Latest / Money Grows on Trees / #354 - Australian Property Prices Have Fallen 4 Months In a Row (The Crash Is Here)

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#354 - Australian Property Prices Have Fallen 4 Months In a Row (The Crash Is Here) · Money Grows on Trees

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Australian property prices have now fallen for four months in
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a row. Most people think it's just a temporary dip. The market always
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bounces back, and the safest thing to do is wait it out. But the reality is
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the engine that's powered every previous Australian property
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recovery, negative gearing, and the CGT discount, has been completely
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dismantled. And there's two ways now for the market to rebalance. It
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will cost somebody either way. I'm Lloyd J. Ross, seven-figure investor
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and entrepreneur, and I've helped thousands of everyday Australians, Americans, New Zealanders, and Canadians get
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out of debt and build real wealth, those in the UK. In this video, I'm going to show
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you whether this correction is temporary or something deeper, the
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exact verdict from the bank's own forecasts, and what
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to do with your money right now depending on whether you own, rent,
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or are waiting to buy. So firstly, it's important to note that the correction
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is real and accelerating, right? So let's have a look at
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the facts so far. We've got four consecutive monthly falls,
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okay? So national prices are now about you
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know, just under 2% below the March 2026 peak.
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So they've come down in the last consecutive four months. And it's speeding up,
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not slowing down. So for example, June fell like 0.4%, I
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read, and then July 0.7. And that's the single biggest
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decline since December 2022. So it's spreading.
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So it started really in Sydney, it recorded the largest fall in July,
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then Melbourne's close behind, if you can believe Melbourne's still falling, because it
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really hasn't, depending where you look, but it really hasn't gone anywhere for
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10 years and now it's falling again. And so, It's
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starting to get going a bit, right? Darwin, incidentally,
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is the only capital that's still growing. And Perth is even sort
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of coming off the ball now, which is interesting because that's a very tightly held market.
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So the behavior confirms it, right? And let's look at what we spoke about in
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one of the more previous episodes, which is the auction clearance rate. So now
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the auction clearance rate is below 50%. It's been there since May. And
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sales are down 16% on just a year ago. The facts are
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just suggesting that not only is it happening, but it's getting worse. And
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the reason for it, let's look at why. The real reason
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for it is because there's been three rate hikes in a row. It's that
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plus it's the budget's tax bombshell that
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landed on investors at the same time. So you have two things driving
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confidence, which is if you increase interest rates consecutively, which
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is what's happened, you're gonna, like I think now, on
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someone who's got like 150, actually I did this exercise with my wife. I
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said, it would be interesting to see your borrowing capacity because I want to do the exercise. And
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we earn our income primarily from drawings, right? And
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so she would max out drawings at $180,000, which
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is taking advantage of all the marginal rates to legally manage
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her tax level. And I did the numbers and I
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believe at $180,000 with a 10% deposit
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or even I think she's only qualified to borrow $400,000. Can
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you believe that? So someone who's on $180k can only borrow
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about $400k. So the reason I'm explaining
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this is because that's what's causing the slowdown because
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you can't just borrow money easily anymore. Plus, the
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budget constraints, the second-hand investor market in
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real estate has effectively disappeared overnight. because
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now they know that if they go into that property as a pre-loved or secondhand property,
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they can't get the negative gearing benefit. And that has a huge impact on
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serviceability at banks too, because what used to happen is you could borrow to
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buy a property investment and they would include the negative gearing benefit
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in some of the serviceability, but they don't do that anymore. And then if you
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add in capital gains tax discount, it's not completely gone.
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The discount system inflation adjusted instead of 50% after one
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year, but it's having an effect on confidence. So
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those things have just knocked the confidence out of the marketplace. And I also think too, the
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fact that they're changing trusts, discretionary trusts, there's probably about 1.2 million Australians that
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rely on discretionary trusts. So they don't even know how
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to buy the property. They don't know what entity to buy it in. So these
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are the things that's causing the correction. So it's not a
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surprise. You'd have to say that it would probably be expected at this point, right?
