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Is The Australian Housing Market About To Crash? · The Follio Property Podcast

• 0:00
  Is the Australian housing crash coming? The reason I want to bring this up is 18.6 year property cycle. When I entered the industry, I got told about this straight away and I myself have gone down a rabbit hole. It's almost like a religion, a cult.
• 0:12
  It's based on a premise, a study by Phil Anderson, and the book is The Secret Life of Real Estate and Banking. Markets don't run forever. What's the point? 18 and a half years, the property cycle crashes. There's sort of four key phases. Slowdown, recovery, recession, global economic crisis. We are very much feels like going on that same trajectory that we went on the last 18.6 years ago.
• 0:32
  People are like, the market's got to fail, the market's got to fail. But the best opportunity to invest in the market is in the crash, in the dip. I'm certainly not here to hope the markets fall. But people want to go to something that's tangible. Residential houses, it's not as liquid. So you can't see a 40% fall overnight. But residential real estate is that asset, particularly that blue chip type stock where people typically park their cash in times of uncertainty. When will the Perth property market slow down? Well, let's dive into it.
• 0:56
  You're listening to the Folio Property Podcast. I'm Rhys Bettle and I'm here each week with my co-host, Lachlan De La Hunty. If you're enjoying the podcast, do us a favour, please hit like, hit subscribe and leave a comment so we can grow this channel. Lachlan, is the Australian housing crash coming? Well, let's dive into it. Let's dive into it. The reason I want to bring this up is...
• 1:16
  18.6 year property cycle. It's topical at the moment. It's trending everywhere. Very, very topical. You know, when I entered the industry, I got told about this straight away and I myself have gone down a rabbit hole, but I thought- It's almost like a religion, a cult. It is. And from someone outsider coming in, reading some of the things about this cycle, some of it sounds like it could easily happen. Some of it sounds a little bit
• 1:42
  When you start talking about the stars and stuff, you lose a bit of traction. But no, there is some merit behind it. It's based on a premise, a study by Phil Anderson. The book is The Secret Life of Real Estate and Banking. It's a very dry read. There's another book that was released by Akil, and that's The Secret Wealth Advantage. And essentially, it dives into this 18.6-year cycle where each market's
• 2:06
  globally and it's more focused around say America and European markets, it goes back to the origination of the dollar which was obviously founded in America and it goes back into that much depth and it looks at every cycle since the dollar was formed.
• 2:23
  And that's correct. Markets don't run forever. And there's been significant recessions throughout the test of time, particularly in American markets. And since 1980, there's been four recessions in Australia. You've got to understand the context of the cycle and not get scared by it because if it is to be somewhat relevant, then it gives opportunity. And some of these things, and it's very cultish, people almost praying for the market to fall and fail because those that have missed it,
• 2:51
  need that hope that someday they're going to be able to get in. So it becomes self-fulfilling that people like the market's got to fail, the market's got to fail. Inevitably, it doesn't. Got so many questions in there. 18.6. Okay. So first one is, what's the point six? Is it 18 and a half years, the property cycle crashes? What are some of the patterns that we're looking at to distinguish that that's going to happen? And that has happened on previous cycles.
• 3:17
  Yep. So like I said, it goes through all the different periods of time and there's sort of four key phases. Yep. So what happens typically, there's an economic event. So if we think of most recently, the GFC. Yep. That is the, you know, prior to that, 2007, is the peak of the market, which is followed by a mass economic event.
• 3:36
  Slowdown, recovery, recession, global economic crisis. So typically, there's a major economic event that occurs, which typically happens after the peak of the cycle, and the market falls significantly, and then the cycle starts. So for this last 18 and a half year cycle, the recovery phase started in 2012. So the peak of the market, 2007.
• 3:58
  Crash took place in 2008, and then it took four years of recovery. So four years of the market in downturn. So we really see prices fall, particularly in the stock market. And understand this book is heavily reflective of the stock market, the share market. But the premise of the book is that all gains in the world come back to land. And we're not going to be able to cover this entire book. It's 500 odd pages in this podcast. But the four phases are...
• 4:26
  Major economic event followed by four years of a downturn in the market, which kickstarts the new cycle. So the new cycle for us in this current period of time was in 2012, where the recovery phase begins and you typically see new technologies come out, you see a lot of positivity back in the markets, you see lending start to occur again because in a shutdown, debt's hard to get. And that runs for about seven years.
