Smart investors can make money in any real estate market. Here’s how we’d make the most of a bad one.
It’s faux pa to mention property market crashes around potential investors, but the reality is they do happen. Are we close to one in 2023? The housing market has softened compared to 2022, but it’s not a risky environment; many precincts are still showing growth, so we think it’s very unlikely Australia’s real estate market will crash anytime soon.
Yet some still speculate the worst. The environment isn’t perfect and it’s far from where it was in 2021; a period of exceptional growth.
Could Australia’s property market crash in 2023?
These days, property market reports are getting heavier with information. That’s because there’s so much to cover: inflation, interest rates, post-pandemic recovery, housing inaffordability, housing supply issues, even the war in Ukraine. Where not saying they would, but any of these factors could send Australia’s property market into dangerous territory.
That’s very drastic to consider, because right now Australia’s economy is so strong and the property market – particularly in the west – has room to grow. That said, doomsayers have as much to talk about as those property market reports. Let’s entertain them for a moment.
Inflation is the highest it’s been since 1987 – many investors would’ve heard stories (or perhaps have their own) from that dark year for the stock market – and there’s no promise inflation will drop in the very near future. (We should note that the housing market accelerated after the share market crash of 1987.)
The official cash rate has of course seen upward pressure as a result, and homebuyers are watching their discretionary income drop while more of their pay checks go towards mortgage repayments. Thankfully, most agree the RBA has nearly hit a ceiling with its rate rising campaign and is expected to drop as early as late-2023.
Far less buyers are in the property market this year than last, with housing affordability one of the major reasons for their lack of participation.
And any escalation of the Ukraine war in 2023 could tragically bring more countries into the region’s conflict, and that could indeed wreak havoc on investment markets (to be honest, most likely the share market).
But with any and all of these factors considered, is a property market crash likely? We wouldn’t put our money on it. Housing bubbles burst because of drastically low demand and high supply. Demand has waned since the pandemic boom period – not plummeted – and we don’t have the supply that would typically warrant a severe property market crash.
Nonetheless, here’s what we’d do if the property market took a nosedive in 2023 or even 2024.
How we’d take advantage of an Aussie real estate market crash
If we sniffed a downturn, holding yield-heavy commercial real estate with value-add potential would be our first and foremost property investment strategy.
Cash is king but nothing outranks cash flow. While yields have indeed fallen in the last 12 to 24 months, it is harder to find stronger yields than in commercial real estate. And the best part is, commercial property investment – many investors forget – can offer robust opportunities for value-adding.
We’d also consider property investments with considerable value-add opportunities. Vacant premises that are, or have the potential to be, very attractive to essential services tenants. These are tenants like government organisations, grocery stores, liquor stores and medical occupants that will likely be unaffected by major economic downturns. These occupants might have short lease tenures, and it’d be our intention to extend them in order to catapult the property’s value.
Sticking to property fundamentals is crucial during a market downturn. Buying well in core precincts, with relevant tenants that suit the premises, surrounded by quality amenity and major arterial roads and highways. These properties are likely to stand the test of time and the downfalls of a challenging property market.
Why wouldn’t we sell off our portfolio? Because we want to be in the game on the other side of the market’s downturn. And if the economy is in strife, there’s usually hope to be found in the future of the property market. Here’s why.
Why the property market is so resilient
In the last several economic downturns, Australian real estate has either remained stable or has accelerated. The same can’t be said for shares, which dropped during every major economic crisis since the eighties. Just take a look at real estate versus the share market in the last four economic crises.
Why is the property market so resilient? Because real estate can’t be sold in a day. Shares can. That makes real estate an illiquid investment and stocks a volatile one; the former resolute against the shortcomings of a recessive economy, and the latter weak.
Talk of housing crises and economic downturns can make inexperienced investors panicky. The feeling of making a bad investment decision is rife – after all, investors have families and futures to worry about and that pressure puts many in investment paralysis: ‘safer not to act than to consider making an investment decision.’
History would show that that’s a mistake. Of course, every investor is different – different appetites for risk and different financial positions to allow a buffer for that risk – but the results, time and time again, show that real estate appreciates in value over long periods of time. It merely depends on whether investors have the patience or the financial capacity to see out that period, and to then prosper at the end of it.
A reliable, yield-generating and capital growth-potential investment is what we’d want in our portfolio should a crash come. Although we’d put more money on a property crash not occurring in 2023.
We’ve been in the property game for decades. And by far our best investment is in quality information. Want the expert’s take on the Australian commercial real estate market? Subscribe to our newsletter today and the next edition will be sent straight to your inbox:
Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.