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Let's talk about the case that's beyond the recovery, right? So let's go through, let's
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give the bear market argument some teeth. Let's
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have a look at it. Firstly, The typical
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recovery engine has been somewhat dismantled, right? So if
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you look back at the past downturns, they've been
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able to cut rates, investors have fled back to the market for
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negative gearing benefit, and the CGT discounts made it interesting
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and effective for people to look at investing in real estate. But from 2027 July
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next year, they'll be gone, right? The pillars that enabled a recovery, gone.
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So the cavalry, so to speak, has been defunded. Crazy.
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And it's going through. I think they haven't pushed it through the house reps yet for the trust stuff,
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but it's happening. The next one is this rent bomb. This
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is from NAB, so National Australia Bank specifically. This is from
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their data and their forecast. They say that without
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negative gearing on secondhand houses, gross rental yields
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must rise 1 to 1.5 percentage points for
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the numbers to work. So if prices stay flat, that
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means rents rise in 25 to 30%. If
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rents can't rise that far, because it's going to completely be
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effectively sealing by people's incomes and cost
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of living, then it means that if rents can't rise that far, Yes,
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it means that property prices will have to fall that far. And I have done episodes
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previously, if you go look back on what could be a 30% correction, right?
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It's possible. Probable is 10, but possible
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is definitely 30. Now, will it happen? We don't know. We don't know. It's
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happened in Japan. It's happened in China. It's happened in America. It's happened, you know, happening in
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Canada as we speak. It's happening in parts of New Zealand. I think it's down 20% in some areas, right?
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So that's what will happen. Now, the banks are already pricing in the paint. which
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is fascinating. So ANZ forecast, they forecast specifically a
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10.6% peaked trough fall across all the
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capitals and even domain. They're
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saying that Sydney houses are at negative seven and
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Melbourne's about negative 3%. That will continue for the next 12 months, right?
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So Sydney's probably gonna fall seven, Melbourne's gonna fall probably
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four to eight, something like that. And there's no, the issue
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with it is there's no rate cut coming soon on
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the horizon. Now the only thing that may cause them to
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do, it's interesting because they're stuck. They
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can't drop rates because inflation is the highest in the Western world. It
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is the high, it's 3.68, 3.7% core inflation rate
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that's sticky. It is high. It's way above, almost double
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their target rate. So it's not like the RBA can
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just cut rates like before. That's the challenge. We haven't experienced this.
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We're in this period of stagflation. GDP growth is short and
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low and almost approaching recession because of the stupid decisions governments
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making in productivity and the waste that they're throwing
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out there in how they spend money. And of course, that's causing inflation.
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Now the RBA can't drop rates, which means it can't rescue the property market
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like it could before. If there was a rate cut, it could not surely
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be coming into place until inflation's curbed. Now,
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if oil goes up, inflation is not going to be curbed. So there's almost
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every case to suggest we're probably not going to get a rate cut for another 12 months.
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So I think it would be very probable to anticipate and
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expect certainly a 7% to 10% fall in prices across the
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major capital cities. Now, there might be some cities like where I live, it might
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be insulated a little bit because of interstate migration is so extreme and the undersupply is
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so great that it may hold steady, right?
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So let's talk about the case for how it recovers. This is the bull market
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argument, okay? Which is equally real. And I look at both sides. Let's
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not be too biased on one side. Let's understand. Firstly,
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the most important thing to talk about is the shortage. Didn't
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go anywhere, didn't get fixed. So the accumulated deficit of
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housing in this country is 250,000 dwellings.
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And what's happening is completions are running about 170K a year, right?
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But 250K needed. And apartment construction's barely
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viable because of the inflation rate of actually building them.
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So you can't really crash a market where you have people coming and nowhere
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to live. And the immigration's causing that, right? Which is what number
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two is, which is the demand. So demand keeps arriving. Migration still
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adds hundreds of thousands of people every single
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year, right? Our population in this country is heading towards like
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27 and a half million to 30 million by 2030. Think about it.
