Episode #76 Property Market Pulse, Predictions & Policies to fix the housing market‪.‬

Summary notes created by Deciphr AI

https://podcasts.apple.com/au/podcast/episode-76-property-market-pulse-predictions-policies/id1685105426?i=1000663399921
Abstract

Abstract

Rich Harvey, CEO of Propertybuyer.com.au, hosts Louis Christopher, managing director of SQM Research, on the Property Buyer podcast to discuss the current and future state of Australia's property market. They explore the impact of recent interest rate hikes, predicting a buyer's market with modest price declines in Sydney and Melbourne, while Brisbane and Perth are expected to outperform due to relative affordability and economic factors. They emphasize the critical need for increased housing supply and policy changes, such as replacing stamp duty with a land tax and incentivizing investors in new housing. Migration rates and the rental market's tight conditions are also discussed as significant influencers on the market's trajectory.

Summary Notes

Impact of Interest Rates on Property Prices

  • Interest rates have been a significant dampener on the housing market in 2024.
  • Initial expectations of an interest rate cut in early 2024 led to increased market confidence, which was later dashed when the cut did not materialize.
  • The uncertainty surrounding interest rates has contributed to decreased consumer confidence among both buyers and sellers.

"I think overall it's been a dampener on the housing market in 2024. I think we need to wind ourselves back to the beginning of the year where you may recall there was great expectation out there that we were about to have an interest rate cut. Well, it never came."

  • The anticipation of a rate cut led to initial market optimism, which was disrupted when the cut did not happen.

"The interest rate levels are at a point where it's been taking out discretionary expenditure out of the economy. We're seeing that in, for example, in softening retail sales."

  • High interest rates are reducing discretionary spending, as evidenced by declining retail sales.

"There is still a risk out there as we speak right now that the RBA will lift rates again."

  • The possibility of further rate increases by the RBA remains, adding to market uncertainty.

Upcoming Economic Indicators

  • The next CPI numbers are crucial and will be released next week, influencing the RBA's decision in August.
  • A poor CPI number could increase pressure on the RBA to raise rates again.

"The next CPI numbers, which I think referring to, comes out next week."

  • Upcoming CPI figures will be critical in determining future rate hikes.

"If that's a bad number, yeah, there'll be a lot of pressure on the RBA to lift rates in August."

  • Negative CPI data could lead to immediate rate increases by the RBA.

Time Lag of Interest Rate Effects

  • The impact of interest rate changes typically takes between three to twelve months to fully materialize.
  • Additional factors, such as high migration rates, can extend this lag period.

"Overall it generally does take about between three to twelve months to go through the system."

  • The standard time frame for the effects of rate changes is three to twelve months.

"One of the reasons why it's taken a little bit longer for interest rates to have their effect in this cycle is because we've had very, very strong population growth."

  • High migration rates have delayed the full impact of rate changes.

Building Costs and Inflation

  • Building costs have begun to stabilize after a period of significant increases.
  • Despite stabilization, overall housing costs, including rents, continue to impact the CPI negatively.

"The ABS has been reporting the same thing as well, that building costs are starting to ease a little, but it's still, it still has been growing."

  • Building costs are stabilizing but still growing.

"Overall housing costs, when you take into account rents, has been having a negative impact upon the CPI prints and will continue to do so for some time to come."

  • Housing costs, including rents, are contributing to sustained inflationary pressures.

Sticky Inflation Factors

  • Inflation remains persistent due to continuous cost increases in essential sectors like rents, food, insurance, education, and health.
  • The RBA is cautious about a wage inflation spiral, where high costs lead to demands for higher wages, further driving inflation.

"It runs through the economy and it keeps running through like a recycled air conditioner."

  • Inflationary pressures are persistent and cyclic within the economy.

"Wages growth has picked up, but it hasn't overly accelerated."

  • While wage growth has increased, it has not reached levels that would exacerbate inflation significantly.

Impact of International Events

  • Global events, such as conflicts in the Middle East and the Ukraine-Russia war, can have significant economic impacts, potentially leading to oil supply shocks and increased inflation.
  • So far, these global risks have been contained, but they remain a concern.

"The risk being that if the Middle east really did blow up, you could see things like what we had in the 1970s where there are restrictions on oil supply shock."

