How to survive a housing market crash

Suburban houses in Melbourne, Australia. Photo / 123rf

This story is about what you can do if Australia has a housing crash. Plenty has been written about whether we will or won't. This is not one of those stories. This is an if-then scenario. A handbook of what to do in case of disaster, if you like.

If housing prices fall, say, 25 per cent, do you want to be stuck in the middle getting covered in blood and gore, or do you want to be off on one side, your hand covering your mouth in horror, saying 'Ouch, that's gotta hurt!'

PROPERTY

If you have an investment property during a housing crash, well, you will probably wish you didn't. The decision is whether to discount it to secure a sale or hang on grimly. It's the perennial dilemma of an investor in a falling market, but really, it's a simple decision.

For owner-occupiers the decision will be more complicated. The value of a house to an owner-occupier is at least partly in the shelter, etc, that it provides, not the financial value. If your house is worth 25 per cent less suddenly, the value of the shelter hasn't fallen. And if you want to sell and buy a new place to live in, the new place has probably fallen in value too, so you're okay.

The main way a housing crash matters for an owner-occupier is if you're planning to sell the house and use the money for something else, like a retirement. If that's the case, trying to sell before the crash reaches its nadir might make sense.

Selling your assets in a crash sounds clever but is it easy? What if you finally decide/manage to sell the day before the market turns up again? The big question is: how far is it to the bottom of the market, both in percentage terms and in terms of time?

Big housing downturns tend not to be short-run blips like you might see in more liquid assets like shares. Check out the time from top to bottom in the case of Spain (six years) and the US (four years). In the case of a big crash you're potentially looking at several years of price decay. Once the downturn starts it is not necessarily too late to sell.

Of course the problem is you don't know if it will be a big or small housing downturn on the day you choose to sell.

SUPERANNUATION AND INVESTMENTS

Nothing is certain, of course, but there are plenty of reasons to think a house price crash could do serious damage to the sharemarket.

There are four main mechanisms for this.

1. The big banks make up a huge proportion of the Australian stockmarket. There's only four of them compared to 196 other stocks in the S&P ASX 200 but they account for 25 per cent per cent of the total value of the group.

The thing to know about our banks is they make their money lending on property. If property tanks their world-famous multi-billion dollar profits will look shaky and their share prices could wend their way southward.

2. Retailers like Harvey Norman are also listed stocks. A booming housing market has been great for Harvey Norman as people fill their expensive homes with nice new stuff. If it all turns to poop not so many people will "Go Harvey Norman Go" and the sofas and dining settings will sit in their showrooms gathering dust.

3. People just buy more stuff when their house value goes up. This is called the wealth effect and it is highly likely to apply in reverse too. Falling wealth will crimp spending at all sort of Australian companies and could depress the sharemarket.

According to a survey by Deloitte and the ASX, 31 per cent of Australian adults own shares. They might consider selling up in a housing crash. But the other 69 per cent of us can't necessarily relax: superannuation is largely invested in Australian shares.

You might not choose exactly which shares your super is in but most super funds give you a few high-level options. Mine - a regular industry super fund - lets me put super into things like a mix of international shares and cash investments if I so choose. That would be one way to reduce exposure to the Australian property market.

If you think about it, your lifetime earnings are already highly exposed to the performance of the Australian economy. Investment advisers are always telling us to diversify. If you put your super in something that doesn't correlate with the health of the Australian economy, you've diversified away some of your risk, even if the housing market doesn't' do anything drastic.

CASH

In the absolute worst case scenario of major financial contagion, financial institutions collapse. What happens to your money?

The big banks have deposits guaranteed by the federal government. So do all Authorised Deposit-taking Institutions, like building societies and credit unions. Deposits up to A$250,000 are guaranteed even if the deposit-holder goes bust.

If you have more than A$250,000 (NZ$268,000) in cash (lucky you!) split it across two banks as the guarantee tops out at A$250,000 per bank.

But beware: not every entity where you can have an account is an Authorised Deposit taking Institution (ADI). If your cash is in an account held by an investment broker or an offset account at a non-bank lender, it could be at much higher risk if that entity goes broke.

(Of course if the government also collapses and we revert to an anarchic state we will all look back at this chat about the exact distinction of an authorised deposit taking institution and have a good laugh.)

YOUR JOB

If the housing market tanks and takes down the sharemarket, while financial institutions are shuffling into their graves with the federal government furiously bailing us out, it's hard to imagine the labour market would be looking too peachy.

What can an Aussie do when the unemployment rate spikes? Do we have to just sit here and take it?

One answer is to get a job that won't disappear in the bad times. If you work at a real estate agency, your job is probably less secure during a housing crash than if you work in a discount grocery retailer. In the really bad times, a government job - say working for Centrelink - is a strong defence. (They'll probably even hire a bunch of new people and make you their manager.)

There's also the passport option. Australia could turn to custard but that doesn't mean the rest of the world will do so too.

Many Aussies have dual citizenship (check to see if you do, you might be surprised) and have work rights in some other part of the world. Even without a foreign passport you might be able to swing a work visa to Canada or the UK if you're young. If things get really dire you could always consider NZ - Aussies can work there with no paperwork required. Mean as!