It Might Be Time For Investors to Flee Australian Real Estate

Andrej Kovacevic  |

Since the beginning of the 21st century, Australia's real estate sector has been in a near-constant state of expansion. Nationwide, home prices had been on the rise for almost a full decade, fueling one of the hottest markets anywhere in the world, and sparking fierce competition among real estate agents for a slice of the booming sales. That's been excellent news for those holding property investments in the country, as well as regular homeowners that saw the value of their properties almost double in a short span. Many thought it was too good to be true. As it turns out, they were right.

This month marks an entire year of falling property values across much of Australia – the first in a very long time – and the market is showing no signs of reversing course any time soon. For investors, it may soon be time to make the critical decision of when to pull out to avoid losses if the trend accelerates. There's plenty of reasons to believe that the Australian real estate market is going to get a whole lot worse, so that time may be much closer than many investors think. Here's why.

Heading Underwater

The ever-rising prices of Australian real estate made investors quite happy, but locals struggled to afford to make home purchases in places they'd lived for their entire lives. Unwilling to move on, many turned to interest-only mortgages as a way to finance homes they could barely afford. The practice worked, so long as values continued to climb. Over the next three years, however, about $360 billion of those loans are about to switch over to interest plus principal repayment schedules, and when they do, many homeowners may already be underwater. The resulting sell-off could produce a housing glut the likes of which the nation hasn't seen in years – and could send prices spiralling downward.

Liar, Liar

If the coming interest-only loan conversions weren't worrisome enough, there's another problem to be found in Australia's home lending market. It's an issue with the potential to destabilize the whole market and one that's almost impossible to accurately measure or forecast. The problem is that Australian lenders have been rushing to feed the real estate boom by turning a blind eye to borrower qualifications and approving risky loans with abandon. Earlier this year, after the beginning of a government investigation into the lax lending practices, lenders started to tighten up their standards, which has curbed borrowers' ability to afford new homes, even as prices continue to sink.

The bigger problem, though, might not be those who no longer qualify for loans. It could be those who are submitting false information to secure the financing they may not be able to afford. These so-called "liar loans" appear to be widespread in the Australian market, and if there's any kind of economic downturn in the offing, they might crater the entire nation's real estate and financial markets. Even worse, if this happens, there will be no way to tell exactly how large the problem will be, or how far down it could take the Australian economy in the process.

The Bottom Line

Right now, almost all of the signs point to a housing market that may be about to enter a prolonged – and steep – downturn. For investors, it could be a smart play to sell off real estate holdings in the country, and hold out for the bottom before buying back in. The only positive news is that prices in the market might stabilize in the near term, buoyed by renewed interest from Chinese investors seeking shelter from the current US-China trade spat. That temporary respite from steep declines should buy those looking for the exit enough time to sell off their holdings before any real losses can accumulate. There is, of course, no way of knowing how long they have to act, but right now, any delays could prove costly.

DISCLOSURE: The author has no disclosures.


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