Property Market Correction in 2022? How to Protect Yourself
Property Market Correction in 2022? How to Protect Yourself
SEAN McCREANOR
General Manager
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The old story about the tortoise and the hare applies to the current state of the Australian property market. Slow and steady wins the race.
If the market steams ahead quickly and carelessly (as it has) there are bound to be losers when things come undone.
We produced an article back in May this year predicting the hot market would cool and could potentially turn sour. Now, we see that many of the triggers for a market correction are starting to emerge.
Our current prediction is the market could have a substantial correction or slowdown by April/May 2022.
Evidence of an impending property market correction
There are several factors that point to a market correction occurring in the near future, such as the recent decision by APRA to tighten lending standards. This is already impacting the time required for buyers to gain finance approval. Many property settlements are being extended by 2 – 4 weeks and there is evidence that these higher loan servicing requirements are starting to bite.
Australia’s ongoing debt problem is also getting worse. The average home loan has grown from $499,126 in September 2020 to $590,026 in September 2021. That’s almost 20% growth in debt over 12 months. Most millionaires will tell you that you don’t get any richer by taking on more and more debt.
International Factors
Internationally, we are seeing increasing interest rates overseas and cooling of foreign demand for Australian commodities. Global concerns over inflation have caused investors to disinvest from government bonds.
Australia has felt the pain shared by the international market, with 2021 set to be the worst performance by the Australian bond market since 1994.
Why are overseas interest rates and the international bond market relevant? Because they drive up the cost of funds for Australian banks. It points to Australian interest rates increasing very soon – which will make your home loan harder to pay.
Australia’s largest trading partner, China, is experiencing economic instability in its own property market, which accounts for 25% of Chinese GDP. Nowhere is this more prominent than in the inability of China’s second-largest real estate company, Evergrande Group to meet its debt repayment obligations. If China starts to experience contagion with debt defaults across its property sector, this could lower investor confidence globally.
An impending Australian federal election in 2022, sky-high property prices, and low investment yields are sure to influence investor confidence.
This mix of factors points to a market correction or downturn, which may occur as early as April/May 2022.
The big question is: What will the government do in an election year and what will the banks do to keep the casino open?
Hopefully, they collectively manage to slow things down without causing an Australian property market collapse. The famous American Economist Robert Shiller (who predicted the GFC) once wrote “High prices rob future gains”. This has never been more evident in Australia than right now.
Protecting yourself from the property market correction
So how do you protect yourself against a property market correction? There are some very sensible things you can do to safeguard property value and the income you generate from investment properties. These measures include:
1. Reduce your debt burden
If you are paying too much on your property loan, you should consider refinancing immediately. Saving 2% on your loan repayments will significantly reduce your interest payments and allow you to generate a financial safety buffer.
2. Own property? Maximize your rental income.
If you own an investment property, you can do a number of things to ensure you maximise your rental income. These include:
- Property presentation – a simple and cost-effective refresh could add thousands per annum to your rental income.
- Value adding – can your rental property be set up so that it allows more tenancies? This is worth considering if you can easily segment different parts of the property. Can a big living area be changed to add an extra bedroom? Can a carport be easily added? You will be surprised how much additional rent you can achieve with some simple value adding techniques.
- Property management and tenancy management – make sure you get the best property management service available. This will add thousands to your income by ensuring: fast leasing; highest possible rent; zero vacancy rate; rent paid on time; maintenance addressed without paying too much; well-priced property management fees; plus other benefits.
- Property presentation – a simple and cost-effective refresh could add thousands per annum to your rental income.
3. Other strategies to keep up with your property repayments
If you are struggling to keep up with your property repayments and you already have a low-interest rate, there are a few things you can do:
- Do you have sufficient room in your property to sublet and take in a tenant? Rents are sky-high at the moment and renters are looking for quality properties to lease at an affordable rent.
- Would it be better for you to sell and downsize? The market is at a record high (highest level in 32 years). Now could be the best time for you to sell and reduce your financial commitments.
- Are you able to rent elsewhere or share accommodation and lease out your property? Given rents are so high at the moment, this is a great strategy to get ahead. It is becoming very commonplace and even has its own term ‘Rentvesting’
If you need help with your property, whether you are selling or leasing, contact Affinity Property today. You can request a free appraisal, email us, or call on (07) 3293 9100
