As the impact of the covid pandemic seems to be easing, I thought this was an opportune time to set out my thoughts and observations on the property market outlook as at April, 2022.
It goes without saying that we have seen unprecedented challenges at many different levels as a result of the covid pandemic. We have seen the curtailment of civil liberties in ways that were unimaginable three years ago. Whole industries have effectively been shuttered for different periods of time. Government stimulus has been at record levels and any concern about budget deficits seems antiquated.
To get some sense of where the property market is heading, I will start with 1992 – thirty years ago. I believe that this will illustrate the four pillars that have supported property price growth over the past thirty years. From that base, I think we can look at the many events in the world and start to make some predictions.
These predictions are based on original thinking that I don’t think you will see reproduced elsewhere. Whether you agree with me or not – I promise some new ideas to help inform your views on the future direction of the property market.
Melbourne in 1992
To begin, let’s travel back to 1992 – Australia, and Melbourne in particular, was a very different place. To illustrate this, let’s look at some key statistics:
| Statistic | 1992 |
| Population (Australia) | 17.5 million people |
| Average Weekly Earnings | $589.00 per week |
| Unemployment Rate | 10.73% |
| Typical Mortgage Rate | 8.39% pa |
| Inflation Rate | 3.01% pa |
| Median Melbourne House Price | $121,500 |
| Immigration (per annum) | $30,000 people |
The above figures are estimates that I have drawn from a series of quick internet searches for the purposes of this article. It is also not my intent to debate immigration or other contentious policies over the past 30 years. Rather, I want to illustrate some of the changes we have seen over thirty years.
The Thirty Years to 2022
I believe that these figures support my view that we have seen a golden age for property investors over the past 30 years. Let’s examine four key pillars that have supported property during this time:
- Population growth – Australia’s population has grown from 17.5 million to 26 million over this period. This has largely been driven by an increase in immigration from 30,000 per annum to around 175,000 per annum. (Noting that the last two years have seen negative immigration as a result of covid restrictions.)
- Interest Rates – Typical mortgage rates have fallen from 8.39% to 3.32% in 2022. In addition, mortgage finance is more readily available than in 1992;
- Employment and Income – unemployment has fallen from 10.73% to 4.0% in 2022 and average weekly earnings have risen from $589 per week to $1,748 per week;
- Government Regulation – It is hard to quantify this. However, regulation has delayed the release of new land for housing, increased the cost of subdividing and building on that land and increased the cost of building generally.
All of the above factors have supported upwards movement in house prices. In very simple terms, more people with more money paying lower interest rates and with relatively fewer choices have pushed property prices up.
As a result, the Melbourne median house price has increased from $121,500 in 1992 to $805,000 now. This in an increase of 6.6 times over thirty years or capital growth (excluding rent) of around 6.5% per annum (compounded). These figures exclude taxes and don’t account for any capital improvements that may be captured in the median house values.
Many property investors, including home owners, have made a lot of money over the past thirty years.
The last thirty years have been somewhat of a golden age for property investors.
Looking Forward
Looking forward, I think the property market faces a reversal of at least some of the trends that have supported property prices over the past thirty years:
- Population growth – at present, population growth has stalled. There are pressures to reduce immigration and therefore population growth in future (both from a green and economic perspective). Worker shortages in many industries will offset this pressure to some extent;
- Interest Rates – Interest rates are already informally increasing and a formal Reserve Bank interest rate rise is widely expected in June, 2022. This is likely to be the first of many;
- Employment and Income – unemployment is extremely low. But logically there is little room for it to fall. Average incomes may increase as a result of worker shortages;
- Government Regulation – This is hard to predict – but politicians are a never-ending source of ideas that impose costs on property and the economy generally. The weight of increasing stamp duties, land taxes, property outgoings and landlord regulations may start to exceed the price support from restrictions on the supply of new homes.
The biggest cloud on the horizon has to be inflation. It is received wisdom in economics that printing money causes inflation. Australia, like many world governments, has engaged in massive money printing over the past 2 years. However, if this is true – why haven’t we seen inflation already?
I believe that the answer to that question lies in the concept of ‘velocity of money’. Simply put, printing money isn’t an issue if everyone takes that money and puts it in the bank. Right now, we have low inflationary expectations and an uncertain world. This means many people are likely to bank the funds – and statistics tells us people have done exactly this. Inflation comes when people start to take the money out of the bank and spend it. We are starting to see this now as confidence returns and the threat of inflation gets more attention.
Inflation
Anecdotal stories about inflation are everywhere. Examples include:
- unskilled labourers asking $80 per hour;
- construction material price increases of 50%;
- shortages of a range of goods as a result of overseas disruptions (Ukraine / China as examples); and
- increasing inflation in key overseas economies such as America.
Most official expectations are for relatively low levels of inflation for a period of a year or two. This will lead to interest rate rises. This has already contributed to a repricing of many tech stocks.
I am concerned that there is a risk that inflation will be higher, last longer and be harder to control than expected as a result of the money printing that has occurred.
The outlook for property in this scenario is hard to predict. On one hand, interest rate rises are a negative for property. On the other hand, property, as a real asset, can be a good hedge against inflation.
Conclusion
To conclude, I believe that the Australian property market faces a more challenging period than we have seen for 30 years. Opportunities will arise and I believe that wealth will be created by those who can identify the opportunities and seize them. However, I also believe the buy and hold strategy that has worked for thirty (or sixty?) years will become increasingly risky. Increasing holding costs and divergences between market segments will reward more active strategies.
In the long term I continue to optimistic about Australia’s future. Australia has many strengths and attractions relative to the rest of the world which it is easy to take for granted as a resident of this country.
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