What affects demand and prices of property in Australia?

Finance & Fury Podcast

Welcome to Finance and Fury. In this week’s episode, we will be looking at the demand for property in Australia.

If you haven’t listened to last week’s episode – it may be worthwhile – discussed supply of property in Australia – this week we will be focusing on demand – which in conjunction with supply = the price of property

1. When looking at property price movements – there is an equation to crack – low supply and high demand = price gain
   1. e where has limited supply but lots of demand is likely to see some rise in the property price over the medium to long term
   2. the reverse is true – if you have areas with high levels of supply – or the potential for supply to increase over time at a capacity beyond demand – then prices may not rise and at worse, actually fall.
2. As part of this equation – it is important to look at not what is happening now, but what is likely to happen in the future –
   1. If you are looking at what is happening now – then you will be buying into a market based around current dynamics – which may not hold up in the future –
   2. As an example - somewhere with limited supply now, but currently has very high levels of demand is likely to already be very pricey – the issue with buying something that is expensive is the further upside capacity that the property may have can be limited – but let’s say that in the future demand stays high, but all of a sudden supply catches up
      1. This is often the case if it is possible – due to developers wanting to get in on the high demand
      2. So, if you have inner city areas with high demand – then developers are incentivised to develop this region and therefore -supply will increase – this can do so at a greater rate then other areas if there are lots of infill or greyfield sites, which we covered in last week’s episode

Demand for property – look at what are the drivers of demand, current state of demand and how to identify areas that will be in demand in the future

1. This comes from people and their wants and need – peoples demand is represented in property in the form of how many dollars someone is willing to purchase a property for – but this one output (of how many dollars people are willing to purchase a property for) has many different inputs –
   1. Desire and demographics – The number of Buyers and where are people demanding property –
      1. The number of buyers comes in two forms – population growth and relocations within a nation
         1. If population growth is high and people are relocating to certain areas – this can manifest in higher demand
      2. Centre for Population still expects Australia’s population to grow – but it is likely to be 4% smaller — or 1.1 million fewer people — by 30 June, 2031 due to boarders being closed

• Where people want to live can be very subjective – as people have different desires – but often this will be in a close proximity to work, or retirement lifestyle living, as well as facilities like shops, schools and transportation

1. Desire can also be influenced by emotion – when emotions run hot, in demanded areas – can see FOMO

1. There has been a shift - Looking at demand through a lense of demographic demand - many people have had a chance to re-evaluate their life circumstances over the past 18 months - Offices were shut and remote working took over – inner city retail and hospitality has been dramatically altered - moving forward people may work from home at a greater rate and not be as drawn into cities
   1. This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some downtime between work and our social lives –
   2. If you can leave your home and be within walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, a great park
2. That’s why choosing the right neighborhood may become even more important – as the saying goes, location, location, location - This is key because it is estimated that 80% of a property’s performance is dependent on the location and its neighbourhood.
   1. The more liveable a neighbourhood is – the higher the chance of capital growth – but again, only if supply cannot be replicated
3. Beyond the demographics of property – another very important component of demand comes in the form of affordability – how much people can actually afford – if the population has no money, or cannot borrow funds to put towards a purchase, then the price demanded will be lower
   1. interest rates are at historic lows – this technically means that housing affordability per $1 is as cheap as it ever has been
   2. Remember that this does not mean that properties are cheap by any sense of any metrics – it simply means that for every $1 that you borrow, it is now the cheapest that it has historically been due to low interest rates
   3. So you can borrow more dollars and you can afford to pay back this balance due to low interest rates – however it isn’t really his simple – as the principal component of the loan repayment also increase

• The RBA has declared that the interest rate will not increase until unemployment is back to within its preferred range of around 4.5% and inflation is back within a normal band – which may be 2024 based around their forward guidance

1. Demand in the form of affordability can always be viewed as an aggregate – when talking about demand for property – it is important to look at what is in demand and where – as these areas can hold up better if interest rates were to rise
2. As an example, lets say, using some hypothetical numbers, that overall demand declined in NSW, QLD and VIC by around 10% – but what does this mean? That is where it is important to break these numbers down
   1. Did demand for apartments and houses decline at the same rate? Or did apartments go down by 20% whilst homes only went down by 5%?
3. Looking at Sydney as an example - Demand for units has increased the most over the past year, with demand for houses broadly flat – why?
   1. An influx of first-home buyers, as well and investors coming back into the market in 2021, has contributed to the increase in interest for units
4. When looking at a measure of demand - auction clearance rates are a decent measure to gauge the human emotion
   79. Sydney – 79.1%, Melbourne – 77.6%, Brisbane – 81.6%, Adelaide – 89.9% - these are all good measures – but looking forward –
   80. However - in many areas – apartments will underperform houses – even if they are in slightly higher demand – mainly due to supply as we discussed in last week’s episode – A report by the federal government’s National Housing Finance and Investment Corporation (NHFIC) predictednew housing supply would exceed new demand by about 127,000 dwellings in 2021, and 68,000 dwellings in 2022, with Sydney and Melbourne to have the largest excess supply of housing stock – mostly coming from apartment developments

Moving forward some areas will strongly outperform others - How do you identify these locations – i.e. What makes some locations more desirable than others?

