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Safe As Houses

Predicted increases in value signals strength in local property market.

By Paul Miron
Thu, Aug 19, 2021 9:44amGrey Clock 4 min


The latest official property data figures have been released, indicating Australian houses prices in some capital cities have risen as much as 29% —the sharpest increase in the residential property market since 1988.

What makes this even more astounding is that this occurred during a once in 100-year pandemic and negative net migration growth, the first time since WW2.

While most of us are scratching our heads in disbelief, bank economists are upping their forecasts. Their consensus is that the property market still has another 10% to 17% in appreciation to go in the coming 12 months.

Essentially, bank economists have generally got it wrong during COVID-19 — first estimating that property prices would drop by over 30% in 12 months. The truth is prices increased by over 15%

As stated in many of previous columns, the health of the property sector in Australia is fundamental in enabling economic recovery and stability.

The real questions to ask are: ‘What are the critical drivers of property prices?’; ‘Are there any structural changes anticipated in the property market?’; ‘Are there any other factors that play a role in contributing to property prices?’

As much as a 14% increase in property price can be directly attributed to a 1% decrease in interest rates according to RBA’s modelling.

Low interest rates undoubtedly are the single most significant factor that drive property prices.

Beyond interest rates, some other factors to consider are:

  • Building approvals and efficiency of the planning process (supply of property)
  • net migration (increases demand),
  • employment
  • vacancy rates.

Perhaps the most eloquent modelling recently undertaken is by the RBA’s Peter Tulip and which quantifies a premium attributed to property prices due to lack of supply and planning constraints. 

Addition cost to houses
% to the total value
Additional cost to units
% to the total value

Tulip’s paper attributes house prices in Sydney to be 73% higher and in Melbourne 69% higher, precisely due to the lack of additional land supply and unit approvals. From an Urban Planning perspective, there is a constraint of available land. New land releases are not cost-effective for the government due to the increased cost of providing infrastructure to support new Green-fill suburbs. Continuing with the urban sprawl as a solution may have outlived its lifespan.

The unavoidable conclusion will most likely align with RBA’s research, more building approvals are needed, and a more efficient and robust planning process is required. Importantly new land releases are the best antidote in keeping prices low. This would avoid making borrowing money harder by dampening demand or increasing interest rates in an attempt to reduce property prices.

COVID-19 lockouts have resulted in net migration being negative, which has dramatically reduced the demand for units. CoreLogic data below shows the premium houses have over units have never been higher.

It’s easy for property commentators to conclude that units are less desirable — people have lost confidence in living in units during the pandemic. Recently publicised cases such as Sydney’s Opal Tower and others have created reduced interest for units.

Median Value

As Australia’s property market grows in size and immigration recommences, the Sydney, Melbourne, and Brisbane unit market will have commonalities with other cities such as New York, Paris, and London.

Units in these cities are not considered a secondary option to houses but a complimentary option due to the ability to live in desirable locations close to amenities, schools, transport, entertainment, work and avoiding the need for motor vehicles

Units in Australia has historically been specifically catered for either: 

  • a transient purchaser who wishes to live in an apartment temporarily until they can afford to buy a house
  • overseas students 
  • cheaper investment property option

As a result, units are generally smaller in size with lower quality building finishes 

On the flip side, we believe there is a strong demand for larger, high-quality apartments. This high-end unit market is expected to grow further as the baby boomers look towards their future accommodation needs and conventional houses will not fulfill their needs.

The NSW state government is acutely aware of these issues and appreciates that building the correct type of units to meet market demand will keep affordability down and cater to the broader market.

The NSW building commissioner David Chandler publicly names and shames builders by policing defects, thus ensuring that developers pick up their game which in turn will protect purchasers. This will restore confidence for purchasers wishing to buy apartments, especially those who want to buy off the plan.

Despite units performing relatively poorly compared to detached houses, we believe that there will be an increase in demand for units. The challenge will be for quality supply as the demand increases. The consumer will be increasingly selective on the offering, expecting a superior or equal liveability offered in an apartment to that of a house.

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

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Mortgage holders should brace themselves for more pain as the Reserve Bank of Australia board prepares to meet this afternoon for the first time this year.

Most economists and the major banks are predicting a rise of 25 basis points will be announced, although the Commonwealth Bank suggested yesterday that the RBA may take the unusual step of a 40 basis point rise to bring the interest rate up to a more conventional 3.5 percent. This could present the RBA with the chance to put further rate rises on hold for the next few months as it assesses the impact of tightening monetary policy on the economy.

The decision by the RBA board to make consecutive rate rises since April last year is an attempt to wrestle inflation down to a more manageable 3 or 4 percent. The Australian Bureau of Statistics reports that the inflation rate rose to 7.8 percent over the 2022 December quarter, the highest it has been since 1990, reflected in higher prices for food, fuel and construction.

Higher interest rates have coincided with falling home values, which Ray White chief economist Nerida Conisbee says are down 6.1 percent in capital cities since peaking in March 2022. The pain has been greatest in Sydney, where prices have dropped 10.8 percent since February last year. Melbourne and Canberra recorded similar, albeit smaller falls, while capitals like Adelaide, which saw property prices fall 1.8 percent, are less affected.

Although prices may continue to decline, Ms Conisbee (below) said there are signs the pace is slowing and that inflation has peaked.

“December inflation came in at 7.8 per cent with construction, travel and electricity costs being the biggest drivers. It is likely that we are now at peak,” Ms Conisbee said. 

“Many of the drivers of high prices are starting to be resolved. Shipping costs are now down almost 90 per cent from their October 2021 peak (as measured by the Baltic Dry Index), while crude oil prices have almost halved from March 2022. China is back open and international migration has started up again. 

“Even construction costs look like they are close to plateau. Importantly, US inflation has pulled back from its peak of 9.1 per cent in June to 6.5 per cent in December, with many of the drivers of inflation in this country similar to Australia.”

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