Which Way is the Property Market Going to Go in 2012?

In one of the weekend papers, I can’t recall if it was the Sunday Times or the weekend version of the West Australian—I am down at site at work so I can’t go and find them and check—there was a 16 page special supplement on the property market in Western Australia. The supplement was very positive and upbeat in relation to the property market, recommending that new home buyers and investors should buy now. Right now! Don’t wait even another month.

But the entire supplement was produced by the real estate industry in Western Australia; so it was not as though they were going to say something like “the property market is still unsettled and could go either way so our advice is to wait and see for a few more months before committing to a 20 year (or longer) loan”.

With the percentage of home sales being a massive 40 percent lower for the first two months of 2012 compared to the first two months of 2011, which in turn was 12 percent lower than the first two months of 2010, the real estate business is missing out on tens of millions of dollars in agent fees. If people are not buying/selling properties then the real estate industry is not making money from sales commissions and settlement costs.

So, considering this, what are they going to say in a special supplement they themselves put together? Not buy less, that’s for sure. They are going to say “buy more” because only when people buy do agents get their settlement fees and sales commissions. It matters little to them if the market goes up or down, as long as people keep buying/selling so the settlement fees and sales commissions keep on flowing in.

The picture painted in the weekend and Monday’s Australian Financial Review (AFR) is a little different.

Firstly both editions of the AFR contained columns indicating that the banks are likely to start softening up the ‘public’ for a further increase in bank-based interest rates. This is because the cost of wholesale funds borrowing continues to curve upwards. Each time the cost of borrowings for the banks ratchets up the margin the banks make on home loans gets less; and they don’t like it when that happens.

Like it or not, the only reason banks lend money is to make money. They make money because they loan the money out at a higher rate than they borrow it at. If they have to borrow the money from international wholesale funding houses for 4.5 percent and then can only let the money out at around 6.5 percent then they are only making 2 percent per annum profit on the loan.

On top of this the World Bank is forecasting further “property price stress” for Australia. Despite the correction in domestic property prices over the last four years Australian domestic properties are the third most expensive in the western world. Only Hong Kong and Shanghai have a property price average higher than Australia’s.

Square metre for square metre the average domestic property price in Australia is just under a whopping five times more expensive than similar properties in the USA.

"“Property price stress” is money-market code for “prices are likely to go down more before they start to go up”. While this is a forecast for the whole of Australia and probably relates more to NSW, Vic, and Queensland it does not mean that Western Australia will be immune to any further price decreases.

The Economist Magazine has stated that it thinks the housing market in Australia is still 53 percent overvalued (January 2012). They are basically saying housing prices need to halve from current values.

I am not going to pretend to know what is going to happen, but I sure wish I did. I sure do wish I did. If you knew your house price was going to halve in the next three to five years then the thing to do would be to sell it now and rent it back. The interest on the sale price would more than pay the rent and you would have that lovely capital stored away safely as cash. Conversely if you knew prices were about to start curving back up then you might take out a mortgage and buy a property down south—properties down there have plummeted over 30 percent just in the last two years.

Anyone know what is going to happen? If you don’t want to post your answer as a comment then send me an e-mail. You can work out my e-mail address from the “About Me” section.