American economist Edgar Fiedler, is famously quoted as saying, “He who lives by the crystal ball soon learns to eat ground glass.”
Forecasting the future of any market, including housing, is certainly not straightforward or simple. If it were, everyone would be millionaires.
However, with local interest rates at record lows and all sorts of unprecedented goings on with the global economy, speculation as to the future of Australia’s property markets is prolific right now.
So what should we expect over the next decade? Well, as always, change is inevitable. But will it be for better or worse? Richer, or poorer?
What’s on the horizon for house prices?
Many suggest we’ve recently (at time of writing in August 2019) reached the bottom of what was, in context, a fairly mild correction phase in the housing cycle.
As illustrated by the below graph, after a brief cool down period, key city markets Melbourne and Sydney have once again started gaining upward momentum.
SQM’s Louis Christopher wrote in late May, “Our view is that dwelling price rises may materialise from the second half of the year as demand increases, as a result of the expected improvement in confidence.”
The “improvement in confidence” that Christopher speaks of, is largely the result of Australia’s collective population feeling a little more stable in terms of our political and economic footing.
Some might think this pre-federal-election confidence a little premature or misguided, given the less than ideal situation with our Aussie dollar dipping to a ten year low in August, but it could always be worse, right?
I mean, we still have the relative stability of that solid commodity we all love (and sometimes love to hate!), keeping our economy steady as she goes…housing. A topic plenty of people are talking about it!
The real estate rumour mill and speculation as to the direction our major property markets are likely to take over coming years is fairly constant right now, as always.
But something’s a little different this time. This time, the glass is half full and an unusual air of optimism abounds among experts.
The housing market makes its own momentum
Housing has long been a social and economic anchor in Australia. We love the ideal of home ownership and take it very seriously; obviously, given we still have one of the highest rates of home ownership in the world, in spite of our property markets being globally vilified as some of the most expensive.
Hence, when housing looks up, so too does Australian consumer sentiment.
Once the federal election was done and dusted it was like we breathed a collective sigh, which coincidentally saw the brakes slowly lift off major city housing markets, and that old “tell” – auction clearance rates, start to rise around May.
Our renewed interest in property was further peaked off the back of this last “downturn”, thanks to recent moves from the Reserve Bank and other regulators to help stimulate spending.
With the RBA cutting interest rates consecutively in June and July 2019 to just 1.00%, and APRA (Australian Prudential & Regulatory Authority) relaxing its regulatory reins on how the banks do business, we could be in the midst of the perfect property market storm at present.
Rather than enduring a prolonged plateau and period of prices losing ground – as one would expect from an upswing the magnitude of which we last experienced – it appears that the next upward trajectory has already kicked off.
So, as our major property markets begin to build momentum once more, what key markers should investors be looking at to have any shot at predicting the future performance of their portfolios, over coming years?
Well, as our friend Fiedler suggests, polishing off the crystal ball can prove rather unpalatable in the future. Nevertheless, following a few primary fundamentals can provide valuable insight into where things might be headed for house prices into 2030 and beyond.
And that’s handy insight to have if you plan on building a profitable property portfolio.
So what should you be paying attention to, when it comes to predicting the future growth of any housing assets you currently hold, and those you are yet to acquire?
Let’s pull out the polishing cloth and gaze into the future, in light of the main drivers for Australia’s major housing markets at this time.
Driver one – I’ve got interest rates, I know how to use them
Some finance experts have described our economy as being “in a delicate place” right now, suggesting rate cuts recently executed by the RBA could be just the beginning.
“The economic indicators are not so rosy and the banks haven’t fully passed on previous rate cuts so the RBA is likely to lower rates in the near future,” said Australian National University’s Alison Booth in an August ABC article.
The main economic indicator putting the wind up the RBA right now is unemployment levels. Which makes sense when you consider that if people are out of work, they won’t be stimulating the economy by opening their wallets.
While unemployment data has shown relative stability of late, with levels remaining around the 5% mark and a record number of Aussies said to be either in or actively seeking work (66% for April/May 2019), the reality is most new jobs being created are part time or casual.
In other words, there’s still not enough money making it into enough people’s pockets, to buoy their spending spirits.
And regulators are now juggling a very different set of fiscal balls to keep consumer sentiment chugging along…
The first ball could be called our underemployment phenomena, which sees more people working; just not enough hours to pay the bills and maintain a mortgage, no matter how low interest rates might be.
