Latest / Money Grows on Trees / #348 - How Far Will Australian Property Prices Fall/Collapse? (Based on History)

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#348 - How Far Will Australian Property Prices Fall/Collapse? (Based on History) · Money Grows on Trees

0:00
Australian property prices are already falling. Most people think
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Australian property just always goes up and any dip is just a temporary
0:07
blip before the next boom. The reality is when
0:10
you look at what's happened in New Zealand and Canada and US and the UK,
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after the same conditions we have right now, a 20% to 40% correction
0:19
is not just possible, it's probably likely and
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that's probably what happens next. I'm Lloyd J. Ross, seven-figure investor
0:26
and entrepreneur, and I've helped thousands of everyday Australians, New Zealanders, Canadians, Americans
0:29
get out of debt and build real wealth. In this video, in this
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episode, I'm going to show you exactly what history tells us
0:36
about where the Australian property prices are headed and what you
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should be doing about it long-term with your money right now.
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So buckle up as we dive into how far will the Australian property
0:46
market fall. Just to kind of frame this episode, there's
0:50
a lot of complicated economic factors
0:54
that are all interacting at the same time to create pricing and
0:58
market cycles, et cetera, in the world. So it's not an easy topic. It's
1:02
very complex and quite often most people that call out things
1:05
They do a pretty good, an okay job of it, but the reality is we don't
1:09
know anything for certain. What we have to do when we're looking at
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potentially estimating what's going to happen in a market, we
1:16
have to look at history. We have to look at other similar markets
1:20
and how they've responded to the same economic inputs like
1:24
interest rates, immigration, etc. we
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have to take what's happened there, apply the
1:32
same thinking to what can happen here, as well as what's historically
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happened, as well as what we understand to be available to us in terms of
1:38
the data, and then we can extrapolate some estimate
1:44
as to what may happen. So I just want you to know, some of
1:47
the analysis I run through here is going to be fairly basic, but
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I do feel that sometimes the most basic analysis
1:55
or approach based on the bigger numbers is
1:59
an easier way to showcase what can happen the next five to 10 years
2:02
in a market. And it's how I tend to look at things first
2:05
anyways on a bigger scale, because you don't wanna get caught up in the minutia
2:09
of things. It can distort how you're kind of trying to see things. Because
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one of the things you do learn in understanding financial history is markets move
2:16
in cycles. It doesn't matter what market it is. Understanding that means that we
2:20
can have some idea. as to what's happened in
2:23
the past, and we can extrapolate some data into the future. But the
2:27
simplicity of what I talk about today will help you understand the
2:31
thinking I've got about the market, how I'm approaching it myself, how I'd approach
2:34
it if I were you, and hopefully just give you some indication of
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what to understand about it and where it's going to go. So with that being said, it's
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a bit of a caveat. I'm not the leading economist
2:46
for the country. I'm just trying to explain to you how I think about this. Which
2:51
is why you follow our channel, right? In the first place. So what
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we do know is this, we know that this week that
2:58
auction clearance rates have plummeted in
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Melbourne, Sydney, and Brisbane. And
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to some extent in Perth, the days on the market have changed in Perth.
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So I need to help you understand this. The clearance rates are at
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what rate do properties get sold at
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auction that have been listed? That's the clearance rate. So
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at what rate are we clearing housing in terms of
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the deals done and closed and settled from auctions, or
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certainly purchased from auctions across the country? So
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when there's an auction on, bidders come, they
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make a bid, they register first, then they bid, and then hopefully a
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sale's made. Now, not always the case. If a sale's not made, then
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the property is passed in and they can negotiate after
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that post-auction. But a lot of the time, the properties are sold
3:47
at auction if it meets the reserve price. The clearance rates
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up until recently were at 50% plus. very
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robust clearance rates, which is very, very, very strong. There
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was also a lot of bidders. So there's a lot of registered bidders showing up. So the
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market confidence was there, the sentiment was high, that
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real estate was going to do well. Now, what's fascinating about market cycles is
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it's always most popular at the peak. Which
4:14
is why even in the gold market, and you go back and listen to these episodes, I spoke about it.
