No smoke and mirrors, BS or bias

There has been a lot of fearmongering about rising interest rates affecting both capital growth and affordability.

In the six years to August 2008, interest rates increased by 3.2%, which did not prevent capital growth of 100% or more in Australian property markets. DO.

Twenty years ago, when Australia had its last property boom, the median house price in most places more than doubled, even as variable interest rates on home loans rose from 6.3 to 9.5% over a six-year period; and that was in over 100 Australian cities and towns, including six of the eight capitals.

The standard variable rate mortgage in 1970 was 6.5%, and in 1990 it was 17%, but the combined median price of property in the capital increased eightfold (from $14,000 to $122 $000).

Interest rates are just one of many factors that affect home prices. DO.

The performance of real estate markets from year to year is always determined by a combination of influencing factors, which number in the dozens.

Recently, we were fortunate to have Simon Pressley, Head of Research at Propertyology, on our Australian network. He gave an insightful depiction of various macroeconomic factors that are currently having a “lifting” versus “driving” influence on real estate markets.

It concluded that there was a net positive increase influencing property markets, with “elevators” such as overseas migration, international tourism, investors, modernization and lifestyle buyers, growth in wages, high home equity, $230 billion in household savings, cheap home loans, low inventory levels. , building material supply constraints, increased rental income, and $45 billion in infrastructure spending to overcome “drags” that included affordability, inflation, rising interest rates, a valuation tighter credit, shortage of skilled labor, rhetoric and commentary.

The world, not just Australia, has entered a period of inflation, which the RBA seems reasonably confident of controlling within a year or so. But Mr Pressley stressed that there is no direct link between house price movements and inflation. On the contrary, historical evidence suggests that periods of high inflation have coincided with periods of the strongest real estate markets.

Australia’s economy is currently the strongest in 50 years. We have more jobs available than people to fill them, business revenues are rising, we have the best prospects for wage growth in a long time and the RBA confirms that household finances have never been stronger. This is the reverse of rising inflation and interest rates.

The housing supply situation has never been so tight. There is no relief in sight for the almost non-existent rental supply. The sharp rise in construction costs for new homes is putting upward pressure on asset values.

It’s real estate markets, plural. DO.

More than 20 cities and towns across Australia are still operating at double-digit growth rates, although Sydney and Melbourne have some frailty in their fundamentals.

Simon Pressley thinks the boom is far from over and wouldn’t be surprised if prices doubled over the next six years in parts of Australia. “Housing will never go out of style. We currently have a severe shortage and huge financial capacity to meet the demand,” he said.

The “experts” are often wrong. DO.

You might remember the many failed doomsday predictions we’ve been subjected to over the past few years – when what really happened was a super crazy time for real estate. The same people are now talking about sluggish real estate markets in 2022-2023. The “worried” commentators speak of a stagnation in real estate prices.

And what about those headlines about the “woe is me” debt-to-income ratio? RBA data indicates that the average Australian with a mortgage is currently only using 4.4% of their household income to cover borrowing expenses and that household liquidity currently consists of $260 billion, most of which is scattered in mortgage clearing accounts and redraws. CBA, Australia’s biggest property lender, said 35% of loans were more than two years ahead of mortgage payments. So why are so many sensational headlines worried about the size of mortgages, especially when banks are extremely conservative in stress testing loan applications?

A recent headline dramatically touted a 30% drop in the “Australian property market” (as if it were a single market!). Such a drop has never happened before, and I see no credible reason to suggest that one of this size should do so now.

And don’t get me started on all the bad news, constantly talking about the US economic scenario.

The media tends to pick one factor in isolation, which is usually the one that grabs the attention. A title often gives the end or result and is a catchy word without a background. I like to think that people look beyond “clickbait” and look for trusted sources of information away from the mainstream media.

I end with this thought: I’m not a blind optimist, but I think you should be aware of pessimists predicting a crash as the market moves. All market conditions change. They never stay the same. Real estate agents should keep their clients informed of changing markets, without having to accept doomsday proclamations.

Joel Davoren is the Managing Director of RE/MAX Australia.



Real estate is a type of real property that refers to any land and its permanent improvement or accompanying structures, whether natural or man-made.


Real estate is a type of real property that refers to any land and its permanent improvement or accompanying structures, whether natural or man-made.

No smoke and mirrors, BS or bias

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Last update: August 08, 2022

Posted: August 09, 2022