A warning has been issued about Australia’s over-priced property market, which analysts predict is in for a massive downturn. One expert predicts property prices, especially those in capital cities, could plummet by as much as 60%, wiping immense value off what most of us regard as the ‘great Australian dream.’ But how likely is this forecast of a major property crash and how will it affect the average homeowner? When, and if, it happens is almost like looking into a crystal ball, but there is no doubt our economy will continue to be volatile and affect all segments of owning and lending, from home loans to cash loans and even fast loans.
Predictions of doom and gloom
The predictions of a 60% crash in the value of Australian homes comes from leading US real estate analyst Jordan Wirsz, who advises Fortune 500 CEOs and fund managers on real estate investment. His belief of a massive downturn stems from fears the global economic downturn will spread to China, our biggest trading partner, and then flow on to Australia. The result of this economic meltdown will be a flood of properties hitting the market as investors attempt to offload. According to Mr Wirsz, this would then create a huge glut of properties for sale and result in major price drops in an attempt to sell homes.
There is no doubt that the world economy always seems to be teetering on a knife’s edge. The Eurozone crisis continues to influence world markets and the US economy is still struggling to get out of neutral. Australia has ridden out the economic storm well thanks to the strength of China, our major trading partner and a nation whose economy continues to grow at impressive rates.
Our over-priced property market
While Mr Wirsz’s predictions may seem extreme, many other analysts agree that at some stage our property market will take a significant dip. Property in this country is some of the least affordable in the world thanks to the real estate booms of the late 1990s and early to mid-2000s. Our capital cities are particularly vulnerable to falling prices – especially inner city suburbs – and regional areas would also follow suit if there was a major correction.
In reality it would take several factors to make this massive property plunge occur – a big spike in interest rates, high unemployment and a huge glut of properties. But in early 2012, interest rates are looking to come down, unemployment is at very low levels and the number of properties for sale is high but not excessive.
What this means for homeowners
Let’s argue that you bought a home for $500,000 and you borrowed $300,000 to purchase it. Even if property prices dropped 25%, suddenly you have lost $125,000 in value. A 40% drop would mean that your home is worth what you borrowed. Any further drops would mean your loan is actually higher than the property’s value and financially you would be in dire straits. But it would take extreme conditions to produce such a result.
You can help insulate yourself against falling property prices. Good advice includes only buying if you plan to stay in that property for more than seven years; shop around for the best home loan deals; pay off extra on your mortgage to help cover any future interest rate rises; and follow a home budget to keep check of your spending.