Listener questions – What will drive capital growth after interest rates rise? (Ep.97)

Listen and subscribe

Apple        Android


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

  1. Access to finance and consumer confidence. These are two key drivers of the property market. If finance is restricted or there is a lack of consumer confidence, this will have a significant impact on demand, which in turn will affect property prices. Consumer confidence is largely impacted by low unemployment or the wealth effect, which is rising property and to a lesser degree share prices. This is why the RBA are so strong on keeping rates low through to 2024, until we see inflation growth of 2% to 3%.
  2. Immigration. Although we’ve had negative population growth due to Covid, we still find ourselves in the midst of a property boom. Whilst immigration can certainly increase demand, it will be heavily influenced by the number of ‘skilled’ workers that migrate. The Morrison government have spoken about specifically targeting this sector once borders open which is likely to have a positive multiplier effect on the economy.
  3. Interest rate increases may not be significant. Governor Lowe of the RBA has stated that interest rates will remain low for the next 3 years. However, important to remember, when we do see some increases, it won’t happen overnight. Based on the interest rate environments we are seeing for many other first world nations, it’s likely we will see gradual increases spanning years to come – and this will only occur if we have very low unemployment resulting in inflation hitting the target band, which has not been achieved for around a decade.
  4. Mastering renewable energy. Our ability to transition away from creating fossil fuel-based energy and move to more sustainable energy production will have a big bearing on the long-term prospects of our country, economy and therefore the property market. Politically, we may not have adapted quickly enough as this change is being led by the commercial sector.
  5. Our relationship with China. 30% of our tourism and Uni students come from China, whilst Iron Ore amounts to $91billion of our $140billion in exports traded with China, which is a significant risk for Australia, as it is for China. Which means for now, we are somewhat connected at the hip in an increasingly uncomfortable mutual reliance.Our relationship with China and future developments is a potential risk on the horizon
  6. Government stimulus and regulation. The reality is that our property market is not a true free market. Our Government’shave a great ability to impact prices and activity through stimulus packages, incentives that assist a particular segment, such as first-time buyers and macro-prudential measures to take the heat out of the market. Each of which are effectively proven by the record reductions in values from 2017-2019, mostly due to macro-prudential regulation and the maintenance of values and subsequent market rebound during the pandemic.
  7. And of course, our ‘gold nuggets’

Market insights

  1. Investors creeping back in. Westpac lending numbers for February reveal that investor lending is up 4.5%, while first time buyers are down 4% and upgraders down 0.8%. It’s still early days, but it’s likely to be a sign that the tide is starting to turn from home buyers driving the market to investors. Investor lending at Westpac is still only at 35%, compared with 65% when APRA brought in macro prudential measures in 2015. We expect these numbers to continue to grow in the coming months as investors tap into increasing equity and the lower cash flow needed to service a loan, with increasing rental yields covering much of the cost of interest with rates at an all-time low.
  2. Property cycles. Sydney has recorded 6.7% growth for the March quarter, which when annualised is growth of 26% for the calendar year.You may think that’s amazing and has never happened before, but according to ABS data, Sydney prices went up 50% in 1988. The following year, prices dropped by 6% before rising again, albeit at a slower pace. The property market is cyclical in nature, sometimes they spike, but it doesn’t mean there will be a collapse afterwards. 
  3. The property peaks and troughs. Looking at property data over the last few decades, it’s clear to see that the negative periods are much shorter than the positive periods. Amazingly, despite all of the doomsayers, the covid downturn was one of the shortest and lowest downturns that we’ve had over the last 30 years. Our most recent property market price reduction lasted for almost two years from 2017 and 2019 and was predominantly driven by APRA implementing macro prudential measures and not economic factors. A poignant reminder of how our property market can be manipulated by government policy and stimulus.