Then there’s the issue of real wage growth trending considerably slower over the past decade. Combine this with ball number one and we have more people working less hours, for less money, in real terms, compared to the rate of inflation and rising cost of living.
Moving right along to the third ball for the RBA to juggle, and we have aged workers and retirees; who are making diddly squat in terms of return on their investments, and facing the reality of reduced future spending capacity.
Hence, while consumer sentiment is looking pretty good at present, keeping these balls in the air could conceivably require further rate cuts by the RBA.
So, how low can they go? Well, a survey of recently polled experts produced a mixed bag of responses. Almost three quarters, or 73% expect the Reserve Bank to continue cutting rates to 0.75% or lower over 2019/20. Around a third believe the cash rate will be reduced to 0.50% within coming months.
Meanwhile, lenders are being actively encouraged to pass on these cuts to those customers who have variable home loans.
“We do expect the banks to pass on in full to the Australian people the benefits of sustained reductions in their funding costs,” Federal Treasurer Josh Frydenberg told Canberra journalists at a joint press conference with the RBA’s Governor Lowe, in early July.
Combine these falling interest rates with APRA’s announcement in May that it would scrap a key mortgage rule, and suddenly borrowers have the potential to access a deeper finance pool and wade back into major city property markets.
Driver two – APRA backs off
In late 2014, when regulators were in a bit of a panic about how rapidly real estate prices were rising across Sydney and Melbourne, APRA introduced a ruling that meant new mortgage customers had to be assessed on their ability to manage monthly repayments at 7.25% interest rates. Irrespective of the going rate of the day.
In May, APRA announced it would scrap the ruling and allow lenders to once more test at their discretion, which will likely be at a rate of about 6%. This could see the average customer’s borrowing capacity increase by 10% or more.
In other words, someone earning an average full time wage of $83,455 could see their borrowing capacity rise by $66,000 from the current $478,000 cap, to $544,000.
No doubt this additional breathing room, combined with enticingly low interest rates, will see more Aussies jump at the chance (and back into the housing market!) to upsize, invest or pop their first home buying cherry.
Another compelling reason to conceive of Australia’s major housing markets gaining considerable ground over the next decade.
Driver three – The government swings into action
You know things are getting serious when the Reserve Bank Governor and Federal Treasurer start getting cosy, in closed door meetings to discuss the fiscal fate of our nation.
The RBA has been patiently waiting for government policymakers to step up and be more active in stimulating spending for some time now, as the Central Bank starts running low on interest rate ammo.
Finally, the government has responded with a two step stimulus plan, involving tax cuts and first home buyer incentives. Both moves will see more money make its way into the average person’s pocket, meaning more to spend on the dream of home ownership that the vast majority of us still aspire to.
Driver four – Party like it’s 1999 – Affordability is up!
Australian property prices have been demonised as some of the least affordable in the world over the last decade.
At time of writing however, the housing market has become more accessible AND affordable than it’s been for an entire generation of Aussies.
According to the Housing Industry Association’s (HIA) July Affordability Index, house hunters can now party like it’s 1999, with property consuming the smallest proportion of earnings since the start of the millennium.
Low interest rates, a bottoming out of the cycle and minor increases in average earnings, mean potential homebuyers with an average income who want to secure a median priced dwelling using a 10 per cent deposit, would spend less on repayments now than they would have in the late 1990’s.
Over the past two years, the median house price across most capital cities has dropped by 10 to 15 per cent.
Despite national median property prices almost quadrupling over the past two decades, even though average earnings only doubled, this recent market decline has combined with record low interest rates to create a renewed air of affordability optimism.
HIA economist Geordan Murray said, “The main reason the HIA Affordability Index today is comparable with the level in 1999, despite house prices rising significantly faster than incomes, is that interest rates are 4.6 per cent today compared with 6.7 per cent in 1999.”
Combine this silver affordability lining on what’s been a looming cloud of uncertainty for an entire generation of would-be homeowners, with upbeat media vibes around real estate, and the recent acceleration we’ve seen in market activity and prices could conceivably continue for some time.
Driver five – Welcome back first home buyers!
