Is it time to be fearful or greedy in property?

What should you do in the current "interesting" property markets?

Is it time to be fearful or is it the right time to be greedy?

I know many investors are confused with the many mixed messages the media and many commentators are delivering.

 

On the one hand, the property market bottomed early this year and in many locations, property values have increased for four months in a row.

On the other hand, the media keeps reminding us that inflation remains stubbornly high, interest rates could keep rising and there could be a recession lurking around the corner.

I've noticed two types of emotion in those interested in property:

1. With a continual conveyor belt of negative media messages, FOBE is still prevalent - Fear Of Buying too Early - home buyers and investors trying to time the market wondering "what if prices do actually fall significantly? What if there is a mortgage cliff? What if rising interest rates cause a recession?"
2. And there is the other camp experiencing FOMO (Fear Of Missing Out) - smart property buyers didn't want to be left behind, they recognise they've already missed the market bottom.

It is said that the 2 most powerful emotions that drive markets are fear and greed.

In fact, master investor Warren Buffet advised: “I'll tell you how to become rich...Be fearful when others are greedy and be greedy when others are fearful.”

So today I'd like to give you my thoughts on this with a lesson from history...

Thirty years ago, as Australia was working its way out of the recession we had to have, few would have thought of property as a good investment.

It was 1993 and interest rates had come down 3 per cent over the previous 2 years as the Reserve Bank tried to stimulate the economy and our faltering property markets.

By the way… this brought interest rates down to 10%, the lowest level they had been for 13 years.

Having just experienced the first Australian recession in a long time, consumer and business confidence was low, there were too many properties for sale, buyers were scarce and some properties, particularly in top-end suburbs, had plummeted in value.

A few years earlier on Black Monday of October 1987, a stock collapse of unprecedented size hit Wall Street and the effects reverberated around the world.

Interestingly I remember that day well.

I can clearly picture in my mind that we were on holiday in Sydney when we heard the news and didn't fully appreciate the severity of the consequences.

However, while the stock market eventually recovered, the lumbering savings and loans industry in the USA (which financed many American homes) was beginning to collapse, leading to a property funding crisis that put the financial well-being of millions of Americans in jeopardy.

In turn, the financial contagion that spread to the rest of the financial sectors led to a recession that hit other countries whose economies were previously healthy but were economically closely linked to the United States.

This included Canada, the United Kingdom, and Australia.

What was happening in Australia back then?

Well...to buy a typical house in mid-1993 you would have paid around:

• $173,000 in Sydney;
• $138,00 in Melbourne;
• $121,00 in Brisbane;
• $102,000 in Perth;
• $156,000 in Canberra;
• $110,00 in Adelaide
• $96,000 in Hobart and
• $132,000 in Darwin.

But over the subsequent 3 decades, the value of many well-located capital city properties around Australia quadrupled, underscoring the wealth of many of today’s Baby Boomers and creating significant property empires for those who took property investment seriously.

Interestingly today’s environment reminds me of those times 30 years ago - we are working our way out of the property market downturn of 2022.

And just like then, many of the same arguments are being floated by commentators explaining why property values can’t keep increasing as they did over the previous three decades.

I accept that much of the gains were related to structural changes that will not be repeated.

The two significant structural events that caused the massive rise in property values over the last three decades were: 

1. The Reserve Bank kept inflation within a narrow band meaning interest rates could fall at a time when time banks became deregulated and this allowed new non-bank lenders like Aussie John Symond to make cheap finance available for borrowers over time interest rates kept falling and credit was easily available.
2. At the same time, wages grew and there were more two-income households. This allowed more Australian families to buy new homes or upgrade their existing homes as their families grew.

These factors won't carry our markets forward in the future, in fact, they played out a few years ago and haven't been relevant for much of the last decade.

Instead...

• We are currently experiencing volatile geopolitical conditions around the world.
• Inflation will remain high for longer than the RBA and most central banks would like.
• We may still have one or two more interest rises and then next year rates will start to fall, but we're unlikely to see those very low "stimulatory" interest rates again for a long, long time.  creeping up around the

Here are 10 reasons not to be fearful about the current property market

1. The average Australian is still very wealthy.

• Overall the total residential property market is worth around $9.6 trillion and there is only $2.2 trillion worth of loans owing against all residential real estate.
• Even though we've slowly spent the multi-billion dollar war chest we saved over Covid19, many households still have significant savings in their offset accounts or prepayment of mortgages.
• Aussie super funds and shares portfolios are performing well.

