In this week’s episode, Dave, Cate and Pete take you through:
- Why is supply and demand important? The Property Professor takes us through Economics 101 principles of supply and demand. These forces determine the price of any commodity. That is true of bananas impacted by cyclones, steel, cars, and of course, property!
- Consumer confidence and the self-fulfilling prophecy of market sentiment. A great influence on consumer confidence is security of employment. We are more likely to commit to a mortgage when we feel safe in our jobs, which results in more demand and property prices increasing. There was a big dip in consumer confidence from March to June in 2020, largely due to the uncertainty of covid and the economic impact. But when we saw that the sky was not going to fall in (thanks to Government stimulus and lenders offering repayment holidays), consumer confidence lifted and property prices started to increase again. If enough people believe that property prices will rise quickly, more people will jump into the market due to fear of missing out, thus increasing demand and therefore property prices – the self-fulfilling prophecy.
- State of the economy, foreign investment and development. When consumer confidence is high and jobs are secure, you get extra foreign investment pouring into the country when the economy is doing well. This goes towards development, whether commercial or residential, and drives business investment. This creates more jobs, lower unemployment and more money in the economy to go towards investing in assets. Employment and unemployment is a major consideration, with Melbourne now in it’s 6th lockdown, the economy is impacted. But this will create opportunity on the other side, when life returns (somewhat) back to normal. So far, we are yet to see property prices negatively impacted by such concerns but we don’t make assumptions in this unprecedented environment we’re navigating.
- The Wealth Effect driving spending. When property values have increased, jobs are secure and confidence is high, people feel wealthier. The more wealthier you feel, the more you spend, which makes you happy and then you spend more! Government stimulus, cash flow boosts, lower interest rates and higher savings booming across businesses and consumers suggests that many people are feeling wealthier and are itching to spend.
- Government assistance and stimulus. The trio discuss the impact of government assistance and stimulus, which is often very targeted towards certain buyers or segments of the market. This has a profound influence on demand in those segments. First home buyers are usually prioritised by the government, but these people are not buying $2M homes; they typically buy apartments and villa units, which impacts a particular segment of the market. Similarly with stamp duty concessions, there was a recent rush to the sub-$1M Victorian market to meet the eligibility requirements of the discount.
- Cost and availability of finance, interest rates are not everything! The Property Professor takes us through the last 30 years of property price increases and how they relate to interest rates. Lower interest rates do not necessarily equate to more demand, however access to finance has a huge impact. From 2017 to 2019, we had our biggest property dip on record, which was driven by access to finance, government policy and APRA regulation. Coupled with the Banking Royal Commission, lenders were shaking in their boots, afraid that their skeletons would be revealed, and loan assessments turned into a forensic exercise which still remains today. We saw non-bank lenders flourish during this period and gain market share, as they weren’t regulated by APRA in quite the same way and weren’t required to comply with the same stringent measures set on banks.
- Existing supply and demand for housing. Developers take into account the existing supply of new apartments. If the market is saturated, why build more? Often developers need to forecast for demand in 2 or 3 years’ time, but if they need to borrow the money, a certain percentage of these must be sold before the lender approves the finance, which confirms the demand, (even before the developer starts building). The percentage is calculated as a function of the developer’s financial position, the risk assessment conducted by the lender and the timeframe required. In many cases this figure is well above 60%, and often 80%. These off the plan sales requirements enforced by the lender are known as “pre-sales”.
- Tax and Superannuation. Government policies impacting tax and Superannuation have a great influence in the property market. The trio discuss the Labor party’s proposed changes to negative gearing for our 2019 Federal Election which loomed heavy over investors, causing many to take a back seat to purchasing before the outcome of the election was known. Once the Liberal party was confirmed to have won the election, the investors came rushing back to the market like the boxing day sales and values started to boom again. SMSF is another key area, where changes to SMS funds being able to own property saw billions of dollars, which were previously untapped, flow through to the market.
- Supply and demand determines price, just like it does with every commodity. Cyclone went through Queensland and devastated bananas, price went up. Even if supply is the same but demand has increased, the price will go up. Price of steel and cars, property is no different.
