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Hi <<First Name>>,
The sky is falling…but is it really? The media plays a strong hand in shaping our perspectives, and the story swings from one extreme to the other. So from having boots on the ground, I wanted to connect in and share with you a more balanced view of what is happening in Australia's economic and property markets.
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From The Pen Of Greg Devine
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I have been asked several times lately, is the sky really falling? The Australian economy has seen an increase in inflation; interest rates have risen (off the lowest base in recent history) and sales prices for real estate range from increasing to steady to falling.
Like Chicken Little, who had a wide range of emotions from bravado to fear and, calm to shock, with all the media headlines lately and especially with an election days away, people are feeling worried and cautious about interest rates and property.
However, coming from an economic background, I can best speak from a Griffin Group point of view on how it affects our projects and more importantly, you, our clients.
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The best way to explain this, is that we take every change, past, present, and future, very seriously and our model survives and thrives on our ability to be forward thinking with a strong emphasis on our experience. These things have all happened many times in the past and will happen again in the future.
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Australian Property Market
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The best summary I have read is an article from SMATS executive chairman Steve Douglas, our friend, business partner and clearly one of the best minds in property and the economy. In his article Property market cools in Sydney, as it should!, Steve commented that:
After a year of massive growth in the Australian Property Market, a 23.7% increase across Australia according to the ABS December 2021 House Price Index, it is no surprise to see growth rates slow down.
A slowing in growth doesn't mean risk is entering the market, as we aren't seeing signs of significant price reduction, but it will be a welcome relief for those still trying to enter the market. What we are seeing is a normalisation of the markets, especially in the large capital cities.
What does concern me is that we have had strong growth in a period of time where little to no real migration has occurred. Now that the borders are open, the incoming migration will pervade the stability and perhaps even further stimulate the property market in the coming years. Hence, I remain very confident of a stable market due to the underlying fundamentals which include:
- Continued limited supply
- Stalled demand with potential for a demand spike from a lift in migration
- Increasing construction costs and build delays
- Low interest rate environment even with allowance for a few rates rises in the near future
- Low rental vacancy
Other views on the same topic are highlighted in a recent news article Housing slow down not doom and gloom. We would like to point out that Brisbane values are up 30% year-on-year to the end of March, while Adelaide is up to 26%, Sydney is up nearly 17% in and Perth increased 7%, according to Core Logic. There are fears emerging among economists that house prices will fall and have a broader ripple effect through the economy given the size of many people's mortgages, particularly on the east coast.
The Agency managing director Geoff Lucas is of the view that low unemployment levels means people should be able to support their mortgage even if prices dip as much as 15%. He also says it is exceptionally good that this year's expected interest rate rises will slow the nation's runaway property price growth. He believes the slowdown will educate a generation of Australians that property should not be a get rich-quick scheme "you can't as a country continue to have growth rates at 24.5% per annum". |
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Interest Rates in 2022/23
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Due mainly to the election, interest rates have been all over the news lately. Australia's inflation rate has predictably increased sharply again over the March quarter. The ABS reported that the headline CPI increased by 2.1% over the quarter. The primary drivers of the recent inflationary outbreak remained covid-related increases in the price of fuel and house building costs.
The official rate increased from 0.1% to 0.35% which the media latched onto to push the message that house prices may drop by up to 15%. If we go back in history, we can see that the average interest rate from 1990 to 2022 is 3.89% with the current interest rate level being less than 10 times the average. In my opinion, there is still more capacity for the market to absorb any increase in rates before we see a drop in house prices.
Analysts predict that cash rates are expected to be 0.50% by June 2022 and trend to 2.0% in 2023 and 2.25% in 2024. This is a gradual increase and not as high as rates have been in the past. I don't feel they will have the catastrophic impact which many in the media are suggesting and if anything, this negative discussion is opportunistic as it allows Griffin to find new projects at reduced prices.