2.  There’s no evidence of mortgage stress for the majority of borrowers.

• Remember..half of all homeowners have no mortgage - that's because they paid off their homes many years ago.
• Many homeowners have 25-30% more equity in their homes than they had 3 years ago.
• Sure some first-home buyers borrowed to the hilt to get into the property market, but as long as they keep their jobs, they would have rather eat Maggi Noodles than sell up their homes and cause a property market crash.
• And yes many Aussie households are feeling the pain of higher cost of living and rising mortgage costs, especially those coming from fixed-rate mortgages, but the percentage of bank mortgage arrears is very very low at present

3. Despite high interest rates we are experiencing strong economic growth

• Economic growth in Australia is expected to slow over the balance of 2023 as higher interest rates and inflation weigh on consumer spending and business investment. After all, that's what the RBA wants. However, the unemployment rate is expected to remain low, which should support economic activity as well as over half a million new residents who will be spending up big as they establish households in Australia.

4. Low unemployment

• Unemployment in Australia is currently at a record low of 3.9%, and it is expected to remain low in the coming years. This low unemployment rate will put upward pressure on wages, which will make it easier for people to afford to buy a home.
• Currently there are 438,500 jobs advertised, but not enough people to fill these vacancies.
• Homeowners don't give up their homes if they have a job, they just tighten their belts as many Aussie households are currently doing.

5. There is a shortage of supply of good properties for sale at a time when there is strong ongoing demand and more properties are being purchased the new properties being listed on the market.

• The construction industry has experience more than exposure of challenges following supply constraints and increasing building costs after the COVID-19 pandemic.
• This means it not been able to keep up with the growing demand for homes.
• This imbalance between supply and demand has contributed to the increase in property prices. As demand continues to outstrip supply, property prices are likely to continue rising.
• Rising construction costs, particularly for high-rise towers, means that many new developments on the drawing board are currently financially unviable, and these won't start being built until in values rise sufficiently to make the project profitable.

6. There’s a shortage of rental properties.

• Australia is experiencing a rental crisis with historically low vacancy rates and skyrocketing rents that will keep increasing this year.

Median Weekly Asking Rents June 2023 - My Housing Market
HOUSES
	Rent	Month	Year	Vacancy Rate	Change
Sydney	$750	0.0%	12.8%	1.0%	⭡
Melbourne	$560	1.8%	16.7%	0.7%	⭡
Brisbane	$580	-5.7%	6.4%	0.8%	⭡
Adelaide	$560	1.4%	12.0%	0.4%	⭡
Perth	$600	0.4%	18.8%	0.5%	⭡
Hobart	$540	-1.8%	-1.8%	1.5%	⭡
Darwin	$661	1.7%	1.7%	0.3%	⭤
Canberra	$670	0.0%	-4.3%	1.5%	⭡

 

• Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
• Also read:Melbourne property market forecast for 2025
• Also read:Sydney property market forecast for 2025
• Also read:Brisbane’s property market forecast for 2025
• Also read:This week’s Australian Property Market Update – Latest Data, State by State December 10th 2024

Median Weekly Asking Rents June 2023 - My Housing Market
UNITS
	Rent	Month	Year	Vacancy Rate	Change
Sydney	$728	-3.0%	32.3%	1.4%	⭡
Melbourne	$555	0.9%	32.1%	1.6%	⭡
Brisbane	$585	4.5%	27.2%	0.8%	⭡
Adelaide	$450	2.3%	15.4%	0.5%	⭡
Perth	$550	0.0%	22.2%	0.7%	⭡
Hobart	$460	-1.1%	-3.9%	2.0%	⭡
Darwin	$525	-1.9%	10.5%	0.7%	⭡
Canberra	$550	0.0%	-1.8%	1.8%	⭡

7. Strong population growth

• Australia’s population growth is booming, with a record high net overseas migration intake and a stable natural increase.
• The ABS population clock shows more than 26,600,000 people now call Australia home.
• The problem is that our population is growing at around 2% per annum putting more pressure on demand for housing as more people need a place to live, but our housing stock is only increasing at around 1% per annum.
• Melbourne, Brisbane and Sydney will be the main beneficiaries of this strong surge in immigration.