Now that it’s not looking quite so difficult to get their foot in the proverbial (and literal) property door, it’s anticipated that low interest rates will allow more renters to secure their dream of home ownership. And the government is pulling out all stops to incentivise that move.
Set to commence on January 1st 2020, the federal government’s First Home Deposit Scheme will mean rather than having to save the obligatory 10 to 20 per cent deposit to save the additional cost of insurance on their mortgages, first homebuyers will potentially require a deposit of only 5 per cent.
The idea being, the government will chip in the additional 15 per cent in the form of a low cost loan, thereby saving borrowers $10,000 of LMI on a typical loan.
Another incentive gaining renewed interest is the First Home Super Saver Scheme, which commenced in 2017 and allows savers to build a depot within the low-tax superannuation system.
Savers make voluntary contributions to their super fund, then apply to have the savings (and any interest earned) released to help pay for a home.
So what does all this mean for housing over the next decade?
Well, a number of things really…
1. As more of the aged population, who still have a few good years of employment left, seek out alternative forms of retirement income – and real estate once more looks to be the rosy option for optimal returns – chances are we’ll see another wave of baby boomer and Gen X investors surge into the housing markets. Pushing up prices in their wake.
2. Lower interest rates passed on by the banks will make mortgages more appealing. Particularly compared to rents across major city markets, which are starting to become less affordable than your average monthly home loan repayments, in many instances.
An increased opportunity for first home buyers to get their foot in the door of the property market could see a further surge in demand and in turn, housing values.
3. Increased consumer confidence, stoked by positive messages in the media, will likely cause many to see current conditions as perfect for stepping back into the markets.
How often in your lifetime will the opportunity arise to buy a property in Sydney for 15 per cent or so cheaper than you could a few years earlier? Or Melbourne residential real estate for around 10 per cent cheaper?
Is your golden investment opportunity knocking right now?
Current market conditions appear to be creating the perfect property storm for those looking to either consolidate their portfolio with the acquisition of further housing assets, or break into the market and take advantage of what the next decade might bring.
Could this be the best time to get into real estate?
Well, in truth, the perfect time to buy an investment property was probably 20 plus years ago. The second best time however, is now.
That being said, property investment success is not really as determinant on timing the market, as much as it is about time in the market.
If you had purchased a property in Sydney for the 1973 median price for instance, you would have paid just $27,400. In Melbourne, a median priced dwelling would have set you back around $20,000 at the same time, and in Brisbane $17,500.
Fast forward to the June 2019 quarter data from CoreLogic and the medians across each of those cities are currently at $866,524, $709,092 and $533,133 respectively.
Not a bad return for those who could exercise some foresight, and a good dose of patience.
Housing will never die…
Australians’ love affair with property is not going to change anytime soon. As a society, we still place a good deal of importance on the status and stability home ownership affords.
And as always, compared to other types of assets, housing is an essential commodity – we all need a roof over our heads!
The types of shelter we trade in might change somewhat over coming decades, as we become more consciously aware of the economic, social and environmental implications of how and where we choose to live.
However, well purchased housing will remain a solid and reliable investment vehicle well into the next half of this century and beyond.
As far as governments go, residential real estate is far too important to the successful stability and growth of our economy to let house prices falter or fall too drastically.
Housing provides fiscal stimulation in all areas and industries, including infrastructure, retail, transport and the like. And let’s face it, housing is not a luxury item we can take or leave. It’s a basic human need.
The bottom line is this…we all need homes and traditionally, Australians worship the ideal of home ownership and the deity of the monthly mortgage.
Property’s underlying stability makes it a consistently reliable investment vehicle and therefore, still perfect for investors looking to achieve balanced cashflow and long-term growth through sensible diversification.
Socially aware property markets
The government will do anything to keep our property markets alive and kicking, including the potential for dramatic policy shifts that could reflect a new social equity based housing system, less reliant on public funding and more focused on private innovation and investment.
Perhaps we’ll see a growth in consortium type ownership structures, where people choose to bypass the banks in favour of pooling their own resources and eliminate the funding burden of a third party, constructing their own form of ‘community’ type housing.
Or perhaps the shifts will be of a more basic nature, as children and their parents are forced into inter-generational living arrangements of a more permanent nature.
One thing that’s certain is this unprecedented period in time for our property markets is permanently altering our perception of housing. And the ‘Great Australian Dream’ will never be the same again.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).