A slowdown in property markets in large parts of the country has been driven by rising inflation, sparking cost of living pressures and rapid hikes in interest, which has seen homebuyer activity fall.
But prominent buyer’s agent Pete Wargent, co-founder of BuyersBuyers, said inflationary pressures appeared to be easing across many parts of the global economy, and consequently, Australia’s housing downturn could be relatively short-lived.
The crucial factor in the downturn easing is simply a change in buyer sentiment, with greater certainty set to turn things around, Mr Wargent predicted.
“For as long as consumers fear rising mortgage rates, activity in the market will be reduced, with both the volume of buyers lower, and the duration of transactions longer.”
Inflation expected to peak this year in Australia
While there could be further supply shocks, with the possibility of a spike in energy and oil prices due to the Russia-Ukraine war, the good news for borrowers is that the peak of the inflation hysteria now appears to have passed, Mr Wargent said.
He said many global indicators are pointing towards declining commodity prices and freight charges.
“Market-based measures of inflation expectations in the US suggest that the peak is already in, with five-year breakevens dropping all the way back down towards 2.6%, and 10-year inflation expectations now below 2.5%.
“These are the lowest figures since September last year.
“Australia’s inflation profile is tracking some way behind other parts of the world. With rising prices for electricity and rents still to flow through to the official figures, inflation isn’t likely to peak here until the end of 2022.”
But the important thing for consumers is regaining some level of comfort that inflationary pressures will eventually fall away, Mr Wargent said, removing concerns about rate rises.
“Australia’s biggest bank already sees the Reserve Bank cutting interest rates in 2023. And in both historical and absolute terms, of course, interest rates are still relatively low.”
RBA Governor Philip Lowe has said that inflation is expected to peak in Australia late in 2022, before declining back down towards 2% to 3%.
The RBA has signalled it intends to hike rates fast to get on top of inflation as quickly as possible, which would then see it be able to reduce the cash rate to more normal levels.
The Commonwealth Bank believes the RBA will start cutting the cash rate in the middle of next year, despite predicting it will rise to 2.1% by the end of 2022 from the current 1.35%.
“Overall, global supply chains appear to be righting themselves, but consumers and homebuyers are likely to remain twitchy until there is a firmly held belief that the feared dramatic spike in interest rates isn’t going to transpire in full,” Mr Wargent said.
“Historically, downturns in Australian property have tended to last 18 months or less, and this time may be no different if inflation expectations decline over the next few months.”
PropTrack senior economist Eleanor Creagh said that how households react to rising rates, high inflation, and falling house prices – which she described as the negative wealth effect – would largely determine how the property market would be impacted.
And it will determine how long the downturn would last, Ms Creagh said.
This will happen against the backdrop of savings and wealth buffers, and hopefully stronger wages growth, she said.
“It is a possibility the fast adjustment in interest rates, in combination with negative real wages growth and falling housing values, sees spending slow and economic conditions deteriorate enough for the RBA to begin cutting rates in 2023.
“How this dynamic plays out will be crucial in determining the quantum of this tightening cycle, and there is a lot of uncertainty here.”
Property fundamentals haven’t changed
When interest rates stabilise and buyer confidence returns, the market fundamentals underpinning growth over the past few years will be the same, with demand expected to outweigh the chronic undersupply of housing over the next few years.
Property fundamentals today are basically the same as they were six months ago, when were the strongest they had been in decades, according to Simon Pressley of Propertyology.
He said the only recent change in the housing market had been to consumer feelings due to interest rate rises, as well as headlines about falling property prices, which he said related largely to the two major cities of Sydney and Melbourne, rather than the whole market.
Interest rate rises had given would-be buyers cause to stop and work out how it would affect them and whether they should buy a property, Mr Pressley explained.
“It’s feelings, not fundamentals,” he said. “There’s no tangible fragility, it’s just people’s minds, and they’re lacking clarity and confidence.
“Property is an expensive acquisition, and it’s not something people rush out and do without having clarity.”
In terms of underlying fundamentals, demand is strong, with migration on the way back up following border re-openings.
As the same time, Buyers Buyers chief executive officer Doron Peleg said housing needs are greater because the average number of people per household has declined.
On top of that, building approvals are falling as construction costs have soared, and nationally the rental vacancy rate of 1% is the lowest it has been in 16 years, resulting in surging rents.
“Stock for sale listings are also about 25% below their half-decade average, so stock remains tight,” Mr Peleg said.
At the macro level, in the Australian economy there is income growth, job vacancies and employment are both at record highs, and the unemployment rate is close to 50-year lows, he added.
“Also, household balance sheets are very robust thanks to a surge in savings through the pandemic.”
Mr Pressley said the fundamentals of property investing were still incredibly strong, and while he expects prices in Sydney and Melbourne to lose somewhere between 10% and 15% in value by June next year, the other capitals will likely see more ‘normal’ growth of between 2% and 7% per year.
Assuming the RBA continues along its current path and most of the cash rate rises occur by the middle of 2023, he anticipates in around 12 months from now there will be a bigger critical mass of people feeling more confident to enter the real estate market again.
A narrow window of opportunity
The potentially short-lived housing slowdown in Australia would provide what may be a very short window of opportunity to buy while competition is low and prices aren’t quite so high.
“The opportunity is a chance to participate in real estate and pick the right quality asset during a period of time when everyone is spooked,” Mr Pressley said.
“The window of opportunity is now – get composed, form your own opinions with good quality information, and block out everything else.
“When you do that you will be reminded that housing is shelter, and there is not enough of it.
“It requires a liability to purchase it, but the cost of buying that liability is still ridiculously low.”
