As we begin the journey of a new year, it is time to place our head on the proverbial chopping block and make a few predictions. As 2019 showed, with most pundits predicting a continuation of property values falling, this is a particularly risky exercise. But, what the heck, let’s give it a go anyway.
Let’s quickly recap. In 2019 we witnessed the fastest market rebound in our lifetime. We have talked about the many economic, political and regulatory changes that drove this upward swing. An unexplored reason for the rapid change, we believe, is faster access to property data in the digital age. We hold the view that this creates the conditions for consumer sentiment to move at a faster pace than ever before, like a flock of birds rapidly changing direction on a whim through an unspoken method of communication. Could this be a harbinger of things to come?
2019 saw an end to the year with a flurry of activity, as we predicted earlier when the green shoots started to emerge post the May election. Core Logic notes that the turnaround for Sydney and Melbourne has been around 6%. Our prediction was that a 5% upswing by the end of the year (circa 10% annualised) was probable for the second half of the year. Which, at the time, many people thought was quite bullish and unlikely.
The big question for 2020 is: “Will the upswing continue its momentum throughout the year or run out of steam?”
We will unpack some of the factors that could come into play and make a few predictions. So, come take a ride with us in our time machine as we explore what 2020 has to offer!
FOMO is back in Sydney and Melbourne
At the risk of stating the obvious, FOMO (fear of missing out) is well and truly back in Melbourne and Sydney. Core Logic suggests that post-September we have seen the fastest growth in values since November 2003.
In November 2019 alone, Sydney home prices jumped by 2.7%. The greatest single-month jump in 31 years. Putting this in perspective, this is annualised growth of 32.4%. This is not sustainable unless we see out of control inflation which is almost certainly not going to occur. We remain fixed in this low inflation environment that is consistently below the RBA target of two to three per cent.
Will the contagion spread to other capital cities?
In a word, yes. And it has already begun.
The spillover effect will see heightened buying activity from owner-occupiers and investors, driving growth in Brisbane in particular, and Adelaide to a lesser extent. Even Perth is seeing a rise in new home purchases and should finally see some upward movement.
Brisbane is likely to be the star performer of this triumvirate, partially due to interest from interstate investors and migration from those based in Sydney and Melbourne. Investors will be attracted to the relative affordability and superior yields. Migrators will be looking to get more bang for their buck in a home, reduce the commute or proximity to lifestyle factors like the water and warmer weather. Despite this, it will not keep pace with growth in Sydney and Melbourne.
As for the other capital cities. Growth in Canberra will be solid but slightly subdued by the public service shake-up that began at the end of 2019. Hobart will remain a consistent performer with its new-found status as a ‘hotspot’. Although, the stellar growth rates we have seen in recent years won’t repeat again in 2020 or for some years. As for Darwin, let’s be tactful and say that the jury is still out!
When will Sydney and Melbourne reach new highs?
Sydney and Melbourne markets will fully claw back previous gains at some point during the second quarter of 2020, as reflected in the indices provided by the property data houses. In reality, as discussed at length in our Podcast #28 “2019, the year that was (and a sneak peak at 2020)”, the data provider numbers lag behind the actual market.
This is because the data is largely based on information collected from the state revenue offices after settlement occurs. Usually meaning a delay of one to three months after the property price is agreed upon before the numbers filter through.
It is our belief that the market has already fully recovered the losses of the last two years and is already setting new highs, despite the data not showing this yet. This is especially the case in the inner and middle suburbs.
What does this mean for buyers?
This means that if you are looking to purchase, you should be looking at comparable sales right back to the previous peak of the market in mid-2017.
The property buying mindset will need to be that your purchase price could set a record for your chosen property style, street or suburb.
To brush up on your property buying, negotiation and bidding skills listen to episodes #29 Congenial negotiation tactics and how to apply them in the right situation and #20 Bidding tactics 101.
You can also click here to request a copy of our education handbook ‘Negotiation – The insiders guide to buying’ from our Principles Series.
By the second half of the year (possibly sooner) the papers will be full of headlines about how property values are setting new records and the lack-of-affordability ‘story’ will be plastered all over the news.
This will precipitate a stalling in the rate of growth by the second half of the year and we will explain why below.
Two supply factors that will drive growth!
An ongoing and prolonged undersupply of new dwellings and established property, combined with easier access to finance will continue to boost property values. Here’s why:
- New dwellings – A significant undersupply of new dwelling approvals will continue and bottom out in 2020, as we see developers make their move this year to take advantage of the increased demand.
As opined by Guy Debelle, deputy governor of the RBA, supply of new property always lags in a property recovery. This occurs because of the time taken to finalise planning and finance for new sites.
The RBA has commented that the lack of credit for developers has had a greater impact on the negative supply of property, and therefore property values than the restrictions of lending to consumers for residential mortgages.
New dwelling supply will be reinvigorated by lenders removing some hurdles for finance to developers. This will not begin to flow through until 2021 though because of all the planning and red tape to get a development. The bottoming out this year of construction will have a negative impact on jobs and income growth which could play out throughout the year to provide some drag on values in time.
- Lending availability – Once again, lenders are falling over themselves to lend money, you just need to tick more boxes to get it.
