30 April 2021
Australian Property. Fantastic Opportunity or a Slow-Moving Train Wreck?
Let’s start with a joke
What do you get if you cross an already property obsessed nation with a slashing of interest rates, a bunch of property purchasing incentives, a global pandemic and a media driven fear of missing out?
Punchline. Read On.
Crazy times for property prices.
As a financial adviser I like to keep up with property prices. This means I read a lot of articles on the subject. For a long time now I’ve thought that property prices in Australia were at crazy levels. But every article I have read lately suggests property prices are going to keep going up and up for the next few years.
This has made me second guess my views on property and ask myself.
- Does the property market represent a fantastic opportunity, or is it a slow-moving train wreck?
- Is now a great opportunity to buy a property, or are we in the mother of all property bubbles?
- Who should be buying property in the current environment?
Forecasts Gone Wrong
By the start of 2020, and after almost two decades of solid property price increases, many suspected Australian property prices were already at highly elevated levels.
When Covid struck most analysts were forecasting a serious downturn in property price. Some tipped falls of up to 30%. Combined with banks making it harder to borrow money this was a safe call.
At the time I remember thinking “you know, it wouldn’t hurt for property prices to level off a bit’.
Boy were the forecasters wrong.
Property Fundamentals out the Window
Historically it was things like a healthy economy, low unemployment rate, wages growth, migration and population growth that fuelled property prices.
Covid has stopped migration in its tracks, real wage growth is almost non existent, unemployment is still fairly high and though we have seen some improvements there are still fears about the economy going forward.
So if this is the case what is driving property prices up?
I don’t think it takes a genius to work out that low interest rates and the general public’s eagerness to take on bigger and bigger mortgages has been the main driver of property prices. According to the Australian Bureau of Statistics the average loan size in December 2019 was $500,000, twenty years before it was $200,000.
Happy for an economist to tell me different and that I have it all wrong. But I don’t think so.
I know, let’s Slash Interest Rates to Historical Lows
At the start of 2020, the Cash Rate was already at a ridiculously low 0.75%. By the end of the year it was 0.1%. Say that again slowly – zero – point – one – percent. Our parents could only dream of interest rates that low.
You can get variable interest rates that start with a 2 now. I’ve seen a 3-year fixed rate advertised at 1.75%.
And this isn’t going to change anytime soon.
In February 2021 the Reserve Bank Governor Philip Lowe went on record saying he expects the cash rate to remain unchanged until inflation is running at between 2 and 3%.
“For this to occur wages growth will have to be materially higher”…”this will require significant gains in unemployment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest.” FEB 2 2021
Add Covid Stimulation
For many Australians Covid probably seems like a distant bad dream, but this time last year the nation was in a Covid inspired panic. We had idiots fighting over toilet paper in supermarkets and governments introducing package after package to keep everybody employed and the economy ticking over.
In a short time, we saw the introduction of Jobkeeper to keep business from letting go of employees, Jobseeker was made easier to receive for the newly unemployed, banks allowed a mortgage holiday for those affected by Covid and people were allowed to tap into their Superannuation if need be.
And of course, some property initiatives were also introduced.
- The HomeBuilder Grant provided up to $25,000 to people who were building a house or buying off the plan.
- Home Loan Deposit Scheme was extended for first home buyers who had a limited deposit.
- Later in the year Victoria slashed Stamp Duty by 50% for those buying a newly built home to a value of $1m, while also offering a 25% discount if you were purchasing a pre-existing home up to the same value.
So what happened over the last year?
First off, not much.
Thanks to people either still being able to pay their mortgage or the ‘bank mortgage holidays’ we didn’t see a mass sell off or the expected property price plunge. Prices dropped a little in Melbourne where the lockdowns were most severe but generally property prices were stable.
Of course Covid made it harder to buy property, especially in Melbourne. Auctions went online and open for inspections became a thing of the past. Things got even worse during the second wave lockdown between August and October.
By then conversations had started to change. It was no longer the end of the world conversations but how soon were we going to have a vaccine.
In Melbourne things changed quickly after the second lockdown ended.. First home buyers could sense an opportunity and pounced. Between all the different grants on offer, plus some developer incentives, they were entering the market with up to a $50-$60k in savings.
First home buyers weren’t the only ones hitting the market. Owner occupiers wanting to upgrade their properties also hit the market hard.
The Covid lockdowns spurred a couple of surprises that have also affected the property market.
With our movements restricted people simply weren’t doing much. Contrary to reports of everybody buying up big online Australians saved a lot of money over the year. According to an article released in December “the pandemic-induced recession saw Australians squirrel away $110 billion in savings”.
What are they going to do with it?
Fear of another share market collapse and term deposit interest rates at all-time lows (you’re lucky to get 1% at the moment) meant good old bricks and mortar still seemed like a safe bet. Auction clearance rates may be an indication that some of this surplus is already making its way into the property market.
Working from home
Lockdowns meant many of us were forced to work from home. But because many of us were able to embrace technology and still work efficiently from home workplace arrangements may have changed for good.
People started thinking they could improve their lifestyle by moving further out. Instead of battling traffic everyday people were thinking maybe I could work from home a couple of days a week and only commute on the others. This led to a massive interest in rural and beach-side properties. In Victoria, properties on the morning peninsula were selling within days of being listed. Similar to other states.
By year end 2020
Come December 2020 all states in Australia had seen median price increases except Melbourne. Nationally property rose by 3% with the smaller states and territories being the stand outs. For a change, the regional areas did not miss out on price gains.
2021 Record Highs
This year has seen more of the same. Each month has seen increases across the board. Auction clearance rates are high and almost every Saturday has been dubbed a “Super Saturday”.
