Is the Australian property market in freefall?
The research team at Binnari thought we’d get out our crystal ball and provide some insights and considerations for what’s happening with the current state of the property market. We wanted to cover off the good the bad and the ugly – but let’s also remember Australia is made up of thousands of micro markets around the country, they don’t all behave as one!
There is no doubt that the feverish demand for property has subsided somewhat, with three concurrent 0.5% increases to the Reserve Bank of Australia (RBA) base rate and further increases to come. Although this will take some adjusting too, we at Binnari don’t think this is necessarily a bad thing, but let’s take a look at some of the concerns and opportunities that could arise:
Inflation and interest rates on the march
It’s been well documented that global inflation is on the rise and interest rate increases are required to stem the tide of spiralling inflation. Now, we don’t have a prediction of how far interest rates might rise to, although many economists are currently saying the base rate will rise in the region of 2.5 – 3.5%. These increases are obviously having an impact on consumer confidence in the short term, as the affordability knock on effect is felt by both homeowners and investors.
Whilst the rate rises had been predicted for some time allowing many homeowners and investors to fix their rates, the higher interest costs are impacting potential borrowers today as banks are now assessing future borrowers at higher interest rates. One thing to note is that a base rate of 2.5 – 3.5% is still historically low when considering long-term borrowing trends, so it’s expected borrowers [JM1] will adjust to this fairly quickly should the RBA take us to these anticipated levels.
Labour shortages, migration and wage inflation
It’s pretty rare that you get spiralling inflation without an increase in wages at some stage to counterbalance. Wage inflation has been sluggish for the best part of the last 8 years, however, it appears that is now starting to change. Post-COVID many industries globally have experienced significant shortfalls in labour, and this is beginning to lead to some reasonable wage growth for certain sectors. We’re also seeing an increase in industrial action as those industries that are less flexible with regards to managing wage growth, are being approached by their labour force with industrial action to strike more favourable wage terms to deal with the increasing cost of living. Recent examples of this include the NSW rail strikes and NSW teachers strikes.
The figure below tracks the nation’s annual wage growth from 1998 to 2022.
It’s hoped that as our borders reopen a flood of skilled migrants will help ease this labour burden currently being felt by most employers, however this will have another side effect – more on this a bit later on.
Falling property prices – not all property markets are impacted the same
The impact of rising interest rates on the various markets will largely come down to affordability levels of those respective markets. For example, affordability is far more strained in Sydney and Melbourne than it is in markets like Brisbane and Adelaide, due to their lower median house prices. The below table from Domain’s Quarterly Reports highlights this with Sydney and Melbourne the only two markets to experience falls over the June quarter. It also displays the disparity between cities as recorded in June 2022.
Source: Domain House Price Report (Domain)
It’s been documented that median property prices in Sydney and Melbourne have fallen approx. 10 – 15% from their peak in December 2021. Whilst this fall sounds dramatic, let’s remember that the Sydney median house price has increased 143% from 2011 through to today, and Melbourne’s has increased by 107% over the same period. Markets like Brisbane have seen more subdued growth over that period recording 73% growth. Interestingly, between December 2011 and December 2020 the growth figure was just 33%.
More than half of the growth achieved has occurred in the last 2 years indicating that Brisbane is at a different stage of its growth cycle. As Brisbane is still coming from a more affordable base and are in the early stages of the growth cycle, we believe that this is more likely to continue than in Sydney and Melbourne over the short to medium term.
Over the June 2022 quarter, CoreLogic’s Home Value Index illustrated that not all markets have reacted the same way to the recent rate rises.
Property markets at greater risk
During COVID almost all the property markets around the country experienced significant increases – even after many of the “so called” experts initially predicted price falls of 20% – 40%. One of the markets that boomed during this period were the coastal and rural locations. These saw an influx of people who were looking for a sea/tree change as they didn’t need to attend an office anymore and could choose to live in locations that offered a more desirable lifestyle. The other demand driver was from second home purchasers.
With overseas travel now at pre-pandemic levels and many employers wanting to strike some balance between flexible working and attending the office – it seems likely rental and sales demand for some holiday locations may start to fall back. Now, when you add increasing interest rates into the equation – that holiday home you purchased during the pandemic might not seem like a necessary hold going forward. Affordable properties in holiday markets that are underpinned by a thriving employment market i.e., the Sunshine Coast, are less likely to suffer than those markets heavily reliant on tourism – although that doesn’t necessarily apply to the $18m Noosa apartment market which is accessible to only a few.
New house and land estates and high-density apartment areas with a large percentage of investors, are generally always more at risk than established areas with limited supply and a high percentage of local owner occupiers.
Supply chain issues and reduced property supply
It’s probably not news to you that the world is in the grip of supply chain issues that is causing chaos – particularly in the construction industry. The issues have been ongoing and have significantly impacted the cost of building new residential and commercial projects. Several Binnari buyers have experienced minor price increases over the last 12 months, due to major construction cost escalations resulting from a worldwide building boom post COVID. This demand for labour and materials has led to constraint on materials such as steel and timber and also major labour challenges. Throw in that China’s ports have also been impacted due to their heavy-handed approach to lockdowns, plus councils are backlogged trying to arrange approvals – you’ve got a very difficult environment to build new properties.
