No smoke and mirrors, BS or bias

If you have been reading headlines in recent months, you might be doing anything from quietly sobbing (“my property portfolio’s value is plummeting”); throwing up your hands in despair (“how will I ever buy a house”); weeping and gnashing your teeth (“I can’t afford to pay my mortgage”); or wiping your brow with relief (“I’m glad I own my home”).

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There has been a lot of alarmist stuff about interest rates rising and affecting both capital growth and affordability.

Over the six years to August 2008, interest rates increased by 3.2 per cent, and that didn’t stop 100 per cent or more capital growth across Australian real estate markets. FACT.

Twenty years ago, when Australia last had a property boom, the median house price in most locations more than doubled even though variable home loan interest rates increased from 6.3 to 9.5 per cent in the six-year period; and that was in more than 100 Australian cities and towns, including six out of the eight capitals.

The standard variable rate home loan back in 1970 was 6.5 per cent, and by 1990 it was 17 per cent, yet the combined capital city median house price increased eight-fold (from $14,000 to $122,000).

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Interest rates are only one of the many factors that affect home prices. FACT.

The way property markets perform from one year to the next is always determined by a combination of influencing factors, which number in the dozens.

Recently, we were fortunate to have Simon Pressley, head of research at Propertyology, present to our Australian network. He gave an insightful representation on various macro factors that currently have a “lifting” versus “dragging” influence on property markets.

He concluded there was a net positive lift influencing property markets, with “lifts” like overseas migration, international tourism, investors, upgrading and lifestyle buyers, wage growth, high home equity, $230 billion in household savings, cheap home loans, low stock levels, supply constraints in construction materials, rising rental income and $45 billion infrastructure spending overcoming “drags” that included affordability, inflation, rising interest rates, tighter credit assessment, skilled labour shortage, rhetoric and commentary.

The world, not just Australia, has entered an inflationary period, which the RBA seems reasonably confident of controlling within a year or so. But Mr Pressley pointed out that there is no direct connection between house price movements and inflation. If anything, the historical evidence suggests periods of high inflation coincided with periods of the strongest property markets.

Australia’s economy is currently the strongest it has been in 50 years. We have more jobs available than people to fill them, business revenues are rising, we have the strongest wage growth prospects for a long while, and the RBA confirms household finances have never been stronger. This is the other side to rising inflation and interest rates.

The housing supply situation has never been tighter. There’s no relief in sight to the almost non-existent rental supply. The sharply rising cost to construct new dwellings places upward pressure on asset values.

It’s real estate markets, plural. FACT.

More than 20 cities and towns across Australia are still running at double-digit growth pace, although Sydney and Melbourne have some fragility to their fundamentals.

Simon Pressley thinks the boom is nowhere near over and would not be surprised if prices double over the next six years in some parts of Australia. “Housing will never go out of fashion. We currently have a dire shortage of it and oodles of financial capacity to meet the demand,” he said.

The “experts” routinely get it wrong. FACT.

You might recall the many failed doomsday predictions we were subject to over the last few years — when what actually happened was a super crazy time for real estate. The same people are now talking about floundering property markets in 2022–23. “Concerned” commentators are talking up flatlining property prices.

And what about these “woe is me” debt-to-income ratio headlines? RBA data says that the average Australian with a mortgage is currently only using 4.4 per cent of their household income to cover loan expenses and that household liquidity currently consists of $260 billion, most of which is squirrelled away in mortgage offset accounts and redraws. CBA, Australia’s biggest home loan lender, said 35 per cent of loans are more than two years ahead on mortgage payments. Then why so many sensational headlines worrying about the size of mortgages, especially when banks are extremely conservative when stress-testing loan applications?

A recent headline dramatically touted a 30 per cent fall in “the Australian property market” (as if it’s one single market!). Such a fall hasn’t occurred before, and I see no credible reason to suggest one of this size should now.

And don’t get me started on all the bad news stories, talking incessantly about the US economic scenario.

The media is prone to pick one factor in isolation, which is generally the attention grabber. A headline often gives the end or outcome and is catchy words without background. I like to think that people look beyond “clickbait” and seek reputable information sources away from mainstream media.

I’ll finish with this thought: I’m not a blind optimist, but I do think you should be aware of pessimists predicting a crash as the market shifts. All market conditions change. They never stay the same. Real estate agents should keep their clients informed about changing markets, without the need to buy into doomsday proclamations. 

Joel Davoren is the managing director of RE/MAX Australia.

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