Michael Matusik is the founder of Matusik Property Insights, has predicted that overheated property markets are set to see a correction in prices come 2015. He is a respected leader in providing conservative property predictions, so this article he wrote in the Property Observer today really took my notice.
I am going to use two of his graphs to show you why he thinks this may happen.
The two graphics show that:
- House prices are cyclical. House prices go up and down according to many factors in the market. Due to the low interest rates and the ease to which people are getting loans (low rates mean repayments are more affordable), the gains made now and into 2014 and 2015, could be eroded if prices grow too fast over the next 12 to 18 months. Matsuik says “that some of the current price forecasts (15% to 20% for 2014 alone) will mean, if they eventuate, a potentially big slide in prices come late 2015 and beyond. There is really little wriggle room for house prices to move.” The predictions of growth around 15% is unsustainable in the next little while but a normal growth of between 5-8% seems more viable for an increase in house prices over the long term.
- Not all capitals are enjoying the rush. Some states haven’t really seen any improvement in house prices yet. Right now the hot spots according to the report are Sydney, Melbourne and Perth and some locations (like every other cycle) will miss out. The report also says that Hobart, Adelaide, Canberra or even Darwin may not enjoy much house price growth this year. In contrast, South East Queensland is in the box seat. Perth is likely to slow. I also think that Sydney and Melbourne will see price growth this year, but they are already ‘over cooked’. Both markets can expect a correction – and maybe big ones – in late 2015.
- With stubborn, high unemployment, full-time job losses and benign inflation – and despite its inflationary impact on house prices – interest rates need to fall further. The collateral damage will be an overheated house price cycle. This is why house prices cycle.
- What will stop this current cycle is any rise in interest rates and an increase in mortgage defaults (which will lead to tighter lending practices). Care must be taken not to borrow too much.
So for those in the hot markets, please take care and do your sums before you commit to buying property to ensure that you don’t overextend in your finances. Try and ask this question to see if you don’t overextend – what if interest rates rise by 2-3%, can you still afford the repayments?
I would love to hear from you to see if you agree with Michael’s predictions. If so leave a comment below.