Fact or fiction? Let’s talk about what’s really happening with the Australian residential property market.

Introduction

For 18 years, I worked in financial services. It was a market mostly driven by intelligent guesses. I thought that was bad enough.  Now, I’m witnessing something even less reliable driving the Australian property market – tabloids.

Over the last 18 months you’ve heard me talk about how:

  • Published property performance figures are generalisations across a market that cannot be generalised.
  • The market fundamentals that drive property price growth have not changed in Australia. Any correction will not be diabolical but very short compared to a 10-year investment horizon.
  • We are near or at the bottom and investors should start getting into the market before they miss reasonable prices.

The good news is, you don’t have to take it from me. I’ve collected the thoughts of the expert Australian commentators and economists that I mentioned earlier. Their opinions support my position and are quite different from the popular media messages that we obsess over.

The Australian Property Market cannot be generalised

Property cannot be generalised because it’s not a single class asset. What do I mean by this? Well, a single asset class is an investment that is expected to have similar risks and returns. They also perform similarly in certain market conditions. Economists generalise asset classes rather than breaking them up into individual cases.

But with the Australian residential property market, many segments perform differently and are affected by unrelated market conditions.

It’s fair and reasonable to generalise asset classes, such as hospitality, resources and global shares. Why? Because these will be largely affected by the same market forces. For example:

  • virtually all Australian hospitality companies suffer when the Australian dollar is high
  • when resource stocks are down, most resource companies lose value, and
  • global shares are expensive when the dollar is weak.

On the other hand, all Australian residential property is not affected by the same market factors. For example, not all property has suffered as a result of tightening credit. Some residential localities recorded strong gains over the past 12 months.

Let’s look at what the experts are saying.

Michael Yardney, one of the most published property authors in Australia, reports:

the most expensive quarter of Melbourne properties recorded a 13.1% fall in value over the last year, while the least expensive quarter of the market is down by just 2.1% over the same time…

On a more micro level, many suburbs have recorded a slight increase in value.

Terry Ryder is the founder of Hotspotting, a market research company that focuses on locality driven investment. He is an accomplished and respected researcher who has specialised in Australian property for over 30 years.

In February this year, Ryder explained how Australian property is generalised by economists:

Here’s what economists do, they look at a graph or table which describes Australian property prices. This is a figure from someone like CoreLogic which provides an average figure for the change in prices for the capital cities. Currently thats a minus figure because of the weight of Sydney. So, they declare that Australian property prices are falling and that this is a national problem”.

Ryder continues:

“In Melbourne, only the top end of the market is sharply down. Undoubtedly, the Tooraks of this world have seen prices falling significantly. But middle Melbourne is remaining solid pricewise and the cheaper outer-ring suburbs still have rising prices. Most of the suburbs of humble Melton are up by more than 20%.

Ryder, who calls this generalisation “a curse”, has a dedicated team researches the property market daily. Suburbs are looked at independently, and the market is broken up by location. While they have identified several “danger” localities (where demand is falling, and vacancies are increasing), these are “greatly outnumbered” by areas where prices are rising.

Property price growth and the “big lump in the middle”

Hotspotting’s national survey identified only 8.5% danger locations compared to more than 20% strong rising locations. The vast majority referred to as “the big lump in the middle” has had solid ongoing demand and reasonable price growth due to the fundamentals that affect property market conditions.

The main drivers affecting property price growth remain strong in Australia. These are:

  • population growth
  • jobs, and
  • low interest rates.

These haven’t changed. The recent shift (in some localities) was a manufactured result. The Australian regulatory authorities limited access to the market through tightening credit, but they didn’t eliminate it. It was a smart move. The market cooled but didn’t crash.

Cameron Cusher is an analyst for Corelogic, the largest provider of property information services in Australia. He recently responded to our questions about property fundamentals. In their experience, demand and supply of housing and credit are ultimately the big drivers of growth.

On the current state of the market, Cusher commented that:

population growth will be driving demand as we struggle to build enough houses for the increase in families moving to Australia and in particular Melbourne.

Similarly, Yardney states that:

Overall property values will be underpinned by a robust economy, jobs growth Australias strongest population growth and the influx of 35% of all overseas migrants. RememberMelbourne rates as one of the 10 fastest growing large cities in the developed world, with its population likely to increase by around 10% in the next four years.

Property crash? What property crash?

Dr Shane Oliver, the Chief Economist of AMP Capital, argues (despite media hype) that Australia has not experienced a property crash at all. In April 2019, he told news.com.au:

Im loathe to even call it a property crashwhat were seeing so far in any case is a subsidence after a long run-up. Were not seeing evidence of a panic in the market.”

