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Will the Melbourne property market collapse?

No matter where you look in the media you will come across different opinions and articles about whether there will be a ‘big collapse’ in Melbourne’s property market. Will we experience what the USA went through in 2008? I want to share my opinion based on my interpretation of past events, and my speculation of how the future might look for property in Melbourne.

First off, I want to start by making it extremely clear that our systems and regulations are far more prudent than our western counterparts in America and Europe. These nations were a classic example of how greed and irresponsibility took hold and damaged their financial credibility worldwide. They were having a great time, buying houses like hot cakes, borrowing more money to furnish them, then borrowing more money to put a nice new car in the driveway to make sure it was consistent with their lavish lifestyle. It was one big party and everyone was having a great time, but a lot of these people borrowing all of this money didn’t even have an income!

However, at the time, the population thought they were being protected by their government regulators…. Hmm, are we in Australia going about our business with blinkers on??

Fundamentally, there were multiple fatal flaws in their system that cost the world trillions of dollars.

Are we capable of repeating this? Even on a smaller scale, I say no.

In Australia, multiple government bodies are watching what our banks are up to, and ensuring they report they are lending responsibly. It seems a bit ridiculous to say, but I will, to get a home loan, you have to prove you have an income to make repayments. A simple concept they failed to adopt overseas.

The next point is mortgage insurance. In Australia, the banks will take out an insurance policy on a home loan that is considered high risk. Whether it is due to low deposits (high bank exposure), lo-doc, or SMSF lending. This effectively protects the banks from making a loss on a property they lent money on in this high risk zone. Wouldn’t the insurance companies be in trouble before our banks?

We’d need an immediate 20+ per cent drop in property values, un-employment to go through the roof, and everyone to put their properties on the market at the same time before this becomes a problem.

I don’t ignore the fact that right now we are in a state of change, lending is getting more difficult, banks are tightening up and they have so many buffers in place to protect the borrower, and the bank from becoming exposed to bad debts. It could happen, I don’t deny that. But to levels of catastrophic outcomes I think not. I do think a correction in the trajectory of our growth is in play, but a downturn in housing demand is not evident at the moment.

How much further can it go? In comparison to super cities around the world we are still extremely affordable. Not that our financial prowess is any match in comparison to New York, London, Singapore etc. But we’re an extremely attractive city on a world scale. I think we have decades of growth to go in property, maybe not at today’s rates, but when we look at it on a broader scale, the growth has been fairly constant for decades with rapid and stagnant periods. Let’s hope we continue to grow steadily, not rapidly, and continue to help our people grow and thrive in this city.

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