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It's only four years away. 30 million by 2008, that's
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insane. So migrants, they rent. They
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don't buy first, they rent first typically. Now that feeds the rent
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surge which then rebuilds yields which then eventually brings the
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investors back to the marketplace even without the tax breaks. So
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a third of buyers don't even use a mortgage either. So
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downsizes, the bank of mom and dad, cash buyers, a huge slice
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of demand that the RBA really can't touch. So there's that kind
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of like the buyers waiting there to buy basically is what that means. So there's kind of this flaw
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in the price a little bit. And this is the counter argument
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to why I don't think it probably will drop 30%. But that's why 10% is probably more
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reasonable. Just quickly, if you're ready to take control of your finances but feel
9:09
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your copy via the link in the show notes and let's get your money working for
9:22
you. Now back to the episode. Number four is that grandfathering locks
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up the supply. So like the existing investors, they keep
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their old tax treatment as long as they hold, right? So it's going to lock up
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new supply to the market for new investors and owners. So
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the quality stock stays off the market and it cushions the fall even
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in some of the best suburbs. And then also, the rent
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math goes each way. So like, if there's rents, they're
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going to increase by they reckon like 25% by 2030. That
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means vacancy is going to be tightened. It's going to be brutal for tenants. Now
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I have mentioned here to renting is key. But I remember I was in this exact
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same situation in when I lived in Abu Dhabi. When I moved to
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Abu Dhabi, I moved there when there was the greatest rental
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crisis in the city. I was paying half
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of my salary, in fact, more. I was probably paying 45, no, 60% of my salary was
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going to rental. So
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it's not my first experience in a challenging rental environment. And then
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you have to be nimble. So I
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moved an hour away from work. So I did the move. I paid
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the price. I was like, okay, I'm going to keep renting and I'll buy. And I
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moved an hour away, an hour and a half. And I then shared
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with three other roommates and cut the rental expense right
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down. and that's how I started saving money and that's how I invested and that's how I got ahead. So
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that may come, it's going to be a little bit brutal for renting but
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if you can be creative, it's not the end of the
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world, right? What can be the end of the world is if you buy a
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house and get into negative equity and you're stuck there and you got operating costs and you can't afford it
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and then you go bankrupt, like that's bad. And that's why I
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did this reel the other day on Instagram and I got, you know, 50-50, but
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many got slayed for it. There's a lady crying. I was
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like, you know, it does suck. It sucks, you know, that you can't buy a house. But people are
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like, oh, why, why can't, she should buy. I'm like, listen, if
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she can't afford to rent, she ain't gonna afford to buy. People don't realize buying is way more
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expensive. And you'll figure that out when you buy
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and you'll see what I mean. But until then, you have to just understand that it's more expensive because you're
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gonna pay 1% of operating costs and 6.5% in borrowing costs. So it's
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7.5%. And rental yields are 4, 4.5%. So it's prima facie on the
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facts, cheaper to rent, even with the
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increase in rental rates. it will be, particularly because you can room
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share, okay? And people are like, oh, I don't want to room share. Well,
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you know, that's how you get ahead, by doing things you don't want to do. So let's look
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at what ANZ is saying. So some of the banks, they're pencilling in
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recovery from say, mid-2027. So, They're saying
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that, well, if the rates do then fall in 2027, we'll see a bottom
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and we'll see some sort of recovery. That's fair to say that. If
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you think about the shortage of homes, you
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think about the vacancy rates, you think about the
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immigration, it's fair to say that there could and
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should be a recovery of some sort. Here's the verdict. What should you do? You
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have to understand it's a correction. And it's a real one. And a correction is
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usually in market parlance is a 10% fall from peak to
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trough. That's called a correction, right? That's the
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name they give it. 20% or more is a bear market, right? And then
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30% or more is a crash. So 10% fall would be one of
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the most, the deepest in recent history. In fact, it will be,
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but it's not the end of the world. It should happen, I think.
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I think even if you're an owner, you should be wanting it to happen. These owners
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that don't want it to happen are crazy. They're greedy pigs, greedy capitalist pigs.
