Property prices – what causes values to fall & how to tackle a rising market (Ep.90)

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

  1. On the flip side. Many of the facets we discussed in the previous episode #71 “Capital growth – what increases property values” have an adverse impact on property values if the opposite occurs so for this episode, we covered some different topics.
  2. Macro prudential regulation. We now have a track record that macro prudential measures have the ability to influence property prices. APRA slammed on the breaks by putting caps on investment lending, LVR’s and interest only loans in an effort to dampen the market and it worked!
  3. Higher and new property taxes. New policy and government announcements do affect buyer behaviour and the beauty is that policy makers can target particular segments of buyers, such as investors, foreign buyers, first home buyers, and so on, (to name a few). The trio touch on some of the changes we have seen and could see in the future.
  4. Negative gearing. Tying in with taxes, the abolition of negative gearing is still on the Labor party agenda. Whether it happens in the 3 years or 10 years is anyone’s guess and the extent of any reduction of negative gearing to a certain number of property V total abolition. The Property Planner share how Labor have not taking this off the table yet and makes his predictions that they will roll it out in some down the track.
  5. Global and political unrest. Our international trade relationships have a large impact on the economic well-being of our nation, and therefore, can directly impact jobs, employment, wages growth and inflation – which all have a bearing on property prices. The Property Planner explores challenges and an example of a left tail or black swan risk that could cause future conflict and severely impact the Australian economy. It wasn’t that long ago a pandemic was scoffed at as a left tail risk!
  6. Natural, environmental or health disasters. As we all understand much more clearly now following the Covid-19 pandemic, these events are significant set-backs for any economy that must manage through these disasters. They often come with a huge cost to governments and can spell increases in unemployment. This event has also increased the willingness for business and consumers to better perceive the risks of climate events also.
  7. Fear of… The trio explain how fear can either be a driver of property values or a wet blanket. During 2020, even people who were stable and confident in their employment chose to wait on the side lines of the property market, for fear of the unknown. Fast forward to 2021 and the trend playing out now is fear of missing out, causing a feeding frenzy in the property market. Fear plays a large part when it comes to price movement and Cate drills into this, and the immediate affect it can have on local markets.
  8. Doomsday media. One thing living through a pandemic has taught us among many, is take what you read in the media with a grain of salt. The Property Buyer explains how the media can irresponsibly skew consumer confidence, creating self-fulfilling prophecies.
  9. Too many renters. Owner occupiers have a greater ability to drive property prices, as they’re willing to pay extra to get into that lifestyle property they’ve always dreamed of. Where the ratio of owner occupiers to renters is decreasing, can cause dampened competition and buying conditions softening values because owner occupiers are price makers. Be careful of the mix in your selected micro location.
  10. And of course, our “gold nuggets”!


Show notes:

  • Macro prudential regulation 
  • Some of the decisions that were made around capping bank growth on investment lending, LVR changes, interest rates for investment loans – it’s proven that it works.  
  • New Zealand has just done this and we all think we’re headed this way – whether later this year or next year, it will come.  
  • Higher taxes on property transactions and ownership 
  • These announcements affect buyer behaviour. Policy makers will find a way to target particular categories of buyers – eg: investors, foreign buyers. Changes to stamp duty, price caps for first home buyers.  
  • Taxes and changes to stamp duty and concessions definitely skew buyer behaviour  
  • Threat of taking away negative gearing, the market jumped into the freezer and did nothing – there was a market deterioration leading into the election in 2019. Our downturn there, was more significant than during COVID.  
  • Labour party hasn’t taken this off the table just yet.  
  • At some point in the future, this will become a policy – whether you’re only able to negatively gear a certain number of properties, we do think there will be a change in this space – 3 years or 10 years.  
  • Until the government doesn’t need landlords to share the duty for government housing, they won’t abolish negative gearing. 
  • Stamp duty – if that is abolished, it will make it easier for people to move houses. This will increase supply. 
  • Global/political unrest 
  • Such a heavy reliance on China – export goods to China fell by 8% in January. They reduced their purchasing of iron ore, which is our key commodity, It’s the most important one to our economy. It dropped by 5%, yet China still bought 80% of our iron ore.  
  • This would severely impact our economy if they just turned that off tomorrow. 
  • Thankfully we don’t have much competition in that respect for now. 
  • The price of iron ore has gone through the roof, it’s such a high grade compared to other suppliers.  
  • Supply and demand is such a critical facet that we all need to understand.   
  • UK and Europe facing double dip recessions, with second and third waves.  
  • Coolabah Capital has a 50% probability that China try to reclaim Taiwan in the next few years, triggering: 
    • A conflict with US  
    • Spectre of WW3 
    • ANZUS treaty with US invoked 
    • Preclude us from selling Iron Ore, Coal and Natural Gas with our largest trading partner  
    • Game changing military US kit coming in the next 5 years, and Xi knows this. If they’re going to make a move, they need to move soon. 
  • Natural, environmental or health disasters 
  • Anything like a pandemic has a direct affect and can impact someone’s ability to buy.  
  • But before reality hit and jobs were lost, was fear. 
  • The first reaction is to put all purchase activity on hold. 
  • There was a lot of irrational behaviour. 
  • People who knew that their industry was not in the firing line, were still hesitant to make decisions – eg: you need a bigger war chest or asset prices would plummet. 
  • Fast forward 12 months and the market is going in the opposite direction, at a faster rate of knots.  
  • If at an auction and you see people bidding up to your price point, it could be a genuine fear of missing out. Property values are much more likely to be higher in March, April, May, June, July. When a market is on the way up, the earlier you buy, the more likely you are to pay a reasonable price. That’s why we’re seeing faster action right now, more people are aware of this fact. 
  • Some people will say in a public auction, the price is the market value. Lifestyle properties are a different proposition altogether. They should be purchased by someone who does not care about valuation shortfall. There were older people, they had their portfolio, they just cared about buying their dream and they can pay whatever they feel.  
  • If you’re buying property, you want to ride out market cycles – 7 to 10 years. You should be purchasing the property that aligns: your money goals; your mortgage strategy; your strategy. Then, if you tick all those boxes, pay the price that you can afford to hold on to. If you pay a little bit over market value, it shouldn’t matter too much. In an ideal world, you’ll be holding these to retirement anyway. 
  • You might want to pay a lot more – but you have to be conscious of what the bank will be willing to lend against it. Try not to get ahead of yourself.  
  • Media impact 
  • When they take an angle that is not balanced and fair.  
  • Our biggest issue was when the pandemic first hit. There were two reports from WBC and CBA – they had economists showing best case, likely case, worst case.  
  • The front-page article only published the worst case.  
  • It definitely made a difference – they took it too far, and it was really irresponsible.  
  • Too many renters 
  • Owner occupiers drive property values up, they have more of an emotional connection. They are the ones who are driving property values at the moment, they’re willing to pay more.  
  • A market place that is too heavily reliant on renters, doesn’t maintain that balance that we’ve historically had. Which was around low 70’s, now to 65% of properties owned by owner occupiers. 

David Johnston- The Property Planner’s Golden nugget: on the overnight swap rate, markets are starting to factor in that interest rates will rise 2.25% at the end of 2023 and 0.5% at 2024. That’s two years before Governor Lowe has suggested, that’s interesting. Overall it’s a positive sign that people believe our economy will recover faster than expected.

Cate Bakos – The Property Buyer’s Golden nugget: a famous saying “what goes up, must come down”. The thing about property, is that there’s a lot of science in it, but there’s also art in it. And this particular saying doesn’t have a place in property. For those who are waiting for things to come down. Property markets over long-term in a healthy environment will trend upwards. The laws of physics don’t apply to the Australian property market. 

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