4:17
When the gold market was on fire, it was pumping. Gold was just
4:20
cranking every day. It was up and up and up. It'd be on $4,000 an ounce,
4:24
and it was just cranking. There was a huge line at the bullion shop
4:27
in Sydney. There was lines of people, like lines, trying to
4:30
buy gold bullion. Now, of course, when gold pear-shaped, there's no line
4:34
there anymore. It's fascinating. There's always more bidders
4:38
when the market's most bullish. Now,
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you don't have to be a genius to know it. You just have to know a little bit of financial history. So
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of course, when I see record numbers of bidders at auctions, I
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don't want to touch real estate. It's obvious. It's like, it's peak
4:53
bubble. So clearance rates are working, it's happening.
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And then of course, what happened? The government changed the
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tax rules in the country. All of a sudden, negative
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gearing on secondhand properties is gone. So all of a sudden,
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you've got the secondhand investor market disappeared overnight. Then
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they changed the way that capital gains tax is to be treated
5:17
as a personal investor. So the 50% CGT discount, gone. SMSF
5:22
lending and borrowing has changed, which means that market's gonna disappear.
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And there's other things too, like trusts are changing, so people don't know when they buy
5:30
a house, what entity to buy it in, and that's tricky right now. So we're
5:33
in a state of flux. So there's a lot of uncertainty in
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the marketplace right now in all those areas that affect real estate specifically, and
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other assets, but primarily real estate. So you have this massive sentiment, high
5:44
confidence, all of a sudden government goes, no, we're going to do this, this, this, and this.
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Sideswiped everyone. Now we're in flux because it has to pass the House of
5:51
Representatives in August for trusts, and they don't even know how to buy the house. They don't
5:54
even know how to buy their property investment. So of course, it's no shock
5:59
No surprise that this has had a knock-on effect. Now,
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not just that, but also we came from peak prices too. So we're also
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dealing with that. So the fallout is a lot faster and higher. So
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clearance rates in Brisbane last week fell
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to 15%. Now, why that's an important data
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piece to understand is because clearance rates are the first thing to change before
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we see price adjustments. Now, the other thing is that when that
6:25
happens, sellers go, oh, I wanted
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to sell. Now, I can't sell quite so easily. So
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now I'm going to negotiate a different price and the
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price will fall if I'm a motivated vendor to sell. So
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now you're gonna start to see price shifts. So like on the,
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if you go to realestate.com, to the for sale sections of
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the major capital cities, you will see price drop,
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price drop, price drop, price, it's happening, right? So you're starting to
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see it. Now if we can add in some macroeconomic factors that have
6:56
also impacted the market, the RBA has
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lifted interest rates, okay? And they may lift them again
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in August when they meet again, but inflation cooled
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yesterday to 3.8%. It's still not under control, so they may
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lift rates again. there's a chance they get up 0.25, or
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they may leave it and let's just see what inflation does in
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the next couple of quarters. But that's having a huge impact because if
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rates are at the retail, the banks are 66 and a half percent, which they
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are, and a house is 1.3 million, a
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lot of people on 180K, they can only borrow 500 grand. So
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the ability for people to borrow has shrunk
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massively because price is a lot higher, but interest rates are a lot higher.
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So of course you're having this other knock-on effect with macroeconomics with
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the interest rate. What's interesting though is that what has prevented
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a massive plummet, what may prevent
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a massive plummet, is the sheer volume of immigrants coming
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to the country and the government spending and I
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would say regulation that's constraining the supply of new housing too. So
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that's probably the alternate force working against all these other things is
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that one. So that's why we may see this like
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toing and froing until immigration really falls or until
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regulations are appeased and supply can happen, we're
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going to see this combativeness happen in the marketplace between the
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things that are hurting the market and the things that are helping the market. It's just, they're
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clashing. So we see price flatlining
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for a long period of time unless one gives. And if
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the immigration one gives, like Pauline gets in the next 18 months
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as an example, if there's a leadership spill in the government and they drop immigration and
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they alleviate red tape, you may see a longer
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extended fall in house prices. And
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this is why it's a complex topic. So let me keep rolling through this
8:47
as we go. What is interesting to me, and
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what I focus on the most is, I focus on long
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sustainable returns in an asset class. So we know, what
8:58
we do know for sure, is that over the last 60 years,
9:02
65 years, or 70 years, just about, is
9:08
we know that the S&P 500, which is the best businesses in the world in
9:12
one fund, has returned on average 10.26% since 1957. That
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much we know. That's actual fact. Fact. Now
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whether that's because of currency debasement or low interest
9:23
rates or whatever, irrespective, that asset class has done that. Chairs. Now,
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what we know for sure is that businesses outperform real estate, fact, because
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they provide more value to the world than just shelter. Great companies outperform
9:35
real estate, fact. I'm not even going to debate
9:39
it with you, okay? Just read up and you'll see it does. So
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now I know that. So I'm like, okay, well, if that's the case, and
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we know that those are the best businesses in the world, and they've done 10.26 for the last 70 years. I
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think in the last 20 years, and certainly 10, it's like 14%. It's very high. So
9:56
we know they've performed the best. Now if we look at real estate,
10:00
We know since probably the 1960s after
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the great 1890, 70 year price
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collapse in real estate in Melbourne, we know that
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real estate on average doubles every 10 years because of the 7% return.
