In the current housing market everyone has an opinion, including me of course!
We have all seen the news headlines either in print or online:
“House prices set to plummet by 20-25 per cent in 2023” – News.com.au 10/2/23.
We have seen the media talk up the “R” word.
Why the Reserve Bank is pushing us towards a recession that we don’t need to have – ABC News 13/2/23.
But are they correct? Is the housing market going to go into free fall, the likes of which we have never seen?
Are the naysayers actually going to get it right for once? Or is it far more complicated than simply the cost of money increasing?
When we look at some other buried headlines that don’t have as much prominence, then I am not so sure.
Last week we saw this headline:
Real estate listings fell by more than a third in Sydney and 31 per cent in Melbourne – AFR 10/2/23
According to the Domain rent Report released in January rents across the country increased by 17.6% with Melbourne year on year showing 20% for units (coming of a very low base after COVID) and 7.6% for houses.
Australian building approvals fell for a third straight month at the end of 2022, with Australian Bureau of Statistics (ABS) data revealing the number of houses and apartments planned in November were almost half the record achieved in March 2021 at the height of the pandemic.
Let’s look at the age-old reasons that control the price of everything.
SUPPLY VS DEMAND
There are 3 ways to get into a property: rent one, build one or buy an existing one.
With building approvals declining rapidly and construction companies failing almost every week, we can assume that the supply of new properties will slow dramatically.
The rental equation is getting a lot tougher for the average household to bear. Rents are skyrocketing – this is a direct result of the increase in costs to most landlords. And this isn’t just interest rates. It is also the state governments new laws introduced 3 years ago now coming into effect.
And then we come to sellers. I usually look at the total selling market as one third have to sell, one third want to sell and will have to within 12 months and then the last third as discretionary sellers.
There will be forced sales. There will be those that listened to our illustrious Reserve Bank Governor who said interest rates won’t be rising until 2024. And then apologised earlier this year for being horrendously wrong!! Some first home buyers will be in over their heads and will need to sell (however if they sell, they will need to rent which is becoming far more difficult). There will also be the usual births, deaths marriages, changes of job etc. This will account for the usual third of properties that are always on the market. But the other two thirds are unlikely to go to market until they absolutely have to. And this will mean that SUPPLY will be substantially strained as is evident by Realestate.com.au huge fall in listing advertisements.
Australian population growth took a hit during the pandemic, but as we now realise, we need more people to immigrate to Australia. We have the lowest unemployment rate since 1974. We simply do not have enough working people in the country at the moment. The government has recognised this and will do absolutely everything it can to increase immigration above and beyond its planned 195,000. I suspect there will be plenty of exceptional visas granted to increase this number dramatically.
The cost of finance to buy a property has increased at a faster rate than any other time in history. Many borrowers have had their capacity to purchase cut by over 10% and if we see any further interest rate rises that will be cut again. This, in my opinion, is the single largest factor of a fall in house prices. However, there are plenty of young buyers looking to the bank of “Mum & Dad” that have not had their borrowing capacity cut and in recent weeks I have attended auctions of sub $1m properties that have had 6-8 bidders. And in this price point, I have not seen any drop in the market prices – quite the opposite.
As you can see the equation is complex. There is not one single reason that can be affected that will change house prices. Right now, I think there will be a slight increase in stock levels on the market due to financial pressures or perceived financial pressures, but by the end of this year, I believe population growth will become the single greatest factor of the house price equation. And this will stabilise the market and may even cause some increases in price.
Overall, I think property prices have fallen just about as far as they will go down, there will be some massive volatility in the marketplace with sales both way up and also way down on what they should be for a few months and then property prices will stabilise and begin to increase later this year and through 2024.
If you would like to have a chat about buying, selling or renting out a property, give me a call, or drop me an email.
I am always happy to chat about property.
Ian James
Director
JPP Buyer Advocates.
