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Ben Kingsley

18/04/2017
Blog post by Ben Kingsley

What Causes Property Price To Fall?

In this How To Session, we’re going to get a little bit more serious, and we’re going to talk about what causes property prices to fall. Now property prices are again, similar to any type of economic value setting mechanism where demand and supply plays a role. So when you get low supply and high demand, you usually see values increase. It’s not different in the property market.

But what actually underlines the demand side? What we’re talking about here is, we need to look at the economy. The economy creates jobs. And obviously with those jobs we earn income. And when we get the income, we can go to the banks or mortgage brokers and we can borrow some money. Now that typically creates the demand in the market.

On the supply side, the builders, the developers, the people who are providing that stock to market are saying, “Oh the economy is looking good. There’s a lot of people who want to buy our product, so let’s create more of that product and get more and more sales going on.” With low interest rates we also tend to see more demand pushing into the market.

Now that’s all well and good when things are great, and that’s what we’ve seen recently in some areas of Sydney and Melbourne. But what could cause those property prices to fall? Well let’s see, when we talk about this, we are talking about the economic changes in the market where it’s experiencing a downturn. Now that could be a localised downturn, or it could be a global thing whereby Australia is impacted by that. When that event occurs, we start to see things happen around the jobs. We start to see the unemployment rise and people potentially losing some of their jobs. When it comes to actually being able to maintain those mortgage payments, if we don’t have a job, it obviously becomes harder and harder to service that debt and ultimately we may be forced to sell the property.

So we start to see no more jobs, rising unemployment, people who have a bit of mortgage stress are also looking to sell their property. But we also saw changes on the supply side. As the developer’s finish off the construction of their stock, we will start to see a spike in supply and a reduction in demand. Now that is also potentially exacerbated by media coverage on property prices correcting. That can cause a confidence problem around

Now that is also potentially exacerbated by media coverage on property prices correcting.

That can cause a confidence problem around sentiment and less and less people are then confident around the market. Again, this will impact the demand side, but we still see the supply rising. So those people who have to sell their properties will sell their properties at a lower price and that causes the whole thing to start to see property prices correct.

So it’s important now, and it’s always been super important about where you buy property because not all properties are an equal. There are potentially some markets within a city location where this is less exaggerated in other areas. What we try to look for when buying the right properties in the right area, are what we call recession-proof locations. Sure, the values might also come down, but they don’t come down as much as some areas where there may be more mortgage stress, or there might be more people who are unemployed. It’s important to understand that property prices go up, and there will be corrections in the market from time to time so understanding what is causing that correction is really important when you’re going on your investment journey.

Thanks for watching.

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