  • Potential for oil supply shocks from Middle Eastern conflicts could spike inflation.

"Yes, we have this regional war in the Middle east, but so far, there's been some periods where I've been very concerned. Well, it looks like it's about to really blow up. But so far there's been some containment."

  • Despite regional conflicts, there has been some level of containment preventing a larger economic shock.

Market Confidence and Speculation

  • Confidence plays a significant role in the property market, influenced by supply constraints, demand drivers, and overall market sentiment.
  • Speculative chatter about a potential housing crash in Australia is largely unfounded due to the lack of oversupply in the housing market.

"Increased chatter about a potential housing crash in Australia."

  • Speculative discussions about a housing crash are increasing but are not supported by current market conditions.

"When we look at history and we look at, for example, the japanese housing bubble and crash, the us housing crash, the irish housing crash, all three of those crashes had one major thing in common, which we do not have in this country, and that was that there was a lot of speculative housing supply and construction that occurred just before the crash."

  • Historical housing crashes were driven by oversupply, a condition not present in the current Australian market.

"We have got a major undersupply, which has, of course, been the primary reason why we've got a rental crisis on our hands."

  • The current housing market in Australia is characterized by undersupply, leading to a rental crisis rather than a potential crash.

Building Approvals and Supply Constraints

  • Current figures for building approvals are crucial for understanding future supply constraints and market dynamics.
  • The discussion on building approvals and their trends was anticipated but not fully covered in the transcript provided.

"What are the current figures for building approvals? Like, has this been improving or declining?"

  • Building approvals data is essential for assessing future housing supply and market conditions.
  • Current financial year (FY 25) is set to complete about 138,000 dwellings.
  • Long-term average since the early 21st century has been 160,000 to 170,000 dwellings per year.
  • Building approvals, which lead completions by about two years, have been trending down.
  • Federal government's target of 1.2 million dwellings over five years (240,000 per year) is unlikely to be met.

"So we're on track for this current financial year. So FY 25 to complete, about 138,000 dwellings. The long-term average since the beginning of the 21st century has been more along the lines of about 160,000 to 170,000 dwellings being built."

  • Current completion rates are below the long-term average, indicating a decline in new dwelling construction.

"Those numbers from building approvals have been trending down. So what this is telling us is that, okay, not only are we going to miss the federal government's target for the first year, where they wanted to build 1.2 million dwellings over five years, we're going to miss it for year one, we're going to also miss it for year two."

  • Declining building approvals suggest that the federal government's targets will not be met in the initial years.

Structural Deficit in Housing Supply

  • A structural deficit in housing supply is expected, leading to more problems rather than a crash.
  • Housing prices may fluctuate, but an outright crash in the housing market is very unlikely.

"So what you're telling me is there's basically a structural deficit coming up in the housing supply, and that is no way going to lead to a crash. In fact, it's the absolute opposite. It's going to create more problems."

  • The deficit will create more problems rather than causing a market crash.

"That's not to say we can't have housing price for. And we'll get on to that in a moment, I'm sure. But to say we're going to have an outright crash in the housing market in Australia very, very unlikely at this point in time."

  • An outright crash in the housing market is very unlikely despite potential price fluctuations.

Policy Recommendations to Address Housing Crisis

Reducing Migration Rates

  • Propose cutting migration rates temporarily to about 100,000 per annum to stabilize the rental market within twelve months.

"The policy which would make the biggest change to stabilize the rental market now would be to cut migration rates for a temporary period. I'm not suggesting for a permanent period. Cut it back to about 100,000 per annum would do the job in terms of stabilizing the rental market within twelve months."

  • Reducing migration rates would stabilize the rental market quickly.

Balancing Economic Growth and Migration

  • Acknowledge the need for skilled migrants but at a controlled rate.
  • Use migration as an economic lever, applying brakes when necessary, especially after a period of high growth post-COVID.

"We need migration. We need skilled migrants coming into this country. Right?"

  • The counter-argument is the need for skilled migrants to support economic growth.

"I think migration can be used as a good economic lever, provided it's used wisely. And there are times when you put on the accelerator and then there's times where you should be putting on the brakes."

  • Migration should be managed wisely, using it as an economic lever.