Just because a project is approved doesn’t mean it will go ahead!
Interestingly, the Binnari team attended an economist briefing at one of the major banks last week who were basing their market predictions on the fact that we are currently delivering double the supply of new properties as normal. The bank had based these assumptions on the high level of planning approvals in the system, however, the reality is the delivery of these approvals is far below traditional levels and is one of the reasons we are facing a major rental crisis.
According to a recent AFR article, delivery of new apartment projects are substantially below their 10 year average in Sydney and Melbourne and marginally lower in Brisbane. For example, Western Sydney is 6000 houses short of the 25,530 that are needed annually to meet demand (Property Council of Australia).
Whilst the challenges are now factored in and can be mitigated moving forward, one benefit of the reduced supply is that even if demand does fall, the current levels of supply expected to be delivered will be easily soaked up by homeowners, investors, and renters.
Record low vacancy rates – the squeeze will only getting worse
Okay, it’s now official – we’re in a rental crisis! Rental vacancies are at their lowest levels since 2006, with a nationwide rental figure of 1%. In most capital cities, the headline vacancy rate is lower than this, and in suburbs where supply is limited, vacancies can be down to 0.5% or less. Another example of this is Brisbane, where the vacancy rate is currently 0.6%, the lowest on record (since data is recorded from 2005).
The table below shows the vacancy rates recorded in each capital city in January 2019 and June 2022.
Source: SQM Research
We’ve outlined the challenges with property over the last 12 – 24 months leading to reduced supply, and we’re now expecting skilled migration to kick off to solve our labour shortage issues. This could become messy before the problem gets resolved, although this is very positive news for potential property investors as rental returns are on the increase.
According to data collected by SQM Research, in the 12 months to July 2022, the asking rental price for houses and apartments in our capital cities increased on average by 15.3% and 14.8% respectively. In Sydney, the market which has seen a minor price correction, weekly house rents have increased over 20% in the last 12 months.
Further pressure is likely to be added to the rental market as a result of increasing overseas migration. The graph below illustrates Australia’s annual net overseas migration figure from 2012 to 2021. We’ve also mapped the projected annual migration figures outlined by the Federal Government in their latest budget.
Based on these forecasts, over the next 6 years, the country will be required to house an additional 1.15m overseas migrants. Historically, 88% of overseas migrants move to Brisbane, Sydney and Melbourne. Those markets are already facing supply shortages and if this trend continues, more pressure will be placed on those rental markets.
Source: ABS & Australian Federal Budget
Binnari prediction – beyond the hype some real opportunities exist
Over the last 12 years in Sydney there has only been 2 years of negative property growth compared to positive property growth. Every capital city market has seen prices rise consistently for over the last 50 years. Let’s also not forget that interest rates have been as high as 15% and inflation hasn’t always been under control. Some market commentators believe we’re entering a 1970’s style stagflation period when interest rates and inflation ran riot. Whilst we’re not saying we believe this to be the case – let’s look at what happened to median property prices during this period.
Between 1970 and 1980, inflation peaked at almost 15%, with a recession in both 1974-75 and 1977-78. The cash rate sat at over 8% and the interest rates were over 10%. In 1970, Sydney’s median house price was recorded at $18,700, in 1980 the price had almost tripled, growing by 270% reaching $68,850.
Throughout this period an average annual growth rate of 14% was achieved. Although we’re not assuming that today’s home values will increase at such a pace, it is evident that even with the current external factors impacting the market, this doesn’t necessarily impact property price growth in the long term.
Even if we agree that the RBA manages to wrangle inflation and brings it back to 2 – 3% p.a., the fact is most investors know that leaving your savings in cash will eventually be eroded as the returns on cash are still below the rising costs of goods and services. For many investors, the predictability of property, the lack of new property, and an almost anaemic rental market – leaves property to still be a strong long term investment proposition. As for owner occupiers, those investment decisions are often based on factors that are not financial i.e., family security, so you’d expect that market to remain strong.
A+ properties a little easier to purchase – but there isn’t an oversupply of them
The Australian property market has proved its resilience over the last 50+ years. Through world-wide recessions, rising interest rates, inflationary environments and more recently global pandemics, the market has continued to fare well.
During the last 12 – 24 months, Binnari has operated waiting lists for buyers as we travelled the country securing the type of properties our investors expect from us. This part of our job has been difficult not just because of the points raised above, but predominately due to the feverish nature of local buyers.
Now whilst we remain confident about the upcoming property cycle in the markets and locations we endorse, a slight cooling in demand will make it a bit easier for our investor clients to lock in grade A+ property options. Let’s remember short term sentiment comes and goes, however quality property assets held for 10+ years will also benefit from being the one with the best outlook, best location or bigger floorspace.
If you would like any more detail on some of the points, challenges, or opportunities raised above, please feel free to reach out to our team HERE who can discuss these with you or provide you with further information and insights.