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So 72, the rule is 72, 72 divided by seven is roughly
10:18
10 years. So that's why real estate on average by and large
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over the course of the last 50 years has returned 7% a
10:25
year, okay? Nominal returns. That
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means, you know, including inflation. So we know
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that. Okay, cool. So now we've got two different. We've got shares have performed 10% to
10:36
14% in the last 20 years. Real estate, 7%, 8%. So
10:41
we can see that. Why is this important? Because When
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they dropped interest rates during COVID in 2021 to zero, to
10:50
zero, they created a
10:54
debt binge like never before. Because in Australia, interest rates
10:57
have never been zero. They were 0.1 to be fair. Now, when they
11:00
did that, they did it to loosen up the credit so that people
11:04
could keep borrowing, so it would run the economy. But they did
11:08
it way too low. They should never have done lockdowns, that was stupid. And
11:12
they did it for too long. What it did was made debt cheap
11:16
really like they made debt free just about and so
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of course What do people do people love to borrow money? They love to buy things
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in this country that they can't afford they love to do it to keep up with the Joneses They do it for all
11:26
these weird wonderful behavior reasons and of course they have a dying love affair for
11:29
real estate So of course what happens is oh, honey. It's two percentage rates
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now. Oh my god. We can borrow a million bucks Let's go to that so they did that at
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Scale in the country or got into this massive debt
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it and it went to real estate and a pumped real estate prices up
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massively because of low interest rates. Okay,
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from 2020 to 2025, that five-year period, real estate
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grew by 60 to 80%. Can you believe that? In
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that period, which is, to put it in perspective, it's 13% returns a
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year for five years. And
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that is way above, way above the 7% on
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average we've had in the last 50. So straight away, you ask
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the question, why did that happen? And the answer is very obvious. Interest
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rates are 0%. That's why it happened. Anyone with
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a brain can tell you that's what happened, right? But I
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shouldn't say that because some of us, anyone who's got an understanding
12:22
of economics can tell you that. but unfortunately not
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everyone has an understanding of economics. That's why they're trying to, that's why they're out there last year
12:28
buying real estate at the peak of the market. So we know that. So all
12:32
of a sudden, okay, we got 65% in five years when
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the reality is it should have been 35% based on averages. So
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we know it's pumped 30 to 35% above the norm,
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the mean. It's called, in statistics they call it the mean, the average, okay?
12:48
Now if the average is, or the mean is seven, and
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it grew 6% above the mean, then
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people who have been around the investing world and economics and statistics, they
13:00
know a force called reversion to the mean, where
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the asset price performance will mean
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revert. So it'll actually go back to the mean. In fact, it won't go
13:11
back to the mean, it'll go below the mean to get it back to the mean. Because
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if you've been for five years above the average by seven, it has to fall
13:19
for five years below the average and stay there for it to
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be back to the mean. So the reality is, not only should we see
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a 30% collapse in prices, we should see it sustained for
13:29
quite some time. If we're gonna revert to the mean, which should
13:33
happen, should happen. The
13:36
things that's preventing it doing that, now before I go on, let
13:40
me say this, this is what we've seen. So let me give you some examples. This
13:44
has happened in China. Prices
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are now back to 2006 prices,
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40% correction. It's happened in China. It's
13:56
happened in Japan. In fact, it's still happening in Japan because Japan
14:00
still hasn't recovered from the 1990 price peak in
14:03
real estate. It's been 35 years and it's still recovering. It's
14:07
happened in Japan. It's happened in New Zealand.
