In this week’s episode of the Property Planner, Buyer and Professor Podcast, the team analyse the macro economic factors which are pointing to property values being at a pivotal turning point towards an upward trajectory. To balance the conversation, the trio also discuss some of the risks which may hold values back. Dave, Cate and Pete take you through:

  1.  Why property values are likely to rise by 10% in 2021 and into 2022. Weighing up the market forces at play, (and in the absence of a loss of control of COVID case numbers) it’s looking likely that we’re at an inflection point in the market and we’ll be gearing up for a property run.
  2. How property values have remained relatively stable throughout COVID. As we’ve been saying since the beginning of COVID, (and contrary to the property doomsayers and alarmists), due to a reduction in supply, property values had a floor underneath them and Dave, Cate and Pete felt that national median prices were unlikely to drop more than 5-10%. Well, the results are in!
  3. The green shoots emerge. Property values in 6 out of 8 capital cities have recorded an increase in median values over September. The two exceptions have been Sydney and Melbourne; Sydney has recorded a slight decline in values of 0.3%, and the reduction is decelerating from previous months, which is typical before an uptick. Melbourne’s median value has declined by 0.9%, and we know that Melbourne is getting their COVID cases under control from the second wave, so we expect the recovery will be a few steps behind the other capital cities.
  4. How low can interest rates go? Interests rates have been slashed and dashed since mid 2019, with a total drop of 1.25% so far. RBA pre-pandemic modelling suggests that when the cash rate is dropped by 100 basis points, property values will increase by 28%. Yes, you heard right, 28%. With more whispers in the wind about a further rate cut – watch this space.
  5. Responsible lending laws to be axed. Now seen as a ‘handbrake’ on our economic recovery, responsible lending laws are due to be repealed in March 2021, which will open up ease of access to lending. There’s nothing like making it easier to borrow money to heat up the market.
  6. Ready, set..SPEND! With nothing to do and nowhere to go, Australian’s are saving more money than ever. Coupled with the ‘wealth effect’ from rising property values, consumers spending money locally instead of overseas will have an enormous impact on the economy.
  7. Unemployment looms. From our own analysis, led by the Property Professor himself, we discovered somewhat surprisingly that in the recent recessions and hikes in unemployment, property values remained obstinately consistent, barely showing any reductions greater than 5%. This is not to downplay the horrific impact that the pandemic has had on some businesses and Indvidual’s. That remains. The trio believe that the impact on property values is likely to be less than many people imagined.
  8. Vaccines, migration and riding the waves. Towards the back end of 2020, we can expect to see viable vaccines in production, international travel slowly coming back online and better management of COVID breakouts. Practice makes perfect, and by now, we would hope Victorian’s are well versed.
  9. International recovery blueprint. Looking overseas at other Western countries, positive housing stories are playing out in the US, UK, Canada and NZ where values are increasing and we are not far behind.
  10. And of course, our ‘gold nuggets’