To offset the interest rate increases, wages growth is expected to pick up at 2.40% this year and forecasted to be at 2.0% in 2023 and 2.3% in 2024. This growth should dampen some of the effect of interest rate increases. Rate increases affect us all however, it is important to note that the Griffin model is looking to develop apartments for down-sizers and over 90% of our end purchasers do not need finance. This information is based on 71 Griffin sales this financial year.
To add to the discussion, Macquarie's global head of strategy Viktor Sheets believes central banks will be forced into a dramatic "back pedal" and will be considering cutting rates within 12 months, just as markets expect interest rates to peak. He is of the view that a slowing global economy and a winding back of government spending will mean the inflationary forces will subside and economies will need support.
Interest rates have been close to zero for a long period of time and were expected to rise, and will continue to rise until they reach approximately 2.6%, and then in my view, will settle in 2024. My opinion is that the impact of interest rates will slow the property market, prices may level off, but I cannot see prices dropping until wages growth stops or interest rates increase to the long term average rate - and neither of these things are likely to happen.
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Property Values & Returns
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For our benefit and our clients, I have read and digested a lot of articles commenting on property values and returns lately and bring here a brief summary of the range of thoughts and points of view.
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Sydney and Melbourne house prices flat, Adelaide now leads
In an article from My Housing Market Chief Economist, Dr Andrew Wilson shared that Sydney and Melbourne house prices were flat over April, increasing by only 0.2% and 0.6% respectively. However, other capitals recorded strong growth, with Adelaide the strongest performer over the month at 2.4%, Brisbane 1.9% and Perth 1.1%.
Market activity is strongly elevated despite the recent easing in price growth with buyer and seller confidence still clearly positive. The outlook for house prices generally remains positive although, the spectacular results recorded last year will not be repeated as rising affordability barriers through sharply rising prices have diminished buyer capacity.
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Slight interest rate rises are unlikely to have a significant influence on housing market activity and house prices albeit, a slight transitory impact on confidence.
Higher rates will be offset by strong local economies with low unemployment rates, rising wages, near record savings rates and government handouts. Demand will be bolstered by the imminent reintroduction of mass migration and new government policies directed toward first home buyers.
The undersupplied rental market will continue to attract higher numbers of investors with rents rising sharply and demand to be heightened by the return of international students.
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Investors return as rents soar up to 20%
Finally, it is worth noting in Australia that with vacancy rates below 1% and strong demand driving renewed interest, residential rents that are rising as fast as property prices are attracting investors seeking higher yields, a hedge against inflation and generous depreciation and tax breaks. House rents in some of Australia's capital cities have risen between 15 and 20 per cent during the past 12 months as supply fails to keep pace with a sharp rise in demand.
Andrew Wilson, chief economist from property consultancy My Housing Market says "stock surpluses are being rapidly absorbed around inner-city Melbourne, Sydney, and Brisbane. Investor interest is accelerating because of capital growth, rising yields and high demand".
Reference: Australian Financial Review 14-18 April 2022
PERTH PROPERTY MARKET
In the article "Perth home values hit a record high" from Business News on the 13/05/22, Core Logic data indicated that Perth's median house prices have hit a new record high of $552,128, which is up 24.5% since June 2020. This is a great result after almost eight years of decline and a steady recovery.
They also suggest that Perth property prices will increase at least another 10% over the 2022/23 period.
A great summary of Perth's property market is captured in the Core Logic's May Perth Housing Market Update video which has just been released. Click here to watch the video.
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Griffin's role is to stop the confusion and allow clients to take a deep breath. We have seen it all before and we'll see it again.
Griffin I feel, is at its best in challenging times and has proven this over 12 years. The projects selected have performed well and to our expectation.
We hope that you've enjoyed this update and look forward to popping back into your inbox with more Australian property market information.
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Until then, we encourage you to follow us on social media to keep up to date with more regular news on the Australian property market and our Griffin developments.
Greg Devine
Founder & CEO
greg@griffin-group.com.au
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