• 4:51
  things improve, things improve. And then you get a mid-cycle peak. For us, it was just before COVID, things got really good. Stock market hit an all-time high, everything's very positive, and then COVID hit, and then you get a mid-cycle slowdown. And that's typically for two to three years. For us, it was a lot less in the last period because COVID took about 12 months before it started to really pick up again. And then you see the next phase of growth,
• 5:17
  and this is typically where you see a rise in land prices, and for us, that was from really 2002 right up into this period, you see seven years of quite positive growth across all markets. But more important than the last two years of that seven is the winner's curse phase. And for us,
• 5:36
  It's documented in these books and other articles and everyone's getting behind the trend that that winner's curse phase potentially started circa 2024 and that's when you see a lot of speculation and that's the key word. Speculation comes into the market and it's forecasted that somewhere mid to late 2026, we're going to see the peak of the market and that's what people are starting to report on.
• 5:59
  And you talk about the winner's curse phase. If you look at the last 21 months, we've had consecutive growth. I'm talking property here. Obviously, we're not going to the share market. The share market's important. We've seen at the moment, you're seeing record high returns.
• 6:14
  unprecedented annual growth in the share market. But more importantly, it's around that speculation. Gold's an all-time high. SX is an all-time high. So there's an argument that suggests that things are too good to be true. They normally are. So that's when I'm like, okay, there might be some more merit to this.
• 6:32
  Interesting. So from the pattern you're saying, we are very much feels like going on that same trajectory that we went on the last 18.6-year cycle. But you did mention earlier the book and the theory is probably heavily driven to more to the US market or even shares in general. Did it affect Australia last downturn as hard as what it did say in America or like the GFC –
• 6:58
  doing some time in the UK. The UK got hit really hard by it and, you know, people lost a lot of jobs. I didn't, you know, I was a bit younger in my career then in Perth with the GFC but didn't feel like I had the same impact. Exactly. Well, no one's protected. Like at GFC, a global event, even COVID impacts all markets.
• 7:13
  But what you find is the markets that get heavily hit are speculative markets. And if we look back at the GFC as our last downturn in the market, the share market got smashed 40% over that first 12 months. Commercial markets get smashed because commercial markets are heavily tied to businesses. So they fell close to 20%. What's interesting is the Australian residential market only fell by 2%.
• 7:43
  And some markets actually went up through that phase. If you look at Perth, it was an outlier. It's seen about close to 8% growth over that annual period when we're in the GFC. So no, not all markets go down. But America was absolutely smacked. And particularly from not just the share market, but their land prices in, you know, you could buy properties for a dollar. And yes, that is correct. I was at university studying property at the time and we're doing a research report in places like...
• 8:10
  Philadelphia, Chicago, you could buy places for a dollar because the banks, what happens is banks start to shut down. They're trying to get as much debt off their books as possible. So you buy the property for a dollar, but you take on the debt. So on a property that should be worth $500,000, you bought it for a dollar, but you take on the debt for $200,000. They just want to get debt off their books. So there is markets that get absolutely smashed, but most often it's the speculative markets.
• 8:34
  Yeah. The debt thing is quite interesting because, you know, from what you've said so far, the patterns are very similar. Australia probably doesn't have as big an impact as what some of these, you know, the Americas of the world. Property hasn't taken as big a hit as what maybe the share market has taken a hit. But in that GFC, it was all off the back of the subprime mortgages and the increased debt levels. What's Australia looking like in terms of, you know, personal debt now versus maybe where it has been previously? Yeah.
• 9:01
  It's very concerning. We're at record highs. And it's not the regulated debt that's concerning, it's the private debt that's at five times, six times where we were in the GFC. And what's private debt? It's unregulated debt. So that's people just giving it out on speculative assets that's not governed by the same regulation and red tape that the big four are. So the best thing about Australia is there is a lot of red tape in our banking industry in comparison to America and Europe.
• 9:28
  So, albeit that's frustrating as a consumer sometimes because there is so much red tape, that's why we've got the buffers in there, the 2.5% buffer. So if things do occur, you'll protect it. You can afford to pay, make your repayments. In the private space, those regulations don't apply. And so you're giving debt to people that may not be able to afford it if there's an economic event. That's why we come back to the fundamentals and when we're advising clients, we're
• 9:52
  We look at, and we spoke about it in the last podcast, cash buffers, debt to income, all these things become really, really important, not just as a protection mechanism to make sure that you're not overexposed in an event, but the best opportunity to invest in the market is in a crash, in the dip. We know that. And I'm certainly not here to hope the markets fall. And I don't think they will because history tells us during economic downturns, people flood back to property, tangible assets. So the share market typically gets smacked.
