Will the australian house prices fall affect the architecture industry?

If your strategy does not consist in crossing your fingers, you should not worry!

brief sum up

Today the fall of house prices in Australia is no longer news. The phenomenon, known since 2017, is followed with interest and anguish by the media, like the news concerning the US presidency. The fall in prices, not specular to the market demand, has affected the whole Australian territory.

As a bubble it is not so quick and lethal. After just over a year, the price of properties still rises above the peaks reached in 2011.

Economic Boulble Portrait

House Price Index Data

The negative trend is a well known reality; it has had, and will continue to have, a slow course as efforts will be made to contain its effects. On the contrary, there are those who think that the phenomenon will ease off soon and that a soft landing will take place well before the mean line.

In any case, it seems much more realistic to think of the phenomenon as a constant in the coming years as the residential market represents a substantial part of the Australian system, whose policies have almost abandoned the industrial propeller. A significant economic impact is expected and the forecasts in terms of House Price Index and GDP indicate the same. To this must be added the fact that the policies of a conservative government generally tend towards austerity rather than support investments.

To better understand the metric value of the GDP index and its interpretation in order to undertake a sustainable growth, it could be useful to read the report produced by BCG for the World Government Summit held in February 2019.

House Price Index Forecast

Australian GDP Forecast

landing expectations

However, it is difficult to determine at what point house prices will stabilize. In general, when dealing with a deflating bubble, prices launch from the peak of the overvaluations, they break the surface of the reasonable evaluations to make a dive into the depths of the devaluations.

Only at a later date these reappear on the surface reaching long-term values.

The point is that Australia has never known long-term values. At the same time there are two major facts to consider:

  • The enormous gap between the economic possibilities of most of the population and the skyrocketing house prices. This factor will discourage people that have to take out a loan in order to buy a house. Few people would buy something with money that they don’t actually have, paying interest on top and risking the loss of a relevant percentage of their investment. It would be easier to have greater expenses by choosing to pay rent at zero risks. People do not like risk, they even pay insurance for that.
  •  The Migration Program Plan. About 190k permanent residents make the Australian population grow by about 0.8% yearly. Those people must have a roof over their heads, but this doesn’t mean that they have to buy it. This is also due to the fact that about 5% of them are in a position that easily allows them to make such a purchase.
  • The enormous gap between the economic possibilities of most of the population and the skyrocketing house prices. This factor will discourage people that have to take out a loan in order to buy a house. Few people would buy something with money that they don’t actually have, paying interest on top and risking the loss of a relevant percentage of their investment. It would be easier to have greater expenses by choosing to pay rent at zero risks. People do not like risk, they even pay insurance for that.

  •  The Migration Program Plan. About 190k permanent residents make the Australian population grow by about 0.8% yearly. Those people must have a roof over their heads, but this doesn’t mean that they have to buy it. This is also due to the fact that about 5% of them are in a position that easily allows them to make such a purchase.

Obviously, a greater demand on the rental market will tend to make rent prices higher, but this phenomenon should be mitigated by the ever increasing availability of new dwellings. If it is true that the profitability of the dwelling industry will decrease, it is also true that it will not slow down. This is also an effect caused by the Migration Plan and population growth.

The drop in house prices has already had a knock on effect on other variables, effects that will inevitably hit back at the price drop.

Trimmed Mean of Core Inflation Rate

Credit Trend

architecture firms

Making predictions about the future of Australian property prices is necessarily hazardous, but it would not be surprising to see a further 40% drop from the current levels. Under this scenario what should an architecture firm expect?

Uncertainty always makes the protagonists of the market react accordingly. And they react as they always do. Banks are always the first to smell of a bad situation, they react fast in order to protect their investments and to contain the damages on the ones already made. Investors are on alert and watching out for a diversification of their assets to mitigate the risk. The government will do something… later.

Investor profits would not necessarily drop symmetrically with housing prices; at least not if the vacant land price would drop with them, but the situation seems to be different:

Australian vacant land prices are going in the opposite direction. This is a scenario that is unlikely to help housing affordability in the longer-term and will also reduce the investors’ profit fork even more.

Investors are likely to be less supported by banks, waiting for a government counter-action and unable to act on product price and land cost. The only thing to do, in order to sustain the profitability, would be to take action on architecture design and construction costs. In other words, the construction and architecture design firm market will be more competitive and aggressive. In the worst case scenario, the situation will lead to a “natural selection”: strong and efficient firms will incorporate smaller ones and will eventually dominate the market while inefficient firms will eventually give up.

improve, adapt and overcome

 Architecture firms have to bare in mind that a gain in efficiency must be stimulated by means of an adequate management of staff and the quality of the services provided, not by a price war. Firms should rely on something more than an office manager. They should look forward to professional figures like a CFO, Program Manager, Account Manager, and so forth.

It is necessary to introduce the possibility to draw on a buffering “design force”, in order to be prepared to face a period of uncertainty. Being agile could make the difference but it is necessary to adequately train in-house staff.

People that come from a long period of prosperity need time to tune in to a fast-paced mode. They will probably look with diffidence towards the actions that the firm will implement to contain the risk.  They will also need time to learn how to deal with an outsourced workforce and how to coordinate their activity.
These are the main reasons why it is necessary to take action now, in a well-planned way, instead of doing it afterwards in a chaotic rush.

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