14:10
Prices are down 20%. Normal returns, most
14:14
areas. It's happening in Canada. Canada's
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down 20%. In fact, some areas
14:22
30%. It's happening in America. It's
14:27
happening, if you look at London prices, London
14:31
prices are now officially 30%, almost
14:36
40% down, 30% for sure. So it's happening in London,
14:39
the most robust, most confident real estate market in
14:43
the world there for a long period of time. So it's not whether it
14:46
can happen, it is happening. So
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why isn't it happening here? The epicenter of one of the greatest real estate
14:53
booms ever, globally, during COVID,
14:57
where we went on a debt binge property love affair and
15:00
pumped markets above the mean by 30%. Why, oh
15:04
why, is it not happening here? Just quickly, if you're
15:07
ready to take control of your finances but feel stuck on where to start, I
15:11
have a solution. My book, Money Buys Happiness, simplifies
15:14
investing and wealth building with practical steps to help you achieve financial
15:18
peace. Get your copy via the link in the show notes and let's get your
15:22
money working for you. Now back to the episode. It's happening
15:25
now. We're starting to see the beginnings of it, which are lower clearance
15:28
rates, price drops, it's already happening. In fact, In
15:32
some areas, I think Sydney in some areas are already down 20%. But
15:36
across the board, it's probably down three, three to five. I think Melbourne's down five, 3% in
15:40
Sydney maybe. Perth is a very strong market. Perth's a weird market. Very, very
15:43
tightly held market, Perth. The days on market has
15:47
doubled. So, you know, Perth is this crown jewel in the real estate
15:50
market. It's gone from six days from listed to
15:53
sold to 11. You could argue that that's
15:58
a big change in Perth, which yeah. We're
16:01
starting to see what is the greatest real
16:05
estate price collapse in 40 years,
16:09
because in the last 40 years, it's not collapsed more than 8%. It's not
16:13
wild to say that it's been the greatest collapse in 40 years, because it is.
16:17
But has it stopped is the answer. So if
16:20
I can summarize this, I'll say negative gearing's changed, CGT
16:26
has changed. Trusts and how they're affected and
16:29
assessed on tax has changed and how people hold assets like real estate has changed. SMSF
16:34
lending has gone, right? Rates
16:38
have risen. Immigration now looks
16:41
like it might be curbed with a new government. Hasn't started yet, but it's likely. Government
16:46
spending may fall. And all the things propping up GDP
16:50
will come to an end. At some point it must. and
16:54
all those things happening at the same time, plus lower confidence, I
16:59
think it's fairly obvious that real estate will struggle. Now,
17:03
I'm not going to say a number, because I don't know, you
17:06
don't know, and no one really knows. But
17:10
what do I anticipate? I anticipate we're
17:13
gonna see, because we're already seeing it in price adjustments now, there's
17:17
no bidders rocking up to auctions right now, 10 to 20% market
17:21
correction is not far-fetched. That would be
17:24
reasonable, okay? And I don't think, even bullish real
17:31
Theoretically, it
17:34
should. But with the amount of immigration and, well, I
17:38
don't know what the RBA is going to do. Maybe RBA will drop rates again and pump it again. Who knows?
17:42
It's very much can be a government policy thing or a monetary
17:46
policy thing that can change it, but 30% possible. But
17:51
10 to 20 are more likely. But here's what I also think. If it
17:54
doesn't, what I do think is it
17:58
couldn't possibly grow bullishly like it has for the next five to
18:01
10 years. And I just don't think anyone who
18:04
understands basic economics, the market, could
18:08
possibly anticipate that it's going to grow at 7% for the next five to 10 years.
18:11
And so I don't think that's likely. So understanding
18:15
this is going to help you because I do think if you're someone who hasn't bought a
18:18
property and you want to, and making sure the
18:21
house doesn't own you, I think you've got time. For the first
18:25
time in your life, you've got time. Now,
18:29
does that mean wait forever? No. You always want to buy
18:32
assets when no one wants them. Now, right now, no one wants them. So,
18:36
you know, there could be some opportunities for you to come in the next six months. In fact, you
18:39
could. So I think you'd want to be starting to look now if you want to get into the market,
18:43
you'd be looking now. You'd be out there. You'd be the only
18:46
registered bidder. You'd be really doing your due diligence. You'd be looking around. You'd
18:49
be looking for deals. There's mortgaging and possessions coming out now because rates
18:53
have risen enough where people are actually needing to force sell their home. That's starting to
18:56
happen. So I think it's a—well, I don't think. It's definitely a buyer's market
19:00
and I think you can start to dig the deals out in the marketplace now.