March saw Sydney reach its highest ever median price while Melbourne is just 1.3% off its record high having risen by $100,000 in the space of a year due to an influx of buyers vying for limited stock.
What can we expect going forward?
If last year, and especially the last three months are anything to go by, property prices are heading north for a while yet.
I know the media loves a good beat up.
I know that anything about increasing property values catches the interest of property owners…probably because it makes them feel like millionaires…. but here are a few headlines that caught my interest.
Australians ready to buy property in 2021 after record savings. DEC 8 2020.
Aussie house prices rise 3% in 2020 with only one city (Melbourne) suffering price falls. JAN 4, 2021
Melbourne property prices soar to record levels in December quarter. JAN 28, 2021
House prices to rise by 16 per cent over 2021 and 2022: CBA forecast. FEB 16, 2021
Loosening the mortgage belt: household interest payments at 35-year low. FEB 22, 2021
Melbourne’s median auction price up $100,000 in a year. FEB 26, 2021
Housing market tipped to power on despite end of JobKeeper: economists. MAR 22, 2021
Melbourne house prices tipped for biggest surge in a decade. MAR 24, 2021
(articles mainly thanks to my subscription of The Age newspaper)
So what’s going to stop this Perfect Storm?
Right now, it seems like we’ve got the perfect storm for property investment.
Interest rates are low and not moving for a few years at least. This means people can service bigger and bigger mortgages. Minimal term deposit rates make investors look for yield and investment opportunities elsewhere. Attractive government incentives and every analyst and their dog predicting a property boom and it’s easy to see why Australians have rushed into the market again.
Logic tells us that this can’t go on forever but what is going to slow this phenomenon down in the short term?
Pent up demand dissipates.
The pent up demand Covid created will come to an end. All of those that were thinking about buying property last year have probably done so already or are in the process of buying. Of course this might mean investors replace owner occupiers and first home buyers as the main drivers.
People come to their senses.
People might finally come to their senses and stop paying ridiculous money for property they wouldn’t have considered 5 years ago….. but I don’t think so. Aussies love property so much and the Fear of Missing out is so strong at this stage that you cant see that happening anytime soon.
With 80000 people going to the football again I think Covid may already be under control in Australia. At least for the time being.
Maybe the economy could take a sudden and disastrous turn for the worst, but it seems to be moving in the right direction. The early call is that the next budget due to be released in May is going to try to pump the economy up, not slow it down.
For me, the most obvious thing that would slow or even stop the property market in its tracks would be major regulatory changes. Similar to those introduced last month in New Zealand. (Source Savings.com.au MAR 20)
Changes there included.
- Reducing the tax deductibility of property investment loans to zero by 2025.
- Increasing capital gains tax payable for properties held for less than 10 years.
- Making it harder to borrow money by increasing the deposits required to secure a mortgage to 20% for owners occupiers and 40% for investors.
- Putting $3.8 billion towards building new houses.
- Increasing income thresholds on first home owner grants and loans.
If Australia adopted these measures, we would quickly see complexions change. But as we know, a strong robust property market generates a lot of spending and is good for the GDP.
I can’t see massive regulatory changes like this happening in the short to medium term and it would take a very courageous political party to introduce those changes.
The next migration wave coming?
Recent comments from a few property experts suggest that with Australia viewed world-wide as the beacon of health and safety in how we managed the Covid 19 pandemic, Australia may become the place to move to and call home in the future if Covid 25 is possible. Such a migration wave could result is even greater momentum is the property market BUT that is just too scary to consider now.
So now we come back to the questions I posed at the start of this piece. Are we in a bubble? Do the current conditions represent a fantastic opportunity or a train wreck waiting to happen?
Who the hell knows!
I thought property was expensive a while ago, as much as 4 years ago. I may have been wrong. What I do know is if I had bought another investment property, my net worth would be up considerably. Sometimes the trend is your friend.
What we do know is that interest rates are not moving in the medium term. The RBA have painted themselves into a corner. If they raise interest rates to quickly there will be blood in the streets.
As the old adage goes “the best time to buy a property is when you can afford one”.
If I was a first home buyer I would be moving hell and high water to get into the market and capitalise on all the grants on offer and the lowest interest rates we are ever going to see. That doesn’t mean I would gear up to the hilt but I would definitely try to enter the market. The first one doesn’t have to be the forever home.
If I was an owner occupier looking to upsize I might be less concerned with a property downturn. I’ll be in the house of my dreams and it doesn’t really matter what it is worth if you are going to live in it for the long term. Saying that I wouldn’t forget the fact that I have to pay down the mortgage at some stage and fully realise that if interest rates do jump things could get really painful. I read long ago that “debt is a wonderful servant but a terrible master”.
If I was in a position to buy an investment property, I would go into it with my eyes wide open. It would really depend on your individual position. Do I have minimal debt on my own property? Is my job secure? Do I have my personal insurances in place? Can I afford it if interest rates went up sharply? Again, super low interest rates help there. If investing I would factor in a slow down and some terrible press sometime in the future. If I was happy with all of that, giddy up!
I think that the next few years do represent a buying opportunity but I realise that this boom can’t go on forever. Nor do I want it to.
One thing is for sure, if it is a bubble, we are all in the same boat…..or in this case on the same slow-moving train.
Endgame Advice can prepare an investment property cash flow analysis tailored to your individual circumstances. For any other queries I am contactable on firstname.lastname@example.org
Andrew Bonnici (BCom, DipFS, Adv DipFS)
Authorised Representative No. 222909
Lifespan Financial Planning Pty Ltd (AFSL 229892)
The purpose of this article is to provide general information only and the contents of this article do not purport to provide personal financial advice. Endgame Advice and Lifespan strongly recommends that investors consult a financial adviser prior to making any investment decision. I have in no way considered or am I aware of your personal circumstances.