Finance Market Update - 26 February 21
There are two separate residential property markets in Australia right now, houses and apartments, and the prices between them are diverging at greater speed than ever before. In this fortnights update we look at their straying value and the boom in property prices, which we precited last year.
Property prices pumping
When we talk about property prices in general if you take the top line figures it jumbles together a lot of data points.
For example, when looking at the national price growth it includes both houses and apartments, and prices from sales from disparate places like Perth to Darwin.
The spread of differences in properties makes a national number hard to rely on, so one should take the figures quoted by media and from data sources with a grain of salt, they are the best means we have but are far from perfect.
Nonetheless we need those figures to know what is happening and when we look at recent figures what appears to be happening is a boom in property prices.
Avid readers of this update might recall that in June 2020 I predicted that we would see record high property prices in 2021.
This was contrary to most of the professional economic prediction makers and media at the time who purported collapses in prices from ten to thirty percent of which none has come to fruition.
I put forward the case that there are 5 forces fighting for a boom in property prices that would ultimately win out over the negative potential outcomes.
Those five forces were low interest rates, high demand, low supply, FOMO, and government support.
You would think that they could link the well-established past performance of property markets as they correlate to low interest rates to see price growth on the horizon. With record low home loan rates, it was almost guaranteed to boost property prices.
Compounding the low interest rates is unprecedented demand from buyers. Mostly for houses and particularly away from city centres.
See above below on the differences between houses and apartments.
Supply is still exceptionally low. There are simply not enough (quality) properties on the market for sale to meet demand. Again, the supply shortage is mostly on the houses side, not the apartments side.
FOMO is real. Many people who were locked inside working and juggling kids and family have realised they need more space and they are seeing the results on the news about prices growing, auctions getting record attendance and reserves from auctions being smashed and they do not want to wait anymore and lose out.
Psychologically there is a fascinating thing called loss aversion. This relates to FOMO and the property market because people will buy things and act a certain way to avoid losing more than they would to even win.
For example, at an auction they might bid more aggressively not to lose rather than just to win. Sound weird but the research is well founded.
The paddle waving at auctions also has to do with how much you can borrow, and also links into the next force of government support.
The government sent billions of dollars into the economy through Jobseeker and JobKeeper but one of the more interesting up-coming changes it the abolishment of responsible lending laws.
We talked about these in an update a few weeks ago and about how it makes more sense for the borrower to work out what they can afford to borrow rather than the bank to tell them what they can borrow.
Just remember banks make money by lending it to people who pay it back so they will still be risk conscious and as responsible as they need to be.
One of the key outcomes from the moving to responsible borrowing from responsible lending will be that peoples borrowing capacity will start to increase.
And the more people can borrow, the more they will spend, the more they spend the higher prices go.
All of these forces are fighting for a boom in property prices and I stick by my prediction that we will (continue to) see record high property prices this year.
Houses and apartments are different animals in the same kingdom, and one is much more popular than the other.
When you look at the types of property people want right now, post covid, the overwhelming demand is for houses.
With people working from home more often and realising they need more space the demand for houses has likely never been stronger, or at least FOMO (see above) has never been stronger.
Couple that with the extraordinary low supply of houses for sale and you start to see two data points that help to explain why auctions are so well attended and reserve prices are getting smashed.
The headline figures of national property price growth cover up the two separate stories between houses and apartments.
Largely apartments are flat or even down while houses are recording the highest prices ever achieved in the suburb.
The explosive growth in the aggregate property prices quoted in media often is often all to do with houses, not apartments, so it is important to recognise the two-speed property market we are currently in. Especially for investors.
Basic economics states low supply and high demand equal higher prices. This is true for the property market.
Funnily enough those are two specific forces I forecasted would contribute to record high property prices this year (see above).
For apartments, more than half of all apartments in NSW are owner by investors which means most people that live in apartments actually do not own them, which also means apartments are mostly an asset class full of investors.
It is important to realise not all apartments are created equal, especially from an investment perspective.
Recently we have seen cracks emerge in the apartment market as international buyers and local investors retreated.
We have also seen literal cracks in apartments like Opal Towers which is likely just an early signal of what is to come from cut corners on other developments.
But there are great apartments to buy either to live in or as an investment, you just need to pick carefully.
So called “investment grade” apartments might turn out to be not so great investments.
Time will tell.