How should we view today’s property markets? That’s a question usually worth considering and without relying upon a crystal ball, I suggest that history might be our best guide.
My starting point ‘No Bubble in Property Market’ a topic I covered here back in September 2013. If I was looking for a topic headline today it might be: ‘Trouble in Property Markets’ as a current topic some 5-years later.
In 2013, the prospect of a property bubble was a hot topic particularly in the months after the Federal Election. There was a great deal of related chatter, that I thought got some commentators over excited, almost wishing that the (non-existent) bubble would burst.
At the time, I suggested that talk of a bubble was over magnified and over stated. In todays’ market, I suggest the same is true and that markets are not in any sort of freefall, they are instead simply running in a predictable manner. I don’t see a place for either extreme boom or extreme gloom, but let’s continue the comparison between 2013 and 2018 with the value of hindsight.
In 2013, we saw some high, even record auction results grabbing the headlines. There was also strong demand for off-the-plan projects and land releases and improving house prices were being lead mainly by Sydney and at the time Perth. But these alone did not create a ‘bubble’.
Although Perth prices did as the mining boom faded, subsequently retreat but, today they are heading back up again, even if slowly.
What can be seen is that price movements, up and down, are always driven by deeper structural concerns. Five years ago, there was a temptation to paint buyers as reckless, rushing head-on into almost any purchase. Buyers apparently were hyper-driven by low interest rates, the worry was could rates remain low for much longer?
While interest rates did fall even further and still remain low, there was also an acknowledged lack of supply. Then over the past five years we have seen record numbers of new homes and apartments built and today as a result high levels of supply are moderating prices.
However, both of these are ongoing influences and with buyers being constantly alerted to the prospect of higher interest rates, some further retreat in demand is to be expected, although five years is a medium-term market adjustment.
In 2013 and again today what has been surprising is how quickly the market has shifted sentiment.
Five years ago, we saw very strong, lively and confident buyers. This level of demand appeared to catch some sectors by surprise, but was no foundation for any sort of alarm however, a retreat today in the opposite direction should also not be seen as alarming.
As buyer demand increased, earlier concerns about a flat housing market and a lag in construction diminished. Increased home building and development at the time was seen as a potential boost for the economy adjusting to a mining boom slow down.
Now after 5-years of strong construction activity, including a strong apartment sector, any slow down will impact growth and possibly have a limited impact on employment.
Location Always a Key influence
In 2013 and today demographics continue to play a central part in the market. In 2013 the appeal of inner city living was on a strong upward trend that had been evident for at least a decade.
Now after 15-years of inner city apartment development, some market hiatus is natural. Now this is no longer a new or emerging trend but an everyday part of the market that’s seen big growth.
However, both Sydney and Melbourne are now having to face the pressures on infrastructure as population density continues to increase. And we continue to ask the question, and that’s; ‘didn’t anyone see this all coming?’
Today even with increased levels of supply people are anxious to live near services and facilities, not only the inner-city locations, but also in areas where new housing stock is readily available.
Improved infrastructure will always attract new levels of development and there are times, even despite strong demand that the levels of supply will exceed market demand and prices will adjust accordingly, up and down.
However prime, popular locations will always recover.
In 2013, I made the comment that the current low interest rates (then at 2.5%) may well not last forever, however they did, and current official rates are at just 1.5%.
In the face of a possible bubble lower rates were not called upon as a way of preventing or limiting any property bubble. However, the availability of affordable loans has, over the last 5-years fueled demand and prices.
In retrospect first time buyers did face a tougher market as investors took advantage of low rates, although the suggestion of a run-away mentality among investors has led to new more stringent lending rules.
This caused investors to think again, but today that’s allowed higher participation among first time buyers and if and when rates do rise they will increase from historic lows.
When we look at the impact of off-shore buyers we have seen another major shift over the past 5-years. Off-shore buyers remained keen on Australian property, attracted by the lifestyle, measured in simple terms of space, a good natural environment and freedom to move.
However strong demand spooked our government, and indeed many other governments across the globe to introduce heavy restrictions and extra charges for off-shore buyers.
The view in 2013 was that off-shore buyers interested in Australian residential real estate took the long-term view however, despite this, the new rules have dampened demand and in part this may have had a negative impact on new apartment prices and slowed the delivery of new projects.
In 2013 some markets had been doing it tough in the 12 months before the Federal Election and that may have depressed activity and thus sales inventory was somewhat modest.
We’ve seen that the long-term shortage of housing, has to some degree eased, and rents today are not as high, but there are regional variations, markets are never uniform.
Owner occupiers today are being attracted by lower rates, and in contrast to 2013 strong employment has influenced demand. Even as predictions of a bubble were current, prices from 2013 now look low by today’s values and a retreat back to 2013 levels is not anticipated.
I suggested in 2013 that developers should not take the market for granted, sticking to the best locations and delivering quality, and remains so in 2018.
Conditions in 2013 did not create a bubble, what we saw instead was a strong market that remained stable as we continued to see economic growth and our population grow to recently hit 25 million.
The improved market activity in 2013 was a combination of all these basic factors, it was not a bubble, these same factors will continue to influence markets today, and prices and demand will adjust. The year 2013 did not turn into a bubble and nor will markets spectacularly deflate in 2018. The ups and downs will continue as demand, finance and buyer sentiment all combine to influence markets.