• 10:19
  So, supers are a massive concern, dropped 40% in our last downturn. So, those retirees that are now working on that, that concerns me. But people want to go to something that's tangible. What's tangible? Residential houses. It's not as a liquid, right? So, you can't see a 40% fall overnight because it takes you two months to sell a property. Share market, instant on the balance sheet.
• 10:40
  So, people go to gold, that's why we've probably recently seen a surge in gold because that could be the speculation people are forecasting something's going to take place. You see a lot of people putting money into cash, Warren Buffett, arguably the greatest investor of all time, two-thirds of his portfolio is now in cash. What does he do? He takes big positions in downturns. That's interesting. But residential real estate is that asset, particularly that blue chip type stock where people typically park their cash in times of uncertainty.
• 11:09
  private lenders are backed by the big four as well from a funding vehicle as well. Of course they are. They just give it to them so they can give it out in a place that's not regulated because the bank can't do it because they're regulated. And the interesting thing is this is actually hot off the press. Friend of the show, Michael Killner, actually sent me a screenshot today and Eubank's come out with a 90% LVR product for investors as well. So we've obviously seen the first homeowner cap.
• 11:35
  increased with the no LMI really starting to drive some volume and now banks are starting to get competitive with investors as well and now dropping minimum deposit as well. And money's getting easy to get access to. Correct. Markets are rising at rates we haven't seen for almost a decade. Share market, there's great speculation. So there is a lot of similarities to the previous cycle. What drives each phase of the cycle?
• 12:00
  Yeah, well, when you look at cycles, Rhys, and this is where some, and the question is, how do some markets, even in a downturn, you know, increase in value while others get smashed by 40%, 50%? It comes down to the fundamentals. And this is where I get really concerned about people being overexposed in speculative markets such as regional towns because the fundamentals aren't strong from a supply and demand equation, and that's what we need to look at. So any market where, you know,
• 12:30
  where demand significantly outweighs supply. And what does that look like? We know it's population growth typically coming into a market that isn't oversupplied. So stock on market, days on market, those sorts of metrics. When the fundamentals are strong, they'll weather almost all storms.
• 12:46
  When a downturn comes, an economic downturn, a recession, a GFC, those type of events, it's typically the sentiment that gets smashed. And what you find is when demand outweighs supply and there's strong sentiment, as we're seeing nationally at the moment, markets rise and they rise significantly. When demand outweighs supply and there's low sentiment, so interest rates are on the rise or there's been a war that's broken out in Russia. We saw that at the start of this year where there was some uncertainty. Yeah.
• 13:15
  Markets still continue to rise, but they don't do so at the rate that people expect at the moment where you're seeing double-digit growth. We'd seen 2%, 3% growth a month, double-digit growth year on year. And that's the thing. What we're seeing at the moment isn't normal. Double-digit growth year on year isn't the norm. What is the norm is somewhere between 6% and 7% growth annually. That's a long-term compounding growth rate of the capital cities in Australia over the last 40 years.
• 13:43
  Anything above that isn't normal. Anything below that isn't normal. So where I get concerned about these cycles is those speculative markets. And for me, that's regional markets over the last five years. If we look at what's outperformed the national market, it absolutely has been the regional market. We've taken positions with clients there. But if I'm looking to offload speculative assets, I would put them in those baskets.
• 14:07
  It's interesting. She mentioned earlier, you know, one of the concerns could be with this 18.6-year cycle is the superannuation. SMSFs are becoming an extremely popular product in Australia, but definitely we're seeing a lot of inquiries. And it's interesting, though. I actually had a client who came through, speaking to her yesterday, came through the podcast, and she'd gone with –
• 14:27
  a competitor of ours initially to get an SMSF. And they were actually recommending two regional players for that SMSF. And for me, that was- That's a huge red flag. There's people's retirement funds. I can see the benefit now because if you think about it, and my mum and dad are in this position at the moment, right?
• 14:48
  And literally 12 months ago, I got them to set up a self-managed super fund. And we've taken a very conservative position in their super fund in real estate, in a capital city, a blue chip asset. And we've parked some of that in cash because that's, you know, they're country people, they're supers, they're a time of fun. They don't have anything else. And...