Taxation Reforms

  • Propose replacing stamp duty with a broad-based land tax to increase market liquidity.
  • This would lower transaction costs and provide a disincentive for holding large properties unnecessarily.

"So by doing that, you're actually providing more liquidity to the marketplace. Downsizers can downsize. Upsizers can upsize. And the transaction costs are a lot less."

  • Replacing stamp duty with a land tax would increase market liquidity and lower transaction costs.

"We've had firm evidence that essentially the stamp duty system we've got from the states has been suffering from, essentially, bracket Creek."

  • The current stamp duty system is flawed and needs reform.

Encouraging Investment in New Homes

  • Provide more incentives for investors to invest in new homes as developers need pre-sales to secure financing.
  • Encourage building high-density housing in inner-ring areas of major cities.

"The other policy I would bring in is provide more incentives for investors to invest in new homes. And I truly mean investors beyond first-time buyers."

  • Investors are crucial for the supply side as developers rely on pre-sales for financing.

"Let's encourage investors to go into new housing. Yep, I think that would make a change."

  • Encouraging investment in new housing would positively impact supply.

Addressing Zoning and Development Restrictions

  • Free up local council restrictions and make hard decisions about building high-density housing in inner-ring areas.
  • Overcome 'Not In My Backyard' (NIMBY) attitudes to increase housing supply.

"I suspect more needs to be done on that front as well. And some hard decisions do need to be made about building high density in inner ring Sydney, inner ring Melbourne, inner ring Brazil."

  • More needs to be done to address zoning and development restrictions.

"Not in my backyard. Let's have supply, but not in my backyard."

  • NIMBY attitudes hinder the increase in housing supply.

Development in Regional Areas

  • Consider building up regional townships to decentralize population and reduce pressure on urban areas.
  • Address financing challenges for developers in regional areas, possibly through a government development fund.

"Rental vacancy rates in regional Australia plummeted as many people moved out of the cities to get away from the lockdowns from COVID and they plummeted."

  • COVID-19 led to increased demand in regional areas, highlighting the need for development there.

"Developers need to reduce their risks in building in regional Australia. And it's very hard for them to do that because the banks have black spots where they say, no, we're not going to lend to you in this area."

  • Financing challenges for developers in regional areas need to be addressed.

Medium Density Housing

  • Propose medium-density housing (townhouses, low-rise apartments) in suburban areas to free up housing stock.
  • This would provide options for older residents to downsize while staying in their local area.

"Approval for manor housing townhouses and low rise apartments in R2 zonings, I think will free up a lot of the housing stock."

  • Medium-density housing would help free up housing stock and provide more options for downsizers.

"By providing that medium density, the housing stock of low rise townhouses, I think would definitely free up a lot of the housing stock."

  • Medium-density housing is crucial for freeing up housing stock and addressing the housing crisis.

Utilization of Space Above Railway Lines

  • Idea of building over railway lines to utilize space.
  • Common practice in other countries.
  • Potential for innovative urban development.

"But you've got this space above the railway lines, and if you visit other countries, this is actually what happens. The space is actually utilized."

  • Demonstrates how other countries effectively use space above railway lines.
  • Suggests potential for similar utilization in local urban planning.

Impact of Migration on Economy and Housing Market

  • 600,000 people migrated in 2023, causing significant impacts.
  • Migration has been inflationary due to capacity constraints in the economy.
  • Essential services like health and education have been strained.
  • Managed migration is necessary to control inflation and economic stability.

"If you flood an economy with more underlying demand all in one go, that economy will hit up against its capacity constraints. We see it in housing, of course, through the rental market, but it's also happened in health. It's happened with education."

  • Highlights how sudden influxes of people strain essential services.
  • Indicates the need for managed migration policies to prevent inflation.

"It's one of the reasons why I think migration needs to be managed. If you don't manage it, then it can potentially be quite inflationary for the economy."

  • Emphasizes the importance of managing migration to control economic impacts.

Political Implications of Migration Policies

  • Migration has become a political issue.
  • Labor and opposition parties have different stances on migration levels.
  • Current trends show a slowdown in migration rates.

"It's been a political football for a long time, and the history of both major parties is. It's something they don't really want to talk about."

