Capital growth – what increases property value? (Ep.89)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. Consumer confidence. It doesn’t matter how low interest rates are or how easy it is to borrow money. If people are not comfortable and confident, they’re not spending extra or making life-changing investment decisions. Security of employment, community health (pandemics for example!!!), government support and stability and the geo-political environment are all critical factors that feed into consumer confidence.
  2. Interest rate cuts and banking competition. RBA confidential analysis shows that property values could rise by 30% if people believe the cut in interest rates is permanent. Although far from permanent, 4 years is far enough away in the eyes of many, along with lender competition to drive up property demand and speculation.
  3. Availability of credit. Access to funding is one of the most critical elements that can increase property prices whenthe tap is turned on, or deflate the market when it’s switched off. We now have a history of APRA’s macro prudential regulation stalling ‘runaway’ property growth. We also have relaxing of the responsible requirements which will make it less onerous to obtain a loan.  
  4. Business confidence. Just like consumer confidence, when businesses are happy and comfortable with a strong pipeline of sustainable income, they’re more likely to spend more, including upgrading systems and putting on more staff. This all drives up spending, creating more jobs, increasing employment, wages and….you guessed it, property prices.
  5. High employment. When we have high employment, more people are likely to consider leaping out of the rental market and embarking on the quest for home ownership. Reducing unemployment down to below 5% is a core focus of the RBA’s low rates for longer and quantitative easing to drive wages growth.  
  6. Wages growth. The Property Planner explains the RBA’s plan to overstimulate the economy in a bid to push down unemployment, promote spending and increase in wages. The resultant effect of these objectives will drive investment and property growth.  
  7. Population growth. The trio discuss the nuances of population growth on a macro (Country, State, City) and micro (Suburb, location) level. Be careful not to confuse affordability with desirability. Just because an area has had a lot of uptake, does not mean it is desirable and will exhibit capital growth.
  8. Government stimulus. When our politician’s throw money at us, and particularly when it’s enabling a purchase decision, it has a direct impact on asset price growth because of the increase in buyers. This also results in great competition pushing up property values and creating new benchmarks, and potentially meaning that some people overpaying for property because they’re desperate to get the discount.You should never base a property decision on benefits that represent a false economy when contrasted against your intended outcome.
  9. A rare few infrastructure upgrades. The trio share the infrastructure upgrades that are worth paying attention to and those that are capital growth red herrings, which is the lion share of them despite what the media, spruikers, agents and the well-intended friends and family might tell you. 
  10. Increase in overseas buyers. Over the last decade, we’ve seen rapid price increases, partly due to an increase in overseas investors entering the market. Restrictions on the type of asset foreign buyers can purchase and additional fees taxes is just a few of the levers that the government can pull to increase or decrease interest in the property market or dampen demand. The ‘wonder from down under’s ability to manage Covid will only amplify Australia as a destination nation for those who can afford to move here, purchase here or send their children here to study and live.
  11. Migration. Whilst overseas migration has come to a halt, there is still interstate and intrastate migration to take into consideration. Age, education, and other demographic factors shape an area when it comes to comprehending the impact on capital growth from our new arrivals. We have also repatriated around 200,000 Australian’s which essentially has replaced migration. Since the pandemic struck (and particularly for those in lockdown capitals), people are moving domestically, whether it be a move away from a city in favour of regions, or an interstate move. Overseas migration may be on hold for now, but we do need to ensure that when it recommences, we don’t confine our attention only to capital cities and the impact of these new foreign arrivals.
  12. Inflation. Tying in with employment and wages growth, inflation is not an arbitrary consideration. The engine room behind our economic drivers is well-integrated, but it goes without saying that inflation will impact property price growth. Every reserve bank is doing its utmost to stimulate inflation. It will be super-interesting to see the role of inflation in the recovery and if it makes its way back into the target band, and potentially takes off which some wise-heads are concerned about given the extent of the fiscal stimulus.
  13. Higher rental demand. This is a function of population growth, migration, building approvals, household numbers and employment. Lifestyle and overall desirability will discern some areas from others however.
  14. Commodity prices and booms. Other than Iron Ore, fluctuations in commodity industries will not have a significant impact on a big city, but drives demand in regional towns that are reliant on that industry for employment and their economic well-being. At the moment, the price of Iron Ore in particular, is providing significantly tail winds behind the economic recovery of our nation. Our reliance on China remains a risk.
  15. And of course, our “gold nuggets”!