8. Strong immigration will continue

• Our country's high standard of living, excellent healthcare, and quality education make it an attractive destination for migrants.
• At the same time, our government has a policy of wanting to increase our population to around 30 million people by the end of the decade.
• The strong growth in the number of working-age people helps fill the job vacancies and helps grow the economy.

9. The same “experts” who are currently predicting that property markets will crash are the same ones who have made multiple incorrect Doomsday predictions over the last couple of years.

10. Increasing urbanization

• More and more people are moving to Australia's cities, which puts upward pressure on housing demand in these areas.
• This trend is expected to continue in the coming years, as more people seek out the jobs, amenities, and lifestyle that cities offer.

Why our property values are guaranteed to increase over the long term

Having been involved in the property markets for around 5 decades I'm a realist and understand property cycles.

I don't expect double-digit growth in most property markets this year, however, I'm not after short-term gains.

I'm a long-term investor and I still see strong underlying long-term fundamentals for our property markets.

While it’s important to understand that while many factors like interest rates, supply and demand, and market confidence, affect a country’s property prices in the short term, in the long term prices are driven by two main factors:

1. Population growth - Australia has a business plan of growing its population to 40,000,000 by the middle of this century. That means for every three houses currently in our suburbs, one extra house will need to be built. And...
2. The wealth of the nation - being a knowledge-based society, Australians will be wealthier than most other countries and able to afford to pay more for their houses in the long term.

And this is positive news for the long-term growth of property prices.

The fact remains that as long as people keep having children and residents from other countries seek to settle on our shores, Australia’s population will keep growing at a rate faster than almost every other developed nation.

Australia's population was forecast to grow to around 30 million people by 2030.

And there are suggestions that our population could double in 70 years' time.

A substantial of our population growth was due to immigration and, in general, these are well-educated people (particularly from China and India) who are in their twenties and thirties which is the family formation stage of their lives.

Fact is: we are going to need whole cities of new immigrants to replace the 5 million or so Baby Boomers who are going to leave the workforce over the next 15 years.

These new residents will boost our country’s economic well-being through the revenue raised from income taxes and all the goods and services they will buy.

And yes, that includes property.

Of course, this means with more and more of us wanting to live in the same four big capital cities (but particularly Melbourne and Sydney which are the economic powerhouses of Australia), and even in the same suburbs of those capital cities, our old friend the supply and demand ratio will keep pushing up the value of well-located inner-suburban properties.

Inevitably this will make property unaffordable for some who will remain tenants, however, others will be able to afford these higher-priced properties.

It also means that our cities must densify and apartments and townhouses are likely to become the style of housing in strong demand as more people swap their backyards for balconies and courtyards; partly because of cost but also because of lifestyle choices.

They'll be trading space (big backyards) for a place (being in the right location).

And having learned lessons from Covid, our neighbourhood will be more important than ever – something people call the “Third Place.”

Our first place is home and our second place is work or the office, but during Covid, for many around Australia, the ability to go to a third place was taken away.

It may be a favourite café, a gym or a place of worship and even local shops and pubs.

They missed that feeling and connection to others, having an outlet to take a break from family or colleagues for a short period to reset.

A gym or exercise centre has been substituted for a favourite walking or cycling path with green space and fresh air.

So, all these features combined will be a major requirement and will create huge demand moving forward.

These are all features of the 20-minute neighbourhood, that will be built around convenience.

Wouldn’t it be nice if all the things you need in a day would be just a short walk away?

In urban planning circles, it’s a concept known as the 20-minute neighbourhood.

Understanding these factors forms part of the research data we use at Metropole to help our clients find investment-grade properties or A-grade homes for owner-occupation.

If you’d like to get the independent, award-winning team at Metropole on your side to help you through the maze of mixed messages about the property market, please click here and leave us your details or call us on 1300 METROPOLE

The bottom line:

While nothing in life is guaranteed, if like me, you are confident that Australia has a prosperous future, and you agree that our population is going to keep increasing and that most of us are going to want to live in much the same parts of our lucky country; you can understand why I see a strong long-term future for our capital city property markets.

Sure there is a risk in buying property, but don’t forget there is also a different risk in not buying!