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Understanding the real estate rollercoaster: a Long-term perspective - featured image

Understanding the real estate rollercoaster: a Long-term perspective

In recent years, we've witnessed a dramatic rollercoaster in Australian home prices.

Despite the unexpected recovery last year following the downturn induced by interest rate hikes in 2022, the journey has been anything but predictable.

According to the latest PropTrack Home Price Index, we saw a marginal increase of 0.02% in home values this January, halting the 11-month streak of declining prices.

Proptrack Homeprice Index January 2024

While capital city home values have plateaued, regional areas have consistently risen for 13 months straight.

Interestingly, the latter half of 2023 exhibited a noticeable slowdown in price growth.

The spring brought a surge in new listings, especially in Sydney and Melbourne, alongside a spike in sales volumes.

However, the increased inventory, coupled with another rate hike in November and the usual pre-Christmas lull, led to more moderate price growth.

The past two years have been marked by volatility, primarily driven by interest rate increases that have squeezed household budgets and reduced borrowing capacity by about 30%.

Yet, despite these challenges, the last 12 months have seen a recovery, pushing most capital cities and regional areas back into positive year-on-year growth.

Leading the charge is Perth, with an impressive annual growth of 15.45%, followed closely by Brisbane and Adelaide.

In contrast, locations like Hobart, Darwin, and certain regional areas in Victoria and Northern Territory are still experiencing a dip in year-on-year figures.

As property owners, it's easy to get caught up in these short-term fluctuations and lose sight of the long-term horizon.

Historically, home values in Australia have escalated significantly, boasting an 80% increase since 2014, despite a couple of brief downturns.

Total Home Price Change Since January 2014

To put this into perspective, consider that the average Australian homeowner tends to hold onto their property for about 11 years.

This duration often sees a general upward trend in property values.

Houses vs. units: a long-term divergence

The gap between house and unit prices has widened over time.

Before the pandemic, the national median sale price for houses was roughly 10% higher than that for units.

Variance Between Houses And Unit Median Sale Price

Since mid-2020, this disparity has ballooned to a striking 31.9%, translating to a difference of around $195,000.

This growing variance can be attributed to the increased demand for houses during the pandemic, as people sought more outdoor space and additional rooms for remote work.

Looking forward

As we look to the future, further growth in property prices is anticipated, albeit at a more subdued pace compared to 2023.

With several cities and regional areas already at their peak prices, it's likely that more will reach new heights.

Since 2014, house values have skyrocketed by 89.4%, compared to a 44.4% increase for units.

This trend suggests that the gap between house and unit prices may continue to widen in the upcoming year.

What does this mean for you as a property investor?

In the medium term, our property markets will be underpinned by 3 factors:

  1. A significantly growing population
  2. Strong jobs creation
  3. Increasing the wealth of our nation.

I see the current market offering a window of opportunity for property investors with a long-term focus.

You see…we are at the early stages of a new property cycle, something that doesn’t happen very often.

Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early-2023.

But if the market hands you an opportunity like this, why not take advantage of it?

Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.

Moving forward, demand is going to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.

At the same time, the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but also because builders and developers will only commence new projects if they are financially viable and currently new projects will need to come on line at considerably higher prices than the current market price,

Of course, in due course, consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.

At that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.

We are also going to be experiencing a prolonged period of strong rental growth - the rental crisis will only worsen further, with no end in sight.

Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.

So rather than trying to hunt down a bargain, focus on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices… Plus they’ll hold their value far better in the long term.

While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.

About Robert Chandra is a Property Strategist at Metropole and has an intrinsic understanding of property markets backed by many years of real estate experience. This coupled with several degrees gives him a holistic perspective with which he can diagnose clients’ circumstances and goals and formulate strategies to bridge the gap.
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