modestly this year.
Are you planning to live in the place you buy for the long term? If yes, then even though you may not get it for the cheapest price, you’ll probably find it is worth at least as much as you paid for it in a decade’s time — that is now the case even for most homeowners in Ireland, where prices slumped more than 50 per cent from their highs, except for those who bought at the very peak.
Even with the greatest caution, it is possible to get caught up in the fallout from some economic maelstrom, which many analysts are warning of right now.
Given the extreme run-up in household debt and home prices, there is certainly a high risk that Australia will experience a very large home price fall of 20 per cent or more peak-to-trough, but there’s no guarantee it will happen or that this is that crash.
The reality is that financialised capitalist economies are inherently unstable and always full of risks, but one can’t live one’s life based on the whims and vagaries of international markets.
I’ve finally accepted that reality and that’s why I’m sleeping soundly in my new home.
Disclaimer: This is not financial advice, merely observations from a Gen Y cynic who has been researching Australia’s property market for more than a decade and now co-owns 20 per cent of a house in Australia’s most expensive city — arms, legs and smashed avo still intact … for now.