Although I am 100 per cent sure all the property forecasts published right now won’t be exactly correct, one thing we can be certain about is that the property market is entering a new cycle.
Rapid price growth has stopped, and some price indices report prices have already declined three per cent in Sydney and Melbourne since the start of the year, while elsewhere growth has slowed.
As we head into different market conditions compared to last year, here are nine things to consider.
- There are more influences on price growth than just interest rates
House prices are very sensitive to interest rates, particularly in areas where housing debt is high such as some suburbs within Sydney and Melbourne. However, they are not the only influence and in some locations, other factors are a greater consideration.
These other factors include the underlying health of the economy, prospects for population growth, urban regeneration and infrastructure improvements, access to finance (ease of lending), increasing wealth, government policy towards property, and the level of household debt.
Presently, all these other factors are providing tailwinds for the property market. Employment is very strong and wages are rising, population growth is expected with the return of open borders, and infrastructure spending is at record levels. Household debt (net of deposits) as a percentage of household income has declined over the past two decades, falling from around 100 per cent in the mid 2000s to around 70 per cent currently.
- Not all markets move at the same rate
While we are seeing prices come back a bit in parts of Sydney and Melbourne, we are not seeing it everywhere. For example, prices on the Gold Coast have sped up this year compared to the end of last year. Similarly, as the property cycle changes, we will see some areas more impacted than others.
- A 10 per cent fall in prices will only take us back to October 2021
Prices have increased by 30 per cent since the start of the pandemic. This level of growth is not sustainable and at some point, conditions had to slow. Right now, the most popular forecast being reported is for a 10 per cent fall in prices. Such a fall would take Australian median house prices back to October 2021. Almost everyone who purchased during the pandemic will still have seen a capital gain even if such a sharp fall in prices did occur.
- A slower market has advantages for buyers and sellers
While we tend to celebrate price growth, the reality is that a fast moving market is stressful to most buyers and sellers. First home buyers don’t like transacting in fast moving markets. Most sellers are also subsequent buyers and hence when looking to upgrade, fast moving prices mean that sellers are under pressure to limit the time gap between selling and buying.
- The biggest mistake buyers make is trying to pick cycles
It is hard to pick market cycles. We saw it most keenly at the start of the pandemic. At the time, the most popular forecast was for a 30 per cent price fall. Prices in fact moved in the exact opposite direction, ultimately ending up 30 per cent within two years. Anyone who followed these forecasts and sold at the very start of the pandemic would have missed out on the remarkable pandemic-driven price growth.
The worst downturn in house prices ever experienced was in Sydney following the Global Financial Crisis. Median house prices dropped 17 per cent between December 2007 and February 2009. They then shot back up again to the December peak by October 2009. Recovery was very quick. More recently, house prices fell following the start of the pandemic in March 2020 which only lasted two months, and then we saw a very fast upward trajectory in prices.
- Slowing markets results in less new stock coming on the market
When markets enter a new cycle, there is typically less new listings coming to market as sellers are more cautious. This lack of new stock on the market creates a challenge for buyers to find quality property. A big challenge right now is a shortage of stock for sale. For these reasons, in a slow market, highly desirable properties are well sought after and will often defy expectations.
- Rising construction costs will make housing more expensive long term
As outlined earlier, interest rates are not the only influence on house prices. Rising construction costs will increase the cost of new and renovated properties, thereby increasing the replacement cost of all existing properties. Right now, construction costs are rising rapidly, and longer term they will have a major influence on house prices.
- Rents are still rising
House prices are slowing but rents aren’t. What does this mean? For some people, it is likely to make buying a home to live in more attractive. Similarly, rising rents are good news for investors – while most investors buy for capital growth, having decent rental returns is a major positive.
- Other investment options are also interest rate sensitive
The likelihood of people selling investment properties to fund non-residential investments is currently relevant. The stock market is currently experiencing high levels of volatility and putting money in the bank yields a minimal return. Property price growth is currently slowing but rental returns are rising. As such, it is unlikely we will see a large number of people selling out of property and investing in other asset classes.
In terms of what we are seeing now in the market, our unconditional sales results for April 2022 are very relevant. In Australia, we sold a total of $5.77 billion and we helped almost 10,000 buyers and sellers. Our April results were 11.5 per cent higher than the same month a year ago. We are focused on ensuring what is happening now in the real estate markets across Australia and New Zealand to ensure our customers are best informed.