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[Podcast] How long will this property downturn last | The Big Picture Podcast with Pete Wargent

[Podcast] How long will this property downturn last | The Big Picture Podcast with Pete Wargent
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Despite all the negative news in the media warning us of the worst property correction on record, my guest today Pete Wargent recently wrote a piece giving good reasons why our housing market downturn could be short-lived. My Podcast 385 The Macro Economic Context 02

Since Australia’s economy and our property markets don’t operate in isolation, each month, I take time out to have a look at the big picture, the macroeconomic factors affecting not just Australia but the world economy, in our attempt to give you a little more clarity on what’s ahead.

Once again, we will take a deep dive into what’s happening in the world and Australia’s economy, and our property market.

Economic and property trends you must understand in July 2022

As we sit here today, inflation is the highest it’s been for years and is only going to get higher, interest rates rose again this month, and people are wondering how high they will go, Bitcoin has crashed, and plenty of stocks are down, the war in Ukraine continues, supply chains are broken, the pandemic is lingering, China is in lockdown, we have a new government, and on and on.

And according to our big banks, Australians must brace for the worst housing correction on record as rising interest rates and recession fears strangle the property market.

We shouldn’t forget how well our economy is doing

  • Annual economic growth is 3.3%.
  • Retail spending at record levels – lifting for 5 consecutive months
    • Retail sales values are now 23.2% above pre-pandemic levels.
  • Domestic tourism jumped 14$ or $2.6 billion in the March quarter.
  • Unemployment is 3.9% - just 1.1 unemployed persons per job vacancy, a record low.
  • Interest rates are only 1 factor.
  • Our economy is growing - not collapsing
  • We're in a buyers’ market - doesn't last forever.
  • The next 6 months will be a window of opportunity for strategic buyers.
  • By the time the media reports the turnaround, it will have already occurred.

There are some negative factors

  • Negative consumer sentiment.
  • Rising inflation and cost of living pressures.
  • Rising interest rates reduce borrowing capacity.
  • Affordability constraints.
  • Uncertainty about our economic future - recession, geopolitical problems, share market falls.

And also positive factors

  • International immigration picking up.
  • Shortage of properties and declining building approvals.
  • Virtually no vacancies.
  • Listing volumes at 30% of 5-year averages.
  • An economy that's still growing and is very resilient. Jobs
  • Low unemployment.
  • Wages starting to grow.
  • Strong household balance sheets.
  • Many borrowers are ahead in their mortgage payments.
  • A strong banking system that has been strict in its lending criteria, meaning very few non-performing loans.
  • Construction costs rising, meaning the replacement cost of properties will rise.
  • Government incentives to encourage first-home buyers.

But the headlines tell us we’ve received a triple whammy from the RBA with 3 interest rate rises in 3 months!

  • Interest rates are still at very low – stimulatory – levels

The red-hot job market might be starting to cool off, with SEEK job ad numbers falling for the first time all year from May to June.

According to the SEEK Employment Dashboard, job ads dropped 2.1 per cent, month on month, marking the first decline after five consecutive months of growth.

We’ve moved into the next stage of the property cycles

Our property markets had a lot to contend with so far this year. A pandemic, floods, Geopolitical problems, rising interest rates, and a federal election, just to name a few.

But the big thing affecting our markets at present is falling consumer sentiment: Property Cycle

  • Our markets are driven by fear and greed and generally overreact
  • Many commentators are suggesting property price falls of 15%- 20% and even 30% if interest rates rise too high.

What lessons can we take from previous downturns?

  • Downturns provide an excellent opportunity for investors and home buyers to purchase high-quality properties at a discounted price.

Latest lending figures

  • If fewer people are obtaining finance approvals, it suggests our property markets will be a little weaker moving forward.
  • Housing loan approvals are clearly off their recent highs and are likely to continue to turn lower, but there is no sharp rollover yet apparent in the data to May.
  • Owner-occupier loan commitments peaked in May last year and are now 9.7% lower, though have flattened out in recent months. Economy
  • Investor approvals had continued to grow over the past year but look to have peaked in March, now 4% off their recent highs. The investor share of new loans has recovered from a 2020 low of 23.1% to around its long-run average and stood at 34.5% in May.
  • This share of fixed rate loans plummeted to 11.9%, now below pre-pandemic levels after picking at 46% back in 2021
  • Interest payments lowest since 1994.

On the other hand, we’re experiencing a rental crisis with falling vacancy rates and strongly rising rents

  • This will only get worse without the opening of the border.
  • Many proposed apartment complexes on the drawing board that may have helped alleviate the rental crisis will not proceed at present because of problems related to rising building costs, supply chain issues, and finance approvals.
  • Dr Andrew Wilson shows that House rents have risen by over 15% in the last 12 months and apartment rents rose by 17%.

Luxury car sales slipping

  • There are signs emerging that Aussie consumers prefer to spend their money on other things rather than cars and homes.
  • A recent CommSec report shows that luxury new vehicle sales are slowing down.
    • This is insightful because, in the past, it has been notable that the ‘top end’ of the housing and car markets have led movements in the broader market, and it looks like the same trend is occurring now. Ultra Wealthy
  • The CommSec index of luxury new vehicle sales shows the index of luxury new vehicle sales fell to a 19-month low of 82,747 vehicles in the year to May. Annual sales are down 11.1 per cent, the biggest fall in almost three years.
  • Similarly, according to CoreLogic's data, national home prices fell for a second consecutive month, CoreLogic’s national Home Value Index (HVI) recorded a value decline, down -0.6%, to be -0.2% lower over the June quarter.
  • Home prices fell 0.8 per cent at the ‘top end,’ but prices rose 1.0 per cent for lower-valued properties.

Links and Resources:

Michael Yardney

Metropole’s Strategic Property Plan – to help both beginning and experienced investors

Get a bundle of free reports and eBooks – www.PodcastBonus.com.au

Pete Wargent’s new Podcast

Pete Wargent’s blog

Some of our favourite quotes from the show:

“Almost everyone who’s looking for a job, there’s a job for them, which basically means that people aren’t going to stop paying their mortgages.” – Michael Yardney

“Maybe people are just being a bit cautious in both those luxury ends of the market.” – Michael Yardney

“Today, rather than keep us alive, our worries are more like spinning on awheel in a ditch. They tend to be pointless and ineffective, and often border – for some people, at least – on neurotic.” – Michael Yardney


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.

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