• 15:09
  For someone to go out there and potentially put that into a speculative market, that makes me sick and that really grinds my gears. So be careful anyone is in that position, but it is tough because they're the most vulnerable market when we talk about your super. Because if you're super, last cycle, 40% of that, you lost that overnight. That's massive, mate. That's a decade of people's savings they've lost overnight. So again, I'm not going to give financial advice on what to do with that. I'm just talking about-
• 15:36
  my family and how I advise my mum and dad because they're in that category. They don't have much either. They've got $350,000 in their super and they need that to last 20 years. It gets concerning. So we have to be really conservative in your super and make sure that, you know, at the moment when everything's going well, people will just, let's set up a self-managed super, let's go buy a property. There's no argument that says property is a good place for it because –
• 15:58
  History will tell us during downturns, residential real estate can hold its own, but certainly not speculative assets. And regional absolutely is in that category. And I'm not to say, everyone listening to the podcast, you shouldn't have regional properties in your portfolio. We've talked about this. It does have a place for the right investor, for the right client. For me, that's not the super fund.
• 16:20
  And on, you know, we could do a whole episode on self-managed super funds, which I think we should get an expert in to talk about it. But generally on those plays, you're wanting an asset you can hold, like a blue chip asset, trading play with it. Whereas these regionals, one, they're speculative. Two, you know, there's peaks and troughs. If you don't sell on the market, you can't sell it. This is the thing. People don't realise...
• 16:42
  but not many listeners may have been investing in the last downturn. I did have an investment in the market. It was a speculative effort. It was an off-the-plan townhouse in a regional market. So I can speak to this 100%. And that was down 40% at the time of completion of construction.
• 17:01
  It's hard to come back from that. I had to hold that asset for seven years and talk about putting yourself behind. So I've been there and done it at a time when I didn't have the money to be able to afford that. So to put your super, your life savings when you're on the other end of the spectrum, lucky I was at the start of my investing career, so I've got 50 years to make up for that and have done so now. But those that have finished your working life, worked their heart and soul for the last 40 or 50 years, have now created an estate where they're going to rely on. Do they go put that in a market?
• 17:31
  that they may not be able to sell if a downturn hits. And that's the reality. In some of these regional areas, you can't sell. There's no buyers. It's like the stock market. Trading is shut. You put it on the market, it sits there for 100, 200, 300 days. So people at the moment don't, I just don't think they've got the eye looking at what if. What if there was a downturn? And I'm not forecasting that it's going to be. That's not what we're here to say. Just make sure you're very...
• 17:59
  aware of what you've got in your portfolio and really aware of the asset quality. And that's what it comes down to. Blue chip assets in quality locations typically always perform and they're a protective measure in your portfolio because during the downturn, they hold their values. So that's what it comes down to. It's the fundamentals of the asset. Not necessarily going to ask you how to predict a downturn fall, but let's signal out...
• 18:29
  Areas like Perth and Brisbane, right? They have been going, everyone keeps asking. Every time I'm talking to a client, a potential client. Don't use Perth and Brisbane. Use Perth and Adelaide. Brisbane and Adelaide have been running for about four to six years longer than Perth. Yeah. We're talking Adelaide's going into the 12th year of growth, like serious growth. Brisbane's pretty close, 11. Perth's seven or eight. We're a bit more premature in the cycle in Western Australia. When will the Perth property market slow down?
• 18:56
  when supply meets demand and the sentiment changes within the market. And I can't see that in the next 18 months. The problem was when Perth was last oversupplied, that was 2014, the data we tracked through PropStick, we oversupplied the market in that year by 800%.
• 19:18
  We built 800% more housing than was required. At the moment, the deficit's 100% in the other direction. We've got a lot of ground to make up before we're close to getting to a neutral surplus of supply and demand. When supply does meet demand and the sentiment changes, how does sentiment change? Global events, media can change sentiment.
• 19:44
  then we may see a stagnation and a potential modest decline in some markets. Where you will see declines is in speculative markets. Out of fringe suburbs where there's a lot of investment activity, they're the ones that take a 20%, 30% dip. Where we won't see serious declines is in blue chip locations where our own occupiers want to live. And what role does affordability play in a cycle? So you mentioned there's clearly a supply and demand. There's some things we can talk about from a demand and supply factor, but can affordability slow down a property cycle?
• 20:13
  Absolutely. We've seen that in Sydney. It's got to a point where it hits a peak of unaffordability, right? And we go through this in our PropStack data, where the ceiling is for every market, every population center in Australia. And history tells us when you hit that historical ceiling, the market stagnates.