The ease of access to finance is largely thanks to the RBA reducing interest rates and APRA lowering the benchmark assessment rate for determining how much you can borrow.
Oh, and the banks diminishing margins on lending and drive for profit.
The lowest rates of all time resulted in housing credit from July to November growing at an astronomical annualised rate of 52 per cent. Most consumers can borrow 10 to 25 per cent more than they could 12 months ago. As we predicted mid-last year, when APRA first lowered the benchmark rate, the loosening of the lending purse strings would naturally flow through to property values. The river of money is still gaining pace.
Supply factors that could put the brakes on… but in the second half of the year!
- Established stock – We expect to see more vendors have the confidence to sell, now that we are in a seller’s market. The increase in stock will provide buyers with greater choice. The supply increase will peak in the spring selling season as numbers get closer to historical norms.
This is reflected already in some of the early data on stock listings.It is unlikely that we will reach the heights of historical supply levels. Property owners are better educated nowadays and understand the value of holding property over the long-term, which is one of our top 7 criteria for successful property investing.Only structural change to minimise the costs of getting in and out of the property, such as removing stamp duty and replacing it with land tax, is likely to adjust this long-term trend. But don’t expect this change to occur anytime soon. The political fallout will deter the politicians for a while yet!
- APRA to flex their muscle – The ever-heating property market will result in intense pressure upon government and regulators, particularly APRA, to take the steam out of the market.The IMF has already warned regulators that the property rebound, rapid credit growth and high debt level is a risk in the low-interest rate environment minimising the government’s ability to reduce rates and utilise monetary policy in an emergency. They go on to say this could add to medium-term vulnerabilities for the economic well-being of Australia.For these reasons and others, we predict that APRA will once again step back into the fray, specifically targeting investors in their cross hairs. We suspect that they will bring in measures such as placing caps on investor credit growth, interest only loans and even add reduced loan to value ratios (LVR) to their arsenal, which wasn’t actioned previously.
- Affordable housing schemes – Consumer and investor demand will continue to gain momentum in areas such as build-to-rent and others schemes following the success overseas in freeing up low-cost property.This will see the government document policy that will support the increased availability of affordable housing.
What factors will impact Demand?
- Available Data – The abundance of property data provides a clearer picture, albeit with a time lag, of what the property market is doing on a macro level. This means that consumers are better informed than ever before, resulting in the level and pace of demand escalating during the first half of the year.As we discussed in Podcast #8 “Interpreting data to uncover an outstanding property and location– and how to sort the gold from the lies, damn lies and statistics!”, on a micro level for suburb selection, and specific property selection, can be misleading and will never be a precision based exercise due to unpredictable nature of human behaviour, and future economic, technological and climate changes.
- The government’s first home buyer boost – This will further underpin demand and propel the continued surge in property values. This has been a consistent outcome of all first home buyer grants and schemes in the past. Click here if you would like to talk to one of our team about what this means for you.
- Population growth and migration rates – Population growth continues to outstrip the supply of new property and remains at historically high levels. This will continue to play a major role in demand for property, both from international and interstate movements to desirable cities, suburbs and towns.
- Further rate cuts – It is highly probable that the economy will remain sluggish, especially factoring in the catastrophic impact of the bushfires and the bottoming out of new dwellings and the negative impact on unemployment.Although we are unlikely to understand the full economic impact of these two events for some time, it remains extremely likely that the RBA will cut rates again to stimulate spending in the first quarter or half of the year. Thus, although not intentionally, now that the market recovery has begun, providing further impetus to the property market.Australian’s newfound austerity when it comes to a reduction in spending on credit cards, increased savings and mortgage repayments is perversely compounding the need to cut rates. While these are great habits, the lack of spending doesn’t help to stimulate the economy.It is great to see Australian’s become more self-aware regarding money management. Watch our YouTube video #2 Money Management on how to set up your own money management system.
What does the ideal world look like!
In the ideal world, the economy would start to recover as Australians feel the ‘wealth effect’ from property values increasing and the share market hitting record highs. Simultaneously, the recovery of residential construction and the federal government implementing fiscal measures and infrastructure spending provide further stimulus to the economy.
Strong job growth numbers result in unemployment reaching the current holy grail of 4.5%, the official RBA measure for full employment (currently 5.2%).
This all results in increased consumer spending, increased inflation moving back into the target band of two to three per cent per annum and increased wages by the end of 2020.
Around the middle of 2020, after the market has fully recovered and moved to new highs, we begin to have more normalised value growth in the range of three to six per cent, following APRA stepping in to slow down investor lending, among other measures, without any further need to cut rates in 2020.
Thereby, as we head into 2021, all the talk is about the economy being in full recovery mode and the RBA is expected to start lifting interest rates again.
So, is this wishful thinking?
What is more likely to take place is rampant property growth, steadying in the second half of the year after the regulatory intervention. Unemployment levels slightly increasing in a large part due to the lack of new construction which will flow through to relatively stagnant wages and inflation. This is all subject to no unexpected international shocks.
Each new year brings renewed hope and optimism. We shall wait and see and keep you updated along the way.
May you and your family have a prosperous 2020, no matter what the property market and economy has in store for us. And remember, the most important economy to manage effectively is your own.