While Dr Oliver refers to general economic conditions underpinning the market, leading economist, Dr Andrew Wilson, gets to the point:

“Overall, investors can sleep soundly knowing that the good economic standing of Australia will continue to support the property market, inspiring a continuous surge of strong demand for housing across the states and territories.”

We have robust population growth, and we’re not building enough houses to accommodate it. As a result, supply and demand factors tip in favour of capital growth. And, these factors appear to be getting stronger.

Shane Garrett, the Master Builders Association chief economist, recently warned that new homes built across Australia is expected to drop rather than increase.  And, according to the Urban Development Institute, even at the peak of growth in Victoria, we were short 10,000 homes per year.  Garret cites the industry response to the Hayne royal commission and tightening credit, as the biggest factor limiting activity in the building industry. Overall, he expects 25% less production until 2023. So as demand continues to rise, our supply is shrinking. A perfect environment for further price growth.

Recently, many economists and financial institutions have changed their forecast for the market. Increases in auction clearance rates, prudential authority initiatives and general improvement to market sentiment have seen many institutions and commentators report an earlier recovery.

Michael Yardney for

the Melbourne property market is slowly regaining its confidence and the underlying fundamental growth drivers remain strong. CoreLogic are reporting that rates of decline, in those suburbs that experienced losses, have started to slow. Auction volumes have doubled week on week”.

Federal Election 2019 – it’s a win!

The May 2019 Australian Federal election had a lot of property investors and even prospective homeowners nervous. But with the Liberal Government holding the power, it’s fair to say that a level of certainty has been restored.

Cameron Cusher points to the election as a win for property investors:

 probably the most positive indicator for the housing market is the certainty that we now have post-Federal election.  Most people expected a change of government and with that, new policies around CGT discount and (Negative Gearing) with no change of Government there is now more stability.  Outside of that APRA has announced they may reduce serviceability buffers on lending which is likely to be an additional positive for the market along with interest rate cuts.

Dr Oliver is one of the most high profile economists that has reviewed his position to indicate an earlier recovery made the following statement in May 2019:

The early recovery scenario would be more likely if the Coalition government was returned to power, as Labors negative gearing and capital gains tax changes would no longer be an issue for the next three years”. He further states that putting aside election-related dynamics, an earlier rate cut could add momentum to Sydney and Melbourne markets that are already seeing the rate of decline slow.

Since this statement, both of these predictions have occurred. Unsurprisingly, major financial institutions, including Citibank, ANZ and HSBC, are citing the financial year end (30th June 2019) as the point of recovery in the market.

Marcus Padley is a stock market commentator and investment manager; he prefers shares to property. In his recent article he states that:

“the odds are that the housing market bottomed on May 18, election day”.

Indeed, property market activity is historically delayed with political uncertainty (such as elections), so when elections are over certainty returns. With this election, additional uncertainties were being proposed by the labour governments negative gearing policy.

Padley continues:

Negative gearing will now be left alone. This was a serious hurdle for any property investors. Property investors can now get on with business as usual, knowing that the government are not going to bugger about with their core enticement, negative gearing, probably, ever.

He also refers to other incentives for property purchasers since election, the governments’ first home buyers scheme and APRA’s loosening of credit criteria:

We now have both the government and the RBA working on basing the housing market. It doesnt get any better than that.

APRAs new standards, along with interest rate cuts, will have a measurable effect on the market. Padley’s ‘back of the envelope’ estimate is that “homebuyer borrowing capacity (will) increase by 14% by the end of the year with obvious implications for the housing market.”

Looking ahead

Whether you believe that the Australian property market has crashed or cruised, it’s difficult to argue against long term gains. At Eda Property, we don’t believe in timing the market, but we can see when there is increased value.

Earlier, I mentioned that I love talking property, and this article is 1500 words longer than expected. Honestly, I could keep going. There are so many comments, reports and data that can demonstrate the bias of Australian media. Investors looking at entering the property market or who are already committed, need to take a deep breath and think about their investment horizon.

If you believe the property market has experienced a recession, you must also think that it will recover. So surely this is a great time to get in.

If you agree that the media is overstating and skewing data to sell papers, then what are you waiting for? Pick up the phone or contact Eda Property here http://edaproperty.com.au

It costs you absolutely nothing to talk to us, and we love this stuff.

Anissa Cavallo is the face, the brains and the lifestyle crusader behind Eda Property. She is a trusted Melbourne property investment advisor that helps everyday Australians achieve change through property investment.