• 20:35
  And after it stagnates, you might see a modest decline in house prices. And it won't be reportable. This is the thing. A market won't have a 40% fall because what happens when a market stagnates or the sentiment goes out? People put things on the market and you've paid a property price, you've paid $800,000 for it, you've put it up from office from $750,000 and you can't sell it. Most people just don't sell it. That's why a lot of people you've seen a lot of C and D grade stock sell in the last 12 months in Western Australia because the people who've been holding that thing for a decade that couldn't sell it.
• 21:04
  are now getting it out of their portfolio. I'm doing it personally. I'm not a perfect investor. I'm getting rid of some of my D and C grade quality assets that I bought when I didn't know what I was doing across Australia. But you won't see massive force because people just won't sell because they won't sell for a significant loss. So then it becomes a holding game. And what do we know about a holding game? It ties your debt up and it can put you behind.
• 21:24
  What about from a demand perspective? Is migration a big driver that's growing that boom? And let's maybe use Perth as an example. You know, we've spoken on previous podcasts. The last data that we had come through was a 60% increase in overseas migration.
• 21:40
  You've only got to look at the trend over the last seven years to see from a net interstate perspective. Perth was in the red for years and post-COVID now it's a lifestyle choice and with the second biggest interstate migration in the country. So how much is migration playing a driver in these house prices and the limit of supply?
• 22:00
  Yeah, absolutely. On the demand side, that is your biggest trigger, population growth. On the supply side, it's new housing. So yes, to answer your question, what could bring about a stagnation or potential slowdown in the market? If the government puts a handbrake on migration, over a period of time, 12, 18 months, two years, you would see the market start to stagnate because there's no people coming into a state or a country, doesn't put instant demand on house prices, that's when you start to see things ease.
• 22:28
  and it's very topical at the moment, and there's lots of discussions that we have let too many people in to our country and into our state, and there's measures that may get put around that, and we've seen that happen in previous cycles where the governments have come in and reduced the amount of people that come into our state and our country, and it's had an instant impact on housing. Universities are a massive one. Students are a huge one, and we say student accommodation only makes up a small amount of the housing. Well, it doesn't because once that's full...
• 22:57
  they then migrate into other parts of other suburbs that are close proximity and then those people get forced out and so on. So it has a huge impact on the total market.
• 23:07
  Yep. And we had Brendan Ptolemy on a month or so ago, and that was one of the things he was pushing for as well. To solve the problem, get more student accommodation. He was massive on it. Yep. Lachlan, what's the biggest bullshit you hear property experts say about cycles? The markets never fall. They never stagnate. Residential real estate, real estate only grows. That is bullshit.
• 23:28
  Markets do peak, they do trough, they do stagnate. No market's immune and we're seeing that in Sydney. Everyone said the Sydney market can't stagnate, can't fall. What's happened over the last three years? Jack Henderson, you've been pushing the New South Wales market for many, many years. It's been the most underperforming market in the country.
• 23:50
  So no one's immune. And birth, we're not immune. And we've seen that. We had seven years of serious stagnation. You could argue it stretched out to nine.
• 24:01
  Markets will correct, will stabilise, will stagnate. Be prepared for it. Don't see it as something to be fearful of. See it as an opportunity because the best investments take place in a downturn. And for investors right now, we've been speaking about the 18.6-year cycle. We've mentioned you've gone through...
• 24:24
  Shares probably take the biggest hit. Australia doesn't have a bigger impact as what maybe some of the other markets like US or the UK or Europe. What would be your advice when investors at the moment nervous to get into the property market because they're fearful of this coming true next year?
• 24:42
  I get it. And be fearful because when you're fearful, you make better decisions. But inactivity can cost you money as well. So just be very, very selective. Be more selective than you've ever been on asset type and asset quality and obviously location fundamentals. Stick to the blue chip locations because that's going to prove positive through the test of time.
• 25:03
  And second to that, make sure you've got a real firm understanding on the metrics that we spoke about previous podcasts, your debt to income, your cash buffers. Make sure your cash buffers during these periods is up well over 10% if you can, because that's your safety net. All right. Lachlan, is the 18.6 year cycle real economics, fact or fiction? Do you call bullshit? I don't call bullshit.
• 25:27
  bullshit. I think there's some merit to it. Make sure you understand it and it can certainly help you understand residential cycles. It can certainly help you understand real estate cycles and how the fundamentals work. That is sitting on the fence. If you could ever sit on the fence, I'll say I won't call bullshit. There's definitely merit to it. Let's stick with that. Thanks, Lachlan. You've been listening to the Folio Property Podcast.