- Level of consumer, business and developers confidence
- How happy and confident we are, determined a lot by security of employment, we are more likely to commit to a mortgage, resulting in more demand and property prices go up.
- Big dip in confidence in March, April, May, June, then when we saw the sky was not going to cave in, thanks to HomeBuilder, JobKeeper, JobSeeker, plus banks came to the party with mortgage repayment holidays, consumer confidence lifted and property prices went up
- Government assistance and stimulus
- When they all come together, you get extra foreign investment as well pouring into a country, when the economy is doing well, which then goes into development, whether commercial or residential and then fits into consumer confidence too
- Drives business investment, more jobs, lower unemployment, more money in the economy to go towards investing in assets
- Time to buy a dwelling index, which has started to drop recently as prices have gotten higher and double lockdowns in Melbourne and Sydney.
- It’s still FOMO city with property – the wealth effect – the wealthier you feel, the more you spend, that makes you happy and then you go and spend more. If enough people believe that property prices will rise quickly, they actually will – self-fulfilling prophecy.
- Government stimulus, job keeper, cash flow boosts, lower interest rates, higher savings – that has boomed across businesses and consumers. People feel wealthier and they are itching to spend it.
- Two speed market – trends and numbers suggest overall we’re saving more, but there are people and businesses doing it hard. Stimulus has been targeted – whether to help people through covid or get the property market going – it skews segments of the market.
- When we had incentive for FHB, saw an uptick of first home buyers – makes sense. These people don’t go out and buy $2M homes, they buy apartments and villa units.
- Sub-million dollar market – stamp duty discounts for purchases under $1,000,000. Rush to everything in 900,000 and this spurs activity in that market.
- Probably still under-estimated how broad of an impact that it has. Lots of people who are much better off because of the stimulus. Push now for some transparency around businesses that have received JobKeeper and JobSeeker – people could get this based on projections, rather than actually revenue. Job Keeper $13 billion was given to an estimated 200,000 businesses who actually had rising turnover – this is the equivalent of what government has allocated to the NDIS in the last budget. That makes a difference to the economy – people put that money somewhere else once it’s paid to them. A fair chunk of this is channelling to the property market and the share market.
- Cost and availability of finance
- It’s not just about interest rates
- June 2002 to September 2003, cash rate was 4.75%, but the property market grew nationally by 24%.
- In September 2013 to December 2014, cash rate was 2.5%, property prices went up 11.5%
- September 2016 to September 2019, cash rate was only 1.5%, property prices increased only 1.2%.
- When the cash rate was higher, property prices went up higher – this has to do with consumer confidence and availability of finance.
- Days of no doc and low doc loans are gone.
- Now there is forensic investigation into your living expenses, which has eased somewhat. Credit assessors were shaking at the knees when assessing, asking for proof of everything – goes back to the banking royal commission, where everyone senior in banks was worried that the skeletons were going to be found in the closet. Many harrowing stories of senior managers having strips torn off them and being embarrassed infront of the media and everyone in the stands.
- That next level of forensic assessment happened during this period, but now it has freed up their turn-around times. Shift of people working in an office to then working at home slowed things down, harder to get a loan approved now than it was every before.
- 2017 to 2019 was our biggest property dip on record – this was driven by access to finance, driven by government policy. Government policy has often played a part, APRA regulations stepping in on investment and interest only lending, differentiating interest rates between owner occ and investment, principle and interest to interest only.
- Servicing when credit was really tight, they were very tough on servicing, not only the property that you’re going to buy, but also the whole portfolio.
- One segment of the market which did increase was first home buyers, incentivised but also their servicing was cleaner, only one loan.
- One of the major changes which happened here was that existing debts had to be assessed based on assessment rates as well (+2.5%), whereas non-bank lenders not governed by APRA, don’t have to do that.
- There was a big delineation, which still remains to some degree, where you can access more funding at times through a non-bank lender, as they don’t have to meet some of these stringent requirements. They ended up getting their largest market share and banks were reducing market share as fast as ever. That has come back a bit now, which is not necessarily a good thing, because the big 4 have a very big market share.
