The Great Australian Property Crash

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September 3, 2014
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November 1, 2014

The Great Australian Property Crash

Bearings crisis

A common question people ask me is: Has property always been this expensive? It’s a question that is invariably followed by: Can property values keep rising forever?

The short answer to the second question is yes – property values will rise as long as we continue to have strong economic growth, an increase in population and robust planning legislation. To the first – well, property has always been relatively unaffordable, but there have been times in our history when it’s been a lot more unaffordable than it is now.

Surprisingly, despite the fact that so many of us are invested in residential real estate, there have been very few studies into the long term history of Australian property cycles.

I have been able to find only one credible study that discusses property values prior to the 1960s: A History of House Prices in Australia 1880 – 2010 by Nigel Stapledon of the School of Economics at the University of NSW.

It’s an interesting study in many ways, and given all the recent talk about Australian property bubbles I wanted to share with you the story of the biggest ever property bubble experienced in Melbourne and Sydney and the reasons for it.

It shows what happens when you have a dramatic economic decline and a fall in population, combined with poor planning legislation.

From 1851 to 1890, Melbourne and Sydney’s population had been growing at an average of 7% and 5.5% respectively. To put this in perspective, modern day national population growth is around 2%.

This high growth in population was driven by the opportunities created from the gold rush of the mid-19th century. This came to a head during the 1880s, when property values surged 64% above inflation between 1880 and 1890. What followed was the biggest property price fall in Australian history.

What caused this bust?

First there was an oversupply of housing. The limited planning controls of the day gave free rein to the construction industry, meaning that new houses were being built at a rate that exceeded the demand from population growth.

Then the 1890s equivalent of the Global Financial Crisis (GFC) hit our shores. The Barings Crisis has been recorded as the most severe banking crisis experienced by Australia. It made it very difficult to get credit to acquire property, which in turn had an adverse effect on demand.

The Crisis also had a negative effect on immigration into Australia, further reducing demand for property. With reduced population growth, demand for rental property declined and rents fell.

With rents falling and credit hard to get, investors and homeowners stopped buying and prices plummeted.

Over the next five years the Melbourne market was hit the hardest. Population contracted by 12% and the property market fell 51%. It took the market 19 years to return to its peak of 1889. Sydney’s property market also fell, but by the smaller amount of 36%.

What this study also uncovered was that values between 1880 and 1955 didn’t move in real value terms, that is, value adjusted for inflation. So over this 75 year period, once you took into account inflation, the price of real estate didn’t move in value.

So what are the lessons to be taken out of this period?

  • Booms don’t last forever
  • Population growth is what underpins sustained demand for property
  • Government policy around the release of supply affects the market
  • Falling rents reduce investor demand
  • Rapid credit policy changes cause volatility in the property market
  • Overseas events have an impact on our local property markets – even in the relatively unglobalised 1800s

It is important to note that we have not had a comparable property crash in modern times. There have of course been falls in the market, but since 1955 the average peak to trough decline in Australia has been around 10%. Typically, the modern day property correction comes in the form of three to six years of price stagnation.

This is largely because of the tight credit standards in this country, our stable banking system and the slow release by governments of new supply onto the markets.

However, while these factors make it unlikely that we will see a major widespread property crash in Australia any time soon, there are some submarkets around Australia that have elements at the moment that expose them to a possible localised price correction. Entering into those markets blindly may prove to be an ineffective investment strategy.

If you are thinking about expanding your portfolio, we would love the opportunity to have an informal chat about any of these local issues.