Are property prices really going to drop by 50%?

An American researcher’s prediction that Australia’s real estate prices are headed for a dramatic decline has been met with scepticism from a key member of the property industry.

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Australian investors have little to fear over predictions of a 30 to 50 per cent decline in property values, according to the director of Empower Wealth and chair of the Property Investment Professionals of Australia, Ben Kingsley.

US researcher Jonathan Tepper, founder of Variant Perception, made the prediction in a 60 Minutes segment broadcast on Sunday night. The segment also featured failed Moranbah, Queensland investor, Kate Moloney.

Mr Tepper expects property prices to plummet at similar rates seen in the US, Ireland and Spain, as a result of high debt to income ratios and overvalued property prices.

However, Mr Kingsley told Smart Property Investment that claims surrounding inflated prices in Australia need to be considered in the context of minimum wage standards and owner-occupier fundamentals driving city market growth.  

“We’re double their (the USA’s) minimum wage, and our property prices are around double, so it’s all relative to income. So for me, the fundamentals around property are obviously employment, that income story, access to liquidity or cash to borrow money and then generally speaking, people want to live where they want to live. So owner-occupiers drive that story and that’s why we see property prices (like they are),” Mr Kingsley said.

He also argues that higher standards in the Australian banking system, which were already in place during the Global Financial Crisis, means the local market is unlikely to see the same devastating consequences of irresponsible lending witnessed overseas.

“How did we get through the GFC? Well, we didn’t do stupid things like lend people who are unemployed money. Like in America, you could get money, because what happens is your servicing calculator is based on a certain level of servicing, so depending what your income is, if you had $30,000 you could borrow $600,000 in America. That’s crazy stuff.

“Whereas right through, before the GFC and even with lower interest rates, we set our assessment rates at as low as 6.5 per cent – that was as low as it got. So even though interest rates came in lower, we didn’t adjust that servicing ratio and then that borrowing capacity didn’t explode like it did in, let me guess, Ireland, Spain, the US, those types of places,” Mr Kingsley said.

The decision by 60 Minutes to use the remote mining town of Moranbah as an example of issues with the Australian property industry was a poor one, he said.

According to the program, Ms Moloney is currently facing the prospect of bankruptcy as a result of several failed investments in the town.

“Google Moranbah, go and look at it on a satellite map and you will see it as a speck in the desert. Anyone who thinks that that’s sensible investing and putting all your eggs in one basket... [It was a] one-trick pony, and that trick didn’t deliver. I feel sorry for those people who were coaxed into going into these particular locations but it comes back to fundamentals. It didn’t pass the lifestyle test and if there’s no jobs out there and the economy falters, guess what? You’ve got a ghost town,” Mr Kingsley said.

“Media look for these types of sensational stories and I’m disappointed in 60 Minutes,” he added.

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