  • Migration is a contentious political issue with differing party policies.

"I think labor will actually have some success in the lead up to the election in getting the migration rates down. We know it's their policy."

  • Labor's policy aims to reduce migration rates, which could affect future trends.

Housing Market Predictions for 2024-2025

  • Housing price falls expected in Melbourne and Sydney by Christmas.
  • Single-digit declines anticipated, not a market crash.
  • Brisbane, Adelaide, and Perth showing stronger market resilience.
  • Interest rate changes by the central bank will be crucial in 2025.

"We're not expecting a crash, but I think single digit housing price falls somewhere between minus one to about -5% over an annual period are likely to be reported in our two largest capital cities."

  • Predicts modest housing price declines in major cities.

"Beyond the two capital cities. So Brisbane, Adelaide and Perth, they're not showing any signs yet of a significant slowdown."

  • Indicates stronger housing markets in other major cities.

"If we were to see an interest rate rise, then for the first six months of 2025, the housing price falls we speak of in Sydney and Melbourne will continue on."

  • Interest rate increases could prolong housing price declines.

Long-Term Investment Strategies

  • Long-term view essential for property investment.
  • Opportunities in Melbourne despite current underperformance.
  • Importance of holding properties for 7-10 years.

"You need to be holding properties for seven to ten years, right? And if you were to come into Melbourne literally in the next six months, probably at the lowest point, potentially, of a cycle you are set for the next rise."

  • Advocates for long-term investment strategy to capitalize on market cycles.

"It's not going to be a crash because of the genuine shortages we've got, but it will be a buyer's market for a twelve month period, essentially starting now."

  • Market conditions favor buyers in the short term, but long-term holding is key.

Predictions for Interest Rate Cuts

  • Interest rate cuts anticipated in early 2025.
  • Rate cuts depend on inflation trends and global economic conditions.
  • Prediction of February 2025 for the first rate cut.

"Potentially the first half of 2025. Potentially. But we got to see some better inflationary prints."

  • Interest rate cuts are contingent on improved inflation data.

"I'm predicting February, but here it is on the record. But again, it's going to be. That's my prediction, but I agree with you. I think it's going to stay on hold probably the rest of the year."

  • February 2025 predicted as the earliest potential date for a rate cut.

Accuracy of Previous Forecasts

  • Mixed accuracy in past forecasts.
  • 2018 predictions were off, but 2020 and 2023 were more accurate.
  • Challenges in predicting market conditions due to unforeseen factors.

"We had a bad year in 2018. I was way off. We said the housing market would slow down, but it fell."

  • Acknowledges past inaccuracies in forecasts.

"We gave ourselves an eight out of ten for our 23 forecast. So our base case forecast came in for most cities last year, which we're happy about."

  • Reflects improved accuracy in recent forecasts.

Conclusion

  • Market conditions are dynamic and influenced by various factors.
  • Long-term investment strategies are crucial.
  • Interest rates and migration policies will significantly impact future market trends.

"Timing is very difficult to get right in the market, and it is time in the market."

  • Emphasizes the importance of time in the market over market timing.

Housing Market Forecast for Sydney and Melbourne

  • The forecast for Sydney and Melbourne's housing market was expected to be flat to falling.
  • The market initially started stronger than anticipated but is now aligning with the forecast.

"To restate the forecast we had for Sydney and Melbourne, which we put out in November, was that we were expecting a flat to falling housing market in those two cities. Markets started off a little bit stronger than what we anticipated, but it's coming back to our forecast now as we speak."

  • Initial market strength did not sustain and is now in line with the flat to falling forecast.
  • Listing volumes have increased in 2024 compared to 2023, especially in Sydney and to a lesser extent in Melbourne.
  • Despite the rise in listings, days on market have increased, indicating not all listings are translating into sales.

"They've been picking up and so we've seen more new listings over the course of 2024 than what we've seen over the course of 23. That's been particularly the case in the market of Sydney, to a lesser extent, Melbourne as well. Days on market, though, has blown out a bit more."

  • Increased listings do not necessarily mean increased sales due to longer days on market.

Distressed Listings and Mortgage Delinquencies

  • Distressed listings are relatively low; about 6000 distressed listings out of 270,000 total listings.
  • Current distressed activity is lower than pre-Covid levels.