Show notes:

  • Consumer confidence 
  • Doesn’t matter how low interest rates are, how easy it is to borrow money – if people are not happy and confident, they won’t be spending extra money on a meal out or making big purchases on home or investment.  
  • One of the biggest factors is employment or security of employment. 
  • In the last couple of months, we’ve seen this pivot from people sitting on their money to FOMO.  
  • Interest rate cuts and banking competition 
  • When we’ve got banking competition, we see lenders and alternative lenders lowering their rates, which in turn increases the borrowing capacity. 
  • RBA analysis shows that property values could rise 30% if people believe the cut in interest rates is permanent, and to a lot of people 4 years is quite permanent. 
  • Availability of credit  
  • In early 2000’s – Money was very much available – no doc loan, low doc loans, you can borrow up to 105% 
  • This time around, we’ve got lower interest rates – but you need more of a deposit and a higher interest rate for investors.  
  • Business confidence/high employment 
  • High employment, where there is high employment, there is high confidence.  
  • People who are confident in their own circumstances – none of us are immune from the effects of Covid, when everyone is feeling like they have job certainty, we’ll see people who might ordinarily be stuck in rentals re-evaluating their options.  
  • Combined with low interest rates and availability of credit, we’ll see more people have a go at home ownership. 
  • Under-employment – people who are under-employed will not be going to go buy a house. There was a huge spike during 2020, but that’s almost come down. 
  • Where people can see a strong pipeline of work which is sustainable, that’s when business owners will think about investing more in the business – training, upgrading systems, employing more people. When they are not confident, they’re not employing people and they’re not spending money. 
  • Wages growth 
  • High employment also drives income growth, which drives investment and property growth.  
  • If our wages increase, we can save that extra money or spend more. 
  • RBA wants to overstimulate the economy or overshoot the mark, to really push down unemployment, driving up wage growth, promoting spending in the economy, which creates more jobs and pushes up property values.  
  • Population growth 
  • Macro v micro 
  • Macro population growth for nations and capital cities – all these people coming from overseas need to live somewhere, they will impact on the rental market and eventually impact on property prices.  
  • Micro population growth for suburbs – what you DON’T want to see is this growing is because it means the supply is increasing – developers building new dwellings. The price is based on the supply v the demand, if there is too much of it, it will go on special.  
  • Look at the population numbers deeper, if we had 10,000 85 year olds move into a state, that won’t do much for property prices. What you want to see is the age bracket that is renting and buying – 25 to 55. If there are lots of these people buying in the property market, that will certainly increase property prices. 
  • Affordability and desirability are two different things. If an area is getting a lot of uptake, it may be because it is affordable. Value increases is because an area is desirable.  
  • Is this what you’ve always dreamed of? It may be the house that they’ve always dreamed of, but not the location. 
  • It might be a good time to buy commercial property for these reasons, but probably not residential property 
  • Government stimulus 
  • When our politicians throw money at us, we’re most likely going to spend it when it’s small enough to spend.  
  • If the amount is significant, people will put it in their savings or pay down their mortgage.  
  • When it’s linked to a purchase decision, stamp duty concession or discount, FHOG – it has a direct impact on price growth because more people are buying property. The number of properties on the market didn’t increase, but the number of buyers did. 
  • Infrastructure upgrades and announcements 
  • There is a lot of speculation, some upgrades that don’t have a massive impact and some that are completely significant. 
  • This new freeway has increased property 
  • University campuses will increase rental demand, so do people working at hospitals. 
  • Re-zoning – school changes it’s name, re-branding. 
  • Infrastructure that gets people to drive past your area, we don’t know if that will help. 
  • Population staying the same, but more younger people moving in 
  • People with more money moving in – that is what you’re looking for. 
  • Other areas 
  • Inflation 
  • Increase in overseas investors 
  • Migration 
  • Higher rental demand 

Cate Bakos – The Property Buyer’s Golden nugget: there is a lot of offerings floating about with government stimulus. You need to ask yourself if what you’re chasing is representative of good value to get the discount. People are fighting for the keys and people are over-spending more than what they’ve saved from the discount. Do not make property decisions based on artificial circumstances created by the government, make them based on your goals and circumstances. 

Peter Koulizos – The Property Professor’s Golden nugget: you need to do your research and analysis. Research is finding data on the website that numbers of people in a particular suburb have increased. The analysis is finding the age group, education and employment to find out what type of people have moved in.

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