Autumn Property Report
Yes, I know that I am swimming against the tide with almost every economist and the RBA saying property prices are going to fall by 15%. It was only a few years ago when Covid hit our shores when the same commentators said property prices would fall 20% and the opposite happened.
What this demonstrates is that bad news always creates headlines but the truth is few people can accurately predict what is going to happen to property prices.
Of anyone, I am in a rather unique position. I am on the ground daily 7 days a week, attending auctions, talking to estate agents, buyers and sellers and I am Chairman and co-owner in one of Australia’s largest property valuation companies which provides me with data and a very unique outlook on what is happening in real time.
There has been much hype in the media about record levels of stock in our market over the March quarter and how negative this is for property. What was not said was that during this same period as soon as stock was listed it was being sold, often before a sales campaign and/ or within 14 days of being listed.
What we are seeing now are vendors retreating from the market causing stock levels to shrink considerably, especially for detached houses. Consumer confidence has waned in the lead up to the federal election and there is genuine fear and uncertainty with talk of rising interest rates and inflation.
In buoyant times vendors see the record prices, high clearance rates and in turn come out and place their property onto the market. In uncertain times they do the opposite which is what is occurring now. Let me take this point further. In my experience house prices do not fall when supply is tight.
Throughout history, our property prices fall when we overbuild .
In the 2000s we created an over supply of inner city high rise apartment stock. The result being a 10% to 30% fall in valuation from the original contract price. Again in 1990 we oversupplied the commercial office markets causing a property crash that flowed through to high end residential property.Housing supply is one area I watch carefully as there is a direct correlation to it and property price growth.
The shortage of stock is not a fallacy. It is causing vacancy rates to fall sharply in the rental market.
Rents are starting to rise.
As rents rise so do investment yields which in turn are attracting investors back into the market.
Rising rents generally cause property values to rise not fall.
Our international borders have been closed for two years. In Australia we have an acute need for skilled labour across every industry and profession. Our workforce is undersupplied.
Immigration will become the cornerstone of our recovery and we desperately need a higher population in order to compete with the rest of the world.
Population shift causes property prices to rise. When international students and immigrant numbers return they have to live somewhere.
In turn , this will drive property prices higher.
The supply equation can not be fixed in the short term with labour shortages and building materials like timber, and steel very hard to source. Many projects have been delayed and cancelled.
It takes 3-4 years to get a large residential project out of the ground , so in the medium term there is going to be a supply shortage causing pressure on apartment and house prices to rise.
There has been a sharp rise in Australia’s inflation with this likely to rise further in the short term.
Bricks and mortar are a hedge against inflation and prices traditionally have risen during periods of higher inflation.
The graph below shows the movement of inflation between 1960 and 2021. There is a direct correlation between movement of inflation and property prices.
This is because rents rise with inflation as do the cost of tradesmen ,building materials and the cost of renovations.
Both the Federal government and the opposition have pledged support for first homebuyers with policy incentives only going to make it easier to enter the market.
In my experience , house prices do not fall during periods of very low unemployment. Australia’s unemployment rate is trending below 4%.
Property growth over the last 5 years, between 2017 and 2021 has been quite modest with Melbourne growing by 37% and Sydney by 35% during the same period
The one caveat is interest rates, but again , historically house prices have mostly risen in history with higher inflation and interest rates.
This time interest rates are off a very low base and historically low, and so increases this time around will have a lesser effect.
Most people have built quite a buffer with increased savings and equity in their homes which will help to protect them from higher interest rate rises.
In my opinion, it is unlikely that interest rate rises during this cycle will be large enough to cause enough tension in our markets and force vendors into financial stress.
Yes , there will be outliers, especially those who have purchased in 2017 or 2021 at the heights of the market.
Under a worst case scenario, I would anticipate to see more secondary investment grade stock put onto the market and perhaps the holiday house.
When finances get tough, it’s usually the boat that is sold first, the investment property or the holiday house.
Vendors are usually reluctant to sell their house or take their kids out of private school.
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