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Show notes

  • The Property Planner provides a helicopter view on the current state of play for the property market and some colour around why I said last week that I believe property values are likely to rise by 10% in 2021, and into 2022, and possibly more. 
  • Low interest rates 
  • The RBA down at Martin Place has been cutting its rate since mid-2019 from 1.5% to where it now sits at 0.25%. That is a drop of 1.25%. 
  • Guy Debelle, the deputy governor of the Reserve Bank, in a speech last week outlined that they are open to reducing interest rates further from the current 0.25% and other monetary policies they’d be willing to implement as needed. 
  • On top of that, among other initiatives, they have controlled the government bond yield curve ensuring that fixed rates for mortgages are providing an even larger reduction in interest rates for many borrowers. 
  • This makes borrowing, buying property, much more affordable. 
  • Well, the RBA’s own modelling suggests that if they drop they cash rates by 100 basis points, in other words, 1%, property values will increase by 28%, yes, that’s right 28%. This was pre-pandemic modelling. Nevertheless, the rate reductions and the yield curve management that actually taken place have been greater than this. 
  • Responsible lending laws are to be repealed 
  • Last Friday Josh Frydenberg announced that responsible lending legislation will be rescinded. These responsible lending laws have been in place for more than a decade. So that’s big news. The reason for repealing the laws is that they’re now seen as a handbrake which will delay our economic recovery.  
  • Although these changes may not take place until early 2021, you are best rest assured that lender policy and their gate keepers, the credit assessors will incrementally remove the shackles and feel more and more comfortable lending to borrowers and taking a common sense approach when it comes to approving loans.  
  • What’s more, these changes will start from now, if the last 20 odd years of finance cycles is anything to go by, and as I have consistently said, more access to finance, is primary driver of growth in property values. 
  • When lenders increase risk appetite they need to protect themselves from risk (increase LVR or tighter lending criteria) – the picture will not change too much, banks will be looking at whether the employee has staff on jobkeeper. The appetite for risk is significantly greater than what it’s been wound back to be. One area they’ll look at is small business loans, and in particular, where they may try to protect themselves for.  
  • Greatest saving levels on record that will be deployed 
  • Far too many people are worse off, but possibly as many, if not more are better off in terms of the money that they are saving.  
  • My estimate would be that more are better off and as they get more confident in the strength of property values, job security and the economy, they will deploy more of their savings and invest. 
  • Ultimately this ALL feeds into The “Wealth Effect”. It is the behavioural economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident when their home, or investments increase in value, even if their income and fixed costs are the same. In other words, you feel more comfortable splashing out and increasing your spending. 
  • Supply and demand 
  • One of the reasons why property prices have not plummeted is because although there are not as many buyers out there, the number of sellers have also reduced. In Melbourne our spring selling season will also be an early summer season. Potentially having campaigns and auctions in January, which is not typical, normally there will be a property holiday over January.  
  • Unemployment is a concern 
  • Reviewed previous recessions, property market was surprisingly resilient, greatest drop we ever saw in property values was 5% but often less. From our own analysis, led by the Property Professor himself, we discovered somewhat surprisingly that in the recent recession and hike in unemployment, property value remained obstinately consistent barely showing any reductions greater than 5%.
  • In this recession, the economists and analysts tell us that a large percentage of the unemployed cohort have been casual, part time and gig workers who were, and remain less likely to purchasing or owning property. They are also disproportionately in the younger age bracket. 
  • This not to downplay the horrific impact that the pandemic has had on some businesses and individuals. That remains. Purely that the impact on property values is likely to be less than many people imagined. 
  • Underemployment – losing hours, even though unemployment might not be as low, underemployment might be higher. The biggest factor will be a move towards more realistic lending. Property prices dropped in 2011 after all stimulus money had been spent. In March next year, the opposite will happen as there will be stimulus of ease of obtaining credit. 
  • Vaccines and medical treatments 
  • My expectation is that they will steadily coming online towards the back end of 2020 and throughout 2021. The US Chief Immunologist, Dr Anthony Fauci recently told Bloomberg he is reasonably confident of effective vaccines being approved as early as November and December with public distribution commencing thereafter. 
  • Migration 
  • International travel coming back online, which will rely on vaccines, medical treatments, travel bubbles and special interest groups such as int’l university students being able to come into Australia.  
  • Tourism has been smashed, but as I have shared previously, if we spend only 2/3 of our normal overseas expenditure locally instead, we can cover the tourism investment and most people are chaffing at the bit for the borders to open up.   
  • Better management of Covid breakouts 
  • Most people get better at what they do, the more experience they have, and we certainly have more expertise in managing and suppressing future breakouts. 

David Johnston- The Property Planner’s Golden nugget: We know that positive housing stories are playing out in the US, UK, Canada and NZ where values are increasing. 

  • UK – The average price of a home rose 1.6% in August from July. This is up 5.2% from a year earlier, the fastest annual rate since late 2016. 
  • US – house price index increase of 1% in September and 0.9% in August 
  • Canada – rose 0.5 percent in August 2020, following a 0.4 percent increase in the previous month and above market expectations of a 0.3 percent gain. 
  • NZ – increase of 0.9% in June, 2% in July and 1.9% in August. 

We know this is a phenomenon happening in other countries around the world, everyone has revised their predictions to 5% drop in values, and expect increase of 15%, just further evidence of what we’re talking about here.  

Cate Bakos – The Property Buyer’s Golden nugget: reading RBA meeting minutes carefully, picking a reliable journalist, that will give you a really good insight into what the leading professionals in the country are bracing themselves for.

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