Property Update - May 2023

Dead cat bounce or economic recovery?

Most property owners are currently feeling the pinch of rising interest rates and the market has certainly been uncertain over the last 6 months.

A recent headline in the AFR stated that capital city rents have jumped 11.7%.

Rents across capital cities have increased by 11.7% over the past 12 months.

The median weekly rent for an apartment in Sydney is now $663/week up 19.1% over the past 12 months, and in Melbourne it is $515/week, up 15.2% over the past 12 months.

What is causing this? Put simply, it is the economic principle of demand for housing outweighing the supply.

With net migration forecast being updated to 400,000 for the past 12 months (up from previous forecast of 230,000) this is really driving underlying demand. This includes the net increase in foreign students, boosted by the Chinese government directive that students enrolled in Western universities must return to face-to-face-teaching.

At the same time of this increased net migration, the cost to build new homes is relatively expensive. Whilst price rises are settling, they are certainly not decreasing. With the costs to build, and increased interest costs whilst properties are being built, the basic economic maths are that the cost of development is too high for average priced homes or apartments, and the maths is only stacking up for more high-end apartments.

This can’t continue and must equalise at some stage.

This underlying demand has seen house prices stabilise in the past 12 months, and some commentary is forecasting it will bounce back.

Christopher Joye from Coolabah Capital in the AFR on Saturday 6th May, 2023, however believes in their research that this house price resurgence is merely a “dead cat bouncing”. Their underlying economic model is showing that house prices are set to fall between 15-25% from peak to trough in nominal home values. This is reinforced by the number of borrowers who currently have fixed mortgage rates of 2% who will be paying 5-6% soon. Further, their research shows 15% of borrowers currently have negative cash flows.

Their economic models are demonstrating that the inflation is caused by demand-side from consumers, with the supply-side goods inflation starting to normalise. Their research has shown Australian consumers have accumulated approximately 20% of their annual income in savings, thus facilitating ongoing demand in the economy.

They believe the RBA will undertake a second rate hike cycle to break this underlying demand, and we are heading for a global recession.

Other commentators say we have reached the bottom of the cycle and the cycle will mean economic growth in 2024.

What should we make of all this different commentary?

We are in for a period of volatility, but basic economic principles will still prevail over the medium term. Whilst there might be some short-term pain, the basic economic equation for housing principle of strong underlying demand and slow supply would outline that property prices will stabilise and look to increase over the medium to longer term.

Hang in there property owners!