Show notes:

  • The question 
  • Hi team! 
  • Firstly, thank you all for such a wonderful podcast and sharing your knowledge. I haven’t missed an episode.  
  • I thought I would throw a question at you that you may or may not want to discuss on your podcast.  
  • I feel that there is great confidence around how the detached property market is going to go over the next 2-3yrs (I know there’s no one property market! But you know what I mean).  
  • So, my question is, with interest rates not likely to be the tide that lifts all ships for the next cycle, what forces can you see working to promote capital growth AFTER this 3ish year event ends?  
  • I was thinking that the governments would target a high inflationary environment to allow a rise in interest rates and to belittle the debt which might place upward pressure on prices. Creating an inflationary environment likely means low unemployment, great wages growth and therefore more money to spend on property but creating that environment seems to be a target they keep failing to reach. Immigration probably ramps up which impacts the demand side of things and also creates jobs but that’s nothing new.  
  • I understand this unknown just places greater importance on asset selection so you’re not reliance on a rising tide but I’ve been thinking about this for a while and finding it hard to see where the next growth cycle comes from if we can’t get the inflation going. But I do think it will get going. What are your thoughts? The old property professor has surely seen some weird and wonderful events in his time. 
  • The answers 
  • Availability of finance is a key driver in the property market and consumer confidence, if you cannot borrow money, there is no demand and property is not going anywhere.  
  • Immigration – next to 0 in 2020 and 2021 – from about 2022 that will increase markedly. You’ll see increase in demand for rental properties. Once they’ve been here for a few years and got permanent residency, they’ll be looking to buy. 
  • Population has decreased in Australia, but we’re still in the middle of a property boom.  
  • Big increase in international students which is no1 export for Vic and SA and no3 overall for Australia 
  • We’ve come out of Covid 19 very well from an economic perspective, health and property.  
  • When we start seeing some increases in interest rates, it may not be a huge increase, it could be 0.5%. Our ability to increase household incomes which is what increases property price growth, and no credit crunch, you’ll see property increases.  
  • Women have returned to work over the last few decades and salaries are getting closer and closer to becoming on par with our male counterparts. By the time we do have balanced salaried and full-time workers in households, we haven’t got another person to add to the income pile.  
  • Change in goods and services and professional roles – skilled migrants arriving, labour driven work force and rising level of professional services.  
  • Ability to transition from creating fossil fuel-based energy and resources, exporting to China and moving more to sustainable energy production, will have a big bearing on the long-term prospects of our country. Iron ore is such a big factor in the wealth of our country – we provide 2/3 of the iron exporting to China. There are some longer-term risks there. Mining companies profits are soaring but they’re not re-investing it because they can see that there are risks on the horizon. 
  • Mastering renewable energy is a critical task, politically we may not have adapted quickly enough. 
  • Wealth effect – drives consumer spending, consumer spending drives jobs and inflation – which is why the RBA wants property values to go up.  
  • State governments can provide stimulus to the market – they can pull assistance to first home buyers and then throw money at them again.  
  • The market is not a true free market – our government’s have such an ability to impact what happens to the property market.  
  • Overarching theme of why the property market will continue to move forward 
  • The market is playing catch up and the government know that, so that’s why we think it will go 20-30%.  
  • 30% of our tourism and uni students comes from China, our relationship with China is a risk there. Of $140B exporting, $91B comes from iron ore to China 

Cate Bakos – The Property Buyer’s Golden nugget: a reflection on the most commonly asked journalist question over the last fortnight, at the moment, the theme of the day is underquoting. We have a fair amount of information floating around in the news now that our regulators are starting to circle in on it. Sometimes it honestly goes beyond the expectation of the agent and vendor. You can’t look at the agent’s price guide, you need to do the research on it. It doesn’t take that long to do your research, 2 hours tops.

Peter Koulizos – The Property Professor’s Golden nugget: the two biggest factors to influence the property market are availability of finance and consumer confidence.

Listen to Our Podcast

180+ 5tar Reviews, Over 400,000+ Downloads

Join Our Newsletter

Subscribe to “The Property Planner, Buyer and Professor” Newsletter

6 + 4 =

Email us your questions or any topics you would like to be covered off on in future episodes:
Follow the podcast on social media