History Shows Owner-Occupiers Could Benefit From A Housing Price Collapse

The meteoric rise of Australian house prices in 2013 sparked fears of a bubble but not everyone will lose should prices fall.

Property prices rose almost 10 per cent across Australian capital cities last year, on record low interest rates and Chinese investor demand.

More Australians are taking out mortgages and they’re borrowing more, but as Chinese growth slows and unemployment figures edge upwards, some analysts worry that prices are unsustainable.

Australian property prices dipped during the GFC in 2008 and again in 2011-12, but neither of those falls were as drastic as during the economic downturn of the early 1990s.

According to RP Data CEO Cameron Kusher, Australian capital city house prices peaked in June 1990 at $125,000 and fell 3.2 per cent by the following April, before returning to the peak in July.

The collapse was far more pronounced in Sydney, Melbourne and Perth. In Sydney, house prices peaked in at a median of $159,000 in June 1990 and fell 8.8 per cent to an April 1991 low, before recovering in September.

Melbourne house prices also peaked in June at $135,000 but took far longer to fall 8.1 per cent, only reaching a low of $124,000 in March 1993, and recovering in December 1996.

Perth prices fell a whopping 10.3 per cent between a February 1991 high of $92,000 and a December 1991 low, and took a full 12 months to recover.

Investors lose out

The 1990s housing bubble pop wiped thousands off house prices but not all homebuyers lost out. Unemployment was approaching 10 per cent at the time, and interest rates were high, driving a sell-off in the market.

As with most house price moves, luxury properties were hit the hardest and some cheaper suburbs didn’t see much of a fall. Some people did well as a result of the sudden increased affordability of homes in previously unattainable suburbs.

But investors were scared off, and slow to return to the market as it recovered.

By the end of 1991, Kusher said owner-occupiers, including first homebuyers, accounted for 85 per cent of mortgage commitments and investors accounted for only 15 per cent, compared to 25.7 per cent in 1989.

Investor levels didn’t return to the pre-recession high until 1994.

“As always, the people who benefit most from a decline in home prices are those that pick the bottom of the market and enjoy the growth once the up-lift kicks in,” Kusher noted.

“Those who picked the bottom of the market at this time enjoyed a significant capital growth benefit with prices not falling again in Sydney until 2004, until 2008 in Melbourne and 2007 in Perth.”

With Australian housing investors now accounting for a huge 38.5 per cent of Australian mortgages and real estate boss John McGrath putting Chinese buyers behind as much as 80 per cent of Sydney house sales, first homebuyers have complained of slim pickings for some time.

Should there be a bubble, a pop could ease some of that pressure, but don’t hold your breath.

RP Data is expecting investor demand to fall off with rental yields and capital growth in 2014, but Kusher says prices will still rise about 5 per cent throughout the year.

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