"The onset of the COVID-19 pandemic disrupted the cyclical upswing of house prices. If you are looking to purchase a property, this article can help you understand what is happening in the market." - John Stavrinoudis, Finance Manager
With Australian property markets currently booming at a faster rate than we have seen in 17 years, the most common question that Propertyology gets asked by clients and our media friends is 'how long will this boom last?"
At this stage, I think it is highly likely that this national property boom, which commenced in Q4 2019, will run deep into 2022, at least.
All things being equal, I think we will look back upon this cray period with the history books showing that some locations produced a 30 to 50 percent increase in house prices over a 3-year growth cycle. Plenty of other locations are likely to produce 70 to 100 percent growth across a cycle that could easily run for 5 years or more.
At an individual city level, the single biggest influences on property market performance will always be localised economic conditions and localised housing supply volumes.
The biggest macro influences on future real estate performance will be the actions of a few key people in high places. While it is impossible to get inside their head, I think the ten most influential macro factors for property markets over the next 5 years. will be as follows:
Rental Supply
While Sydney and Melbourne have a significant surplus of rental accommodation (43,607 dwellings advertised vacancies as of the end of July 2021), the 15 million people who live in the rest of Australia only had a combined 17,706 dwellings available.
In Australian real estate history, there has never been a bigger crisis than this. There are countless stories of businesses all over Australia advertising jobs but are unable to attract candidates because there is no accommodation available for those keen to relocate.
Changes to household structures, relationships, finances and lifestyle preferences are other everyday drives behind a need to change where one lives. But there is nothing available. Consequently, annual rents have increased by thousands of dollars in more than 40 Australian cities. The problem will get significantly worse before it gets better.
Lockdown Legacy
With each week that Sydney and Melbourne are in lockdown my fears for their future economic health increase. Melbourne has already been in lockdown for more than 200 of the last 500 days, while it appears highly possible that the current Sydney lockdown could surpass 100 days.
Hospitality businesses and CBD retailers can only survive on a drip for so long. For the owners, employees and commercial landlords of each of these businesses, the ability to pay mortgages and rents is in serious jeopardy. Ditto to investors who own apartments - don't touch them! Australia's two biggest cities continue to have the most concerning property market fundamentals in all of Australia.
Regional Relocation
The inverse of the emotional and financial scarring from big-city lockdowns is the insatiable appetite for open space, natural environment, and work-from-home flexibilities.
Over the first 12 months of COVID-19, regional Australia had a net population increase of 44,000 from internal migration (and 145,284 over the last 5 years) while Sydney and Melbourne each had a population decline of 32,000.
In locations all over Australia, Propertyology's buyer's agents are seeing first-hand examples of the transference of housing demand every day. I expect the regional relocation trend to continue to gain pace.
Government Debt Strategies
It was unquestionably the right decision for governments worldwide to raise debt to fund a series of important COVID support packages. But, before too long, the attention of governments will turn towards trying to return their respective budgets to surplus.
The financial statements of each of Australia's state governments will be tested significantly over the next 5 years. State economics and property markets will be affected.
Already, we have seen the Victorian government recently introduce new taxes and the Queensland state government has desperately struggled to fund infrastructure for many years.
Interest Rates
A rising interest rate cycle generally means fewer buyers of real estate, primarily because glass-half-empty personalities lose confidence. It will take six increases of 0.25 percent just to get back to the interest rate settings of mid-2019 when mortgage holders coped fine. Future interest rate rises will be more than offset by a strong labour market and wage growth (higher incomes).
Personally, I will not be the slightest bit surprised if the RBA begins lifting interest rates as soon as the next federal election is out of the way. Whenever rates do rise, it will be a good thing because it will be a recognition of a strong national economy and many COVID uncertainties behind us. Property prices will still rise, but the rate of growth will relax.
Housing Supply
Last year, Australia's construction sector (housing supply) was stimulated at a time when the national population growth rate was the lowest in more than 100-years (housing demand). It is my view that, by 2022-23, property markets in some bigger profile locations may be confronted with over-supply channels.
China
Of the 250 nations to which Austalia exports goods and services, 42 percent of our export revenue (or $165 billion 2020/21) was from China. From just one customer, that is an enormous amount of revenue that Australians rely upon to support 100,000's jobs and to fund infrastructure.
$134 billion of that $165 billion annual revenue from China (or 18 percent) was collected by Western Australia, predominately for the steel-making commodity, iron ones. Just this month the WA state government announced a record of $5.6 billion budget surplus which was filled by $11.3 billion in royalties from the sale of the state's iron.
When China is spending big coins on WA's iron ore, strong trends are produced for WA's economy, internal migration and vacancy rates. WA's unhealthy reliance on China also means the opposite is true. It is the primary reason why Perth's median house prices declined by 10 percent over the decade entering June 2020.
International Border
The current insufficient supply of labour is restricting opportunities to fulfil economic development potential in industries such as construction, agriculture and manufacturing. Increased wages from such high demand for labour will invariably be passed on to consumers.
At some point, overseas migration will recommence. But the economic pendulum has well and truly swung away from Sydney and Melbourne, and more towards the smaller capital cities and (especially) regional Australia. Accordingly, it is highly probable that a significantly smaller ratio of Australia's future overseas migration intake will be placed in our two biggest cities.
Tax Reform
The Australian Labor Party recently declared that they have no intention of meddling with negative gearing or capital gains taxes, however, watch-this-space for property tax changes at the state government level.
The NSW government is considering replacing the large one-off stamp duty cost with a smaller (but annual) land tax. The ACT government is already in the process of implementing a similar model. Don't be surprised if other states are proposing changes to stamp duty at some change. The new taxation model will increase housing demand, although it is not all roses.
Credit Policy
In previous reports, Propertyology has commented extensively about how past decisions made by the banking regulator, APRA, become the primary cause of the current national rental crisis and booming growth in asset values.
While I think it is less likely than likely that APRA will bow to growing calls to (again) squeeze credit, their track record for considering big-picture consequences is not good. One can only hope that the APRA Board does not wish to leave a legacy as economic destroyers and dream-breakers.
Source: Propertyology
What happens next for Australian property markets? (2021, September 13). Propertyology. https://www.propertyology.com.au/what-happens-next-for-australian-property-markets/
