There’s been a lot in the media today about the prospect of house prices falling in Sydney and other parts of Australia by up to 25% over the next couple of years due to the global credit crunch and possibility of recession.
Although no one knows exactly how this will turn out, I think 25% is extreme. My guess is it’s more likely to be around 10% at worst, and history indicates it may not even be this bad. Depending on the source of data, the average annual increase in house prices over the last 25 years has been 6-8%. This includes the periods of negative growth in 1982, 1990, and 2004. Even during the very bad recession of 1990, average property prices declined about 6%. A few short years later any negative growth had disappeared as the market slowly recovered to 4-5% annual growth.
So the first message is this: while property values may decline in the short term, historical trends indicate they are very likely to recover in the medium term.
What does this mean for seniors with a reverse mortgage? Well, the good news is that the lenders have already prepared for this scenario. The lending parameters used by SEQUAL lenders are so conservative that it is extremely unlikely that a fall of even 25% would have any impact on lenders or borrowers. Example: a senior who is 75 years old can only borrow 30% of their property value, so the banks have ensured there is a lot of margin for error in the design of these loan products.
Such a conservative approach may not be sexy, but in these uncertin times it’s certainly prudent. Strong banks are good for borrowers, and the main reverse mortgage lenders in Australia are very well placed to ride out this storm.
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