- Employment and unemployment – health of the economy
- In the 1990’s recession, whole country had a recession, some of the major banking organisations went under which particularly affected Vic and SA. From 1990 to 1996 – Melbourne 3.1%, Adelaide 5.9% – Sydney 16%, Brisbane 23%, Perth 27% Hobart 20%, Darwin 47%. It is not a correlation or coincidence, these states were having bad times, banking crisis plus national economy produced subdued property prices.
- Melbourne now in 6th lockdown, that must be hurting the economy and that is why Melbourne is trailing now.
- It will create opportunity out the other side, at some point life will get back to being reasonably normal, the trends the cities were going on will give or take come back. Maybe there will be a permanent change of people wanting to live regionally.
- Existing supply and demand for housing
- If there is already a stack of new apartments, lots of them for sale, an apartment developer would be really silly to build another group of apartments. How much is already out there? Is it saturated, why would we build anymore?
- Apartment developers need to forecast for 2 or 3 years time, you can sell off the plan if you have to borrow money, meaning there’s already demand for 80%.
- Developer will by block of land, set up a display home and sell first portion. Then open up the second portion and sell that. The only reason they are bringing on more supply is because there is more demand.
- Until covid comes along and no one wants a one bedroom apartment or studio – this is reflected in vacancy rates and distressed sales. Developers will give away TV when they’ve over supplied. Feel for any developer that’s put a lot of capital into something like that, because there will be losses in some segments in the market.
- Government policy on tax and Super
- One of the drivers of the record drop was the policy on abolishing negative gearing and reducing capital gains tax, a lot of people were afraid to purchase property until they knew the result of the election.
- Then people were rushing like the boxing day sales to get back into the proeprty market and it started to boom again.
- SMSF being able to own property will increase property prices – Billions of dollars more money into a market.
- The global pandemic didn’t rock the market as much as a threat to negative gearing did.
- Both of those times when most people were fearful, were the best times to buy.
- 1999 – John Howard brings in CGT discount for properties sold if you’ve owned it for at least a year. But in 2000, the GST will be introduced, what will happen with that? Will properties be 10% more expensive. Nothing happens in the property market or building game, so first home owner grant is introduced. $7,000, now it’s $15,000. Still not much happening in new home market, so government doubles it. Investors get it because of capital gains tax discount, then banks come to the party with no doc and low doc loans, first time buyers want a piece. All the pent up demand and incentives before hand caused this.
- Population change – we’re in wonder of how property prices have increased so much, but haven’t had any migrants coming in. Next year when boarder open, the rental market will be impacted. Then when they’re eligible for permanent residency, there will be a huge impact on property prices from overseas migration.
- Australia has coped very well with Covid
David Johnston – The Property Planner’s Golden nugget: History may not repeat, but it often rhymes. There are some themes running through what we’ve talked about, government policy, government stimulus, uncertainty causing people to delay making decisions. Reminder to look back over history, what has caused property market movements and it will help inform your decisions into the future.
Peter Koulizos – The Property Professor’s Golden nugget: It’s the people with the money that drive demand. It’s the people with first home owner grants, that the bank lent them, at a more localized level, people with the money that will drive other areas. Eg: Mornington Peninsula has gone gang busters, not because of the people living there having increased salaries, but because Melbournians with their salaries are purchasing there.
Weekly Market Update
- How have two-bedroom, single fronters been impacted through covid? Cate shares an article she has recently written analysing the performance of 6 two bedroom, single front cottages across Melbourne. A lot of people have expounded the popularity of 3 bedroom houses in the wake of covid lockdowns (including us), however the demand for these smaller dwellings has been strong. Why is that?
- Dangers of online mortgage calculators. Dave shares the real-life examples that unsuspecting consumers have come across when using unreliable online mortgage calculators. In one particular example, a couple saw a differential of $160,000 between the online calculator and their credit assessed borrowing capacity, all because the online calculator didn’t ask how many dependents they had. Other traps include not differentiating between variable incomes and purchasing in high-density post codes were income could be shaded to as low as 65%. The devil is in the detail when determining your borrowing capacity.