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If you've got kids, who is in real estate in a home and
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shelter where you've had this tremendous growth in the last five years
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of, say, 60%, 80%? It's crazy. Then you whine about a
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20% fall. Then you're like, you don't think about the next generation. It's
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pathetic, like it is. Even as an owner, you'd
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want it to fall for your kids. It's not beyond a recovery, of course,
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because we've got this huge shortage. And we have millions of people
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going to be moving here. Now that, as I've said before in previous episodes, that may
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change with a new government, right? But for
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now, that's what's going to probably enable some sort of floor
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on the price. But when it recovers, it's going to be a different market. It's
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going to be different because you don't have the tax
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breaks. You don't have the same CGT rules. You don't have
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the same structures being able to buy. You don't have the same confidence. It's
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a different marketplace, right? And we don't know what's happening with immigration.
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If you're buying to live, make sure you've
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got a long time horizon to hold. You wouldn't buy a house to flip it,
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for example. That doesn't make any sense, yeah? When you're renting, brace
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for a 25% increase in rent and as I mentioned, I've
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experienced that before and it sucks. Make some moves to
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make it not suck. What we did as an example and you can replicate this,
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we just renewed our lease recently and I renewed it for two years at the current rate. Now,
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the only way that the owner can break that is they can send you four
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weeks notice to move out and they have to kick you out and then get a new tenant and there's a
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risk for that too for them. But lock in a long
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lease if you can. So two year, whatever it might be, and lock it in. That's
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one thing you can do. And then invest the difference externally while
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you're doing it, which is cool, right? And the third, investing. So
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you don't have to invest in real estate. You can rent and then invest
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the balance into some sort of index. And I've mentioned that so many times. Or a private business.
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You know, like, again, and I don't mean to bring up the laundromat example, but like,
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you know, that, That's like, you can spend 300k
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and make 100 grand net. It's better than a real estate by a factor of
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five. There's so many things that you can do. It's not the end of the world, right?
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If you're already an
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owner and you're not getting killed by
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your mortgage, because don't forget, rates still can go up from
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here. So if you've got property investments, you're grandfathered in. So that's interesting.
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So you could probably hold if it doesn't kill you. And also if
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you own your house, like there's no way you would say, If you own it outright, there's
15:00
no way you'd sell because you're getting, especially if it's in your personal name, you're
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getting all the CGT benefits, like no capital gains tax. And
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you wouldn't try and time the market to get out and then wait for it to fall 10% and
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get back in. Real estate's way too expensive in terms of transaction costs to do that. Like
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you would never. So in closing, I want to say this, I think it's going to be the
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corrections on foot. It's going to continue certainly for the next 12 months.
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If you're in a position where you want to buy, it could be an opportunity in the next 12 months
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to do that. Historically, it's recovered pretty well. We're going
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to see a different recovery. But all these other factors like lack
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of housing, immigration is going to prevent a substantial collapse.
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It will, like it should. So the market will recover just
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depending on when. and what it looks like. But the most important thing you do is you
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don't over commit to a house and a mortgage you can't afford. And
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you don't just cop your rental increase on the chin, you get creative with it. And
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then you have a longer term plan to invest the difference and actually scale your wealth and
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look for unique ways to make extra money. This is how you approach it. And
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then when you're in a position where you can comfortably buy, I mean, yeah,
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why wouldn't you? You can, but, you know, do it sensibly. Just
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be a responsible adult about it. Don't compromise it thinking, I've got
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to get on the ladder. And then you're stuck in there and
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you can't get off the flipping ladder and the ladder's burning. You don't want that to
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happen. All right. So hopefully that can make sense to you, give you some idea
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of kind of how to navigate the next 12 months, what I think is going to happen. And what
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I love about doing this show is that we get to see in 12 months how accurate
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we are. So the mid-2027, we're going to
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see, was this a pretty good estimate? So that's the data.
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They're the facts. Do with it what you will. And if you've got
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any questions, I'd love to pop them in the comments. I come back and reply to all the
16:35
comments. So see in the comments, hit the subscribe button above and
16:38
share this episode with a friend, whoever needs to see it. See you
16:42
in the next episode. Thanks for listening to Money Grows on Trees. If you enjoyed the
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