What future for Australian real estate? Having correctly predicted the current national real estate boom, Property Head of Research, Simon Pressley examines the elements that will shape the future performance of the real estate market.
In the past 18 months, the lives of 25.7 million Australians have changed.
We have a new “normal”.
One thing that is not normal is the current high rates of house price growth that we are experiencing across Australia.
All else being equal, I think we’ll come back to that crazy time with the history books showing some places produced a 30-50 percent increase in house prices over a three-year growth cycle.
Many other sites are likely to produce 70-100% growth over a cycle that could easily last five years or more.
Propertyology has always advocated that the greatest influence on the performance of the real estate market will always be the economic conditions of each individual city as well as the volumes of localized housing supply.
At the macro (national) level, the biggest influences on future real estate performance will be the actions of a few key people in high places.
While it’s impossible to get into the heads of these people, Propertyology estimates that the 10 most influential macroeconomic factors for real estate markets over the next five years will be:
While Sydney and Melbourne have a large rental housing surplus (43,607 vacant units announced at the end of July 2021), the 15 million people living in the rest of Australia had only 17,706 units (combined) .
There are countless stories of companies across Australia posting job vacancies but unable to attract applicants as there is no accommodation available.
Annual rents have already risen by several thousand dollars in more than 40 Australian cities. The problem will get considerably worse before it gets better.
Legacy of containment
Our two largest cities continue to have the most worrying property market fundamentals across Australia.
With each lockdown, my fears for their future economic health increase. Melbourne has already been locked up for more than 200 of the past 500 days.
CBD hospitality companies and retailers can only survive for so long on a drip.
For the owners, employees and business owners of each of these companies, the ability to pay mortgages and rents is seriously threatened.
It may take a little longer for everyone to fully understand the economic and real estate legacy of frequent blockages.
Sir Isaac Newton’s Law of Motion states that for every action there is an equal and opposite reaction.
There has never been a better real estate case study for Newton’s Theory than the emotional and financial reaction to big city closures.
Over the past 18 months, Propertyology has observed an insatiable appetite for open spaces, natural environments and the flexibilities of working from home.
The trend towards regional relocation will continue to accelerate.
In the first 12 months of COVID-19, regional Australia saw a net population increase of 44,000 as a result of internal migration (and 145,284 in the past five years), while Sydney and Melbourne each experienced a population decline of 32,000.
Government debt strategies
The financial statements of each of the Australian state governments will be significantly tested over the next five to ten years. State economies and real estate markets will be affected.
I won’t be in the least surprised if the RBA starts raising interest rates as soon as the next federal election is over.
Anytime interest rates rise, it will be a good thing as it will be the recognition of a strong national economy and many COVID uncertainties behind us.
It will take six 0.25% increases just to get back to the interest rates of mid-2019, when mortgage holders did well.
Future increases in interest rates will likely be offset by wage growth.
Real estate prices will continue to rise, but the growth rate will ease.
Australia’s construction sector was boosted last year (a component of housing supply) at a time when the national population growth rate (a component of housing demand) was the lowest since over 100 years.
I predict that by 2022/23 real estate markets in some larger locations may be facing over-supply issues.
Of the 250 countries to which Australia exports goods and services, 42% of our export revenues (or $ 165 billion in 2020/21) came from China.
Of these revenues, $ 134 billion (or 81 percent) was collected by Western Australia, mainly for the production of steel, iron ore.
Jobs, economic growth, the ability to finance infrastructure, internal migration, vacancy rates and real estate prices in Perth are directly linked to China’s export volumes.
It is a very unhealthy addiction.
Migration abroad will start again at some point.
But the economic pendulum has indeed moved away from Sydney and Melbourne and more towards the smaller capitals and (especially) regional Australia.
As a result, it is highly likely that a significantly lower ratio of Australia’s future overseas migration inflow will be placed in our two largest cities.
The NSW government is considering replacing the high cost of the single stamp duty with a lower (but annual) property tax.
The ACT government is already implementing a similar model.
Don’t be surprised if other states also offer stamp duty changes at some point.
While I think it is less likely than likely that the Australian Prudential Regulation Authority (APRA) will bow to growing calls to (further) cut credit, their track record of considering the global consequences does not. is not good.
One can only hope that the APRA board of directors does not wish to leave a legacy of economic destroyers and dream breakers.