"We've got a distressed listings index and report that we put out there for our audience and those numbers have actually been surprisingly benign. So across the country, we're reporting about 6000 listings which seem to be selling under distressed conditions. That is out of a total number of know, some 270,000 listings."

  • Distressed listings are a minor part of the overall market and are fewer than before Covid.

Impact of the Mortgage Cliff

  • The feared "mortgage cliff" did not materialize.
  • Homeowners prioritize keeping their principal place of residence over other expenditures.

"There was a great fear of the great mortgage recess... The mortgage cliff coming off fixed rates... Didn't happen."

  • The expected crisis from fixed-rate mortgages ending did not occur.

"The principal place of residence to home, the last thing that sells when you're trying to cut back expenditure, you will stop going to restaurants first. You will stop the holidays first. You will sell a car. She may sell the investment property first, but the home is the very last thing."

  • Homeowners cut other expenses before selling their homes.

Spring Market Expectations

  • A rise in spring listings is anticipated for major cities.
  • Clearance rates are expected to continue falling, indicating a market slowdown.

"I think we'll see a rise and. Well, we normally get a rise in spring listings and I think we'll see the same thing again for our largest capital cities. Clearance rates will continue to fall from here, in my opinion."

  • Spring will see more listings, but clearance rates will drop, slowing the market.
  • The rental crisis persists with a national vacancy rate of 1.3%.
  • Vacancy rates in Sydney and Melbourne are slightly higher but expected to fall in spring.

"We have a national rental vacancy rate of 1.3%. Sydney's running at about 1.7% now. If I recall, Melbourne's running at about 1.5."

  • Low vacancy rates indicate a continued rental crisis, but some seasonal fluctuations are expected.

  • The severe rent increases of 10-20% are likely over, as negative news has been priced into the market.

"The days of ten to 20% rises in rents, I think are now behind us and it's starting to show up in our numbers now. Were actually recording some rent declines in Sydney, for example, from their very high levels and it's the case now in Melbourne too."

  • Rent increases have stabilized, and some declines are being recorded.

Impact of Rental Laws in Queensland

  • New laws in Queensland limit rent increases to once per year, potentially causing a lag effect.

"In Queensland, they've just introduced new laws that even if a tenant is on a leaves their rental property, it's still on a twelve month period. But you can't put up rents more than once within a twelve month period."

  • Rent increase restrictions may delay rent hikes but are seen as counterproductive.

"I'm not a proponent of rental restrictions in the market, caps on rents, anything like that. This is crazy. It's actually counterproductive."

  • Rent caps are viewed as counterproductive and may worsen the rental crisis.

Future Property Boom Predictions

  • A nationwide property boom is unlikely without aggressive rate cuts by the Reserve Bank of Australia.
  • Specific cities like Brisbane and Perth may see better performance due to factors like relative affordability and state economic support.

"I'm not so sure whether we're going to get a mother of all property booms nationwide, not unless the Reserve bank of Australia aggressively cuts rates back towards, say, 1%. And I think that's highly unlikely for the time being."

  • A nationwide boom is unlikely without significant rate cuts.

"I think Brisbane is going to be one of those cities where we're going to see long term outperformance performance compared to Sydney and Melbourne. And Perth is another one as well."

  • Brisbane and Perth are expected to outperform due to affordability and economic factors.

"One big change which has occurred with the state of WA is that they have, for the last three to four years now, I think, been receiving a larger percentage of the GST pie, and that has been helping the state tremendously."

  • WA's increased GST share has positively impacted its housing market.

Affordability in Adelaide

  • Adelaide's housing market benefits from affordability, though economic challenges remain.

"Adelaide can do well, but I always scratch my head in terms of its outperformance because you look at the south australian economy, you know, there's not a lot of fireworks there. You know, quite frankly, there just isn't. But one thing that South Australia does have, and the city of Adelaide definitely has in spades, is affordability."

  • Adelaide's affordability attracts buyers despite a less dynamic economy.

"People need to also be cautious, though, that it could be more difficult to find a job in Adelaide when we have a major economic slowdown."

  • Economic slowdowns could make job finding more difficult in Adelaide.

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