19:04
Start doing it now, and I think some of the best deals will come over the next 12 months. But
19:10
be ready, because this country has a real, real
19:14
desire for unquenchable thirst for
19:17
real estate. Now, as to whether that's going to continue to happen with these new
19:20
changes to CGT and blah, blah, blah, is up for debate. But
19:23
here's what I do know. I think the Labor government for the next 18 months is gonna pump
19:26
immigration. I also think the supply remains constrained because of
19:30
the crazy red tape that's available out there and
19:33
the big build that's causing a lot of tradies and so forth to be extremely expensive and
19:36
materials to go up because of inflation. So I think building is gonna be constrained. So
19:40
in your favor, if you're a property owner, those are gonna be constrained. That's gonna create a
19:44
price floor. So we're gonna see a correction, but those two
19:47
constituents is gonna make it unlikely it's gonna be a massive collapse.
19:51
All right, so, but we'll see. So
19:55
the answer to the question of where it's gonna go would lie between zero and
19:58
40%, which is about 20. So if Sydney's already down three to four to five, Melbourne's
20:02
down five, another five to 10 to go, probably 20, we'll be
20:05
there, right? Remember, London's down 40, Canada's down 20, roughly.
20:10
New Zealand's down 20. China has not grown for 20 years.
20:14
Japan still hasn't recovered. USA is down 20% in a lot of
20:17
the areas, because inflation's high there and they're increasing rates. Don't
20:21
be surprised if it's 20%. Don't be surprised, but be ready too,
20:24
okay? So how do you plan for this is this. If
20:28
you can't manage your debt and you're like, oh my God, I needed this to go up for this
20:31
work, start thinking about downsizing and pay off the mortgage. The less
20:35
debt you have, the better. If you own your home and
20:38
you own it outright, you'd be crazy to sell it in any market. I just don't
20:41
think that's a sensible thing. Someone asked me that day, Lord, I got my home paid
20:44
off. Should I sell it and invest? I'm like, no, no, no, no, no. Down the hard yards, keep
20:48
it. Long term, just hold it forever. If you paid it off, that's very
20:51
smart. You don't want to be playing around with market timing, real estate assets,
20:55
that's for sure. Nor stock assets. You have to, I'd be,
20:58
if I own my home outright, good position to
21:01
be in, I would be focusing my efforts on business and stocks. That's
21:05
where I'd go next. Would I be leveraging
21:09
it to buy property investments in real estate? Nope. For
21:12
many reasons, one, no negative gearing, two, no, I wouldn't. The net
21:16
yield of a property investment at 6.5% rates is
21:19
negative. You are gonna lose money property investing right
21:22
now with the yields, with no deposit or fully financed or
21:27
leveraging a house, you're gonna lose money in a property investment now. So I don't think that's a
21:30
good idea. Hold your house, get into stocks over time and
21:33
get into a business. That's what I'll be doing. If you're waiting to buy, as I
21:37
said, you have time. You have the negotiating power. So negotiate harder, hold
21:41
your bid longer and go low ball.
21:45
It's time. This is your chance. This is what you've been praying for. So get yourself together
21:48
and start. And even if you don't have the deposit yet, start to get clever
21:52
with it and start to look around for ways because I think you are going to
21:55
experience the next 12 months a good opportunity time. I
21:59
think if you don't own any real estate, you don't have an
22:02
ability to earn money outside your job, I think a business is better than a property. I
22:06
still think that. For those who own, is
22:09
there any solace for you? Is there any hope? Of course. If
22:13
the next 20 and 30 years, Again,
22:17
we don't know maybe you won't Do I think the
22:21
Australian market and property will do okay? I think so. I think it's gonna
22:24
be okay I just don't think it's gonna be how it
22:27
has been. That's all so I don't think you're gonna lose
22:30
a ton of money next with you But I don't think it's gonna be as
22:34
bullish as what it was and I think that's a fair assessment to make Based
22:37
on what I've discussed in this episode So I hope that gives you some level of
22:40
indication and some basic analysis as to how I'm thinking about the
22:44
real estate market and assessing as to where you sit as a buyer, owner,
22:48
investor, and what you wanna be focusing on. So if you've
22:52
enjoyed the episode, if you agree with me, pop in the comments, I agree. If
22:55
you don't agree with me, come and fight me and we'll have a conversation down below, it's all good. And
22:58
if you've enjoyed the episode, hit the share, share with a friend, say, hey, you need to listen
23:01
to this, this is a pretty good idea of what's happening in the marketplace. Of
23:05
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