3. Physical location – locations that are gentrifying and are expected to become good neighbourhoods due to their lifestyle locations
   1. This means destination suburbs where there is a wide range of amenities that are within walking distance or a short drive are likely to outperform in the future.
      1. At the same time, many of these suburbs will be undergoing gentrification – these will be suburbs where incomes are growing, which translates into people’s ability to afford higher levels in prices
   2. A good neighbourhood means different things to different people, but there are some key factors that help to determine which locations have the potential to grow in value faster in the future.
      1. Generally, a good neighbourhood is determined by the physical location, suburb character, and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
      2. In planning circles, this concept is known as the ‘20-minute neighbourhood’. Many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet the 20-minute neighbourhood tests, but very few outer suburbs do because there is a lower developmental density, less diversity in its community, and less access to public transport.
   3. So what to watch out for is up and coming neighbourhoods – those that are likely to go through additional population density over the next 10 years – which is the key driver for more amenities being places in – i.e. shopping centres, restaurants, gyms and transportation

Where the overall price comes into it - Supply and demand combined needs to be accounted for

4. As previously mentioned - Rising property prices are the result of Supply and Demand coming together
   1. When supply is higher than demand – it is considered a buyers’ market – sellers must compete by offering lower prices to attract buyers
   2. When demand is higher than supply – it is considered a sellers’ market – as buyers now must compete by offering higher buyers
5. Demand looking forward –
   1. For the last few decades continued strong population growth and declining interest rates has been a key driver of demand
      1. Australia’s population has been growing by around 360,000 people each year – this translates into around 180,000 new dwellings needing to be built each year to accommodate all the new households
      2. However - 60% of this growth comes from immigration - so in the short-term population growth will fall with boarders shut

• But Australia’s planners think that our population will reach 40m people in the next 30 years – so overall population growth will still be one of the highest in the world

1. Home prices rather hot at the moment – and this may slow down over the next few years – however auction clearance rates remain high and emotions are running high at the moment - with FOMO having become a key driver of property price growth

1. finance approvals are also are at record levels – showing that more people are looking at getting into property at the moment due to low interest rates – but if rates go back up then these approval levels may start to decline
2. For Supply – the concentration of 85% of the population in 9-10 cities has helped condense the new supply coming to market
   1. There is no more land supply to add to the most desirable areas to live in as these are currently built out – the only increase in supply in these inner-city suburbs will come in the form of apartments – however – unless you can afford a property for $1.5m + then buying a home in one of these areas may be outside of your price range – therefore you may need to look at outer lying suburbs that are expected to go through high levels of population growth with a limited supply of land – i.e. already built out
3. Australian house price forecasts - Price movements – for 2022 and 2023 – from core logic and Westpac economics – these are just forecasts – there is very small chance they are going to be exactly accurate
   1. Sydney – 4% then -6%, Melbourne – 6% then -6%, Brisbane – 8% then -1%, Perth – 4% then -1% and Adelaide – 6% then -2% = so for Australia wide – gain 5% in price then see a reduction of prices in 2023 by 5%
   2. It is expected that more expensive areas will outperform – in nominal terms –
   3. The current property cycle was initially characterised by all segments of the market rising – other than inner-city high-rise apartments – but some areas have risen faster than others – as the high end of the market has lead growth in property values
   4. Looking at some of the data from Corelogic – they break property into 3 tiers – high, mid and low - the high tier is the top 25% of property values in any given region, with mid being 50% of dwelling values and low being the lower 25%
      1. Based around these number – the top tier dwelling values are around $1m+
      2. In the recent bull run on property - The top tier saw prices go up by 1.8 times the mid and 2.25 times the low tier property when measures as a percentage – so if the low tier increases by 1%, then the top tier would have increased by 2.25%
   5. This is due to many of the factors previously mentioned – areas already built out and in high demand will be more expensive already – but they can see higher levels of capital growth for houses – not apartments – but also for people wishing to upgrade in housing
      1. Those already in the top tier were likely not looking to upgrade (i.e. trade in property) – so lower supply of these properties – lead to property price gains
      2. Add on the fact that interest rates have been low – allowed for additional increase

Summary – it is impossible to tell exactly what the future of property prices has in store – many variables – but you can get a better idea about price movements by focusing on the supply and demand potentials for property -

If it is a PPR purchase – then a greater level of emotional attachment can occur with this purchase – if it is the right property for you for the long term, you can afford the debt repayments, even if interest rates rise and you have a decent level of equity for the property (20%) – then buying into a market that has seen price gains may be the correct decision

If you are purchasing a property for investment purposes – or to hope for capital growth over the years before trying to upgrade properties – then you can look for properties in areas that you may not want to live due to proximity – but others may

If we are looking at investments – ideally – look for areas which have seen supply cap out but demand yet pick up are potentially areas where prices can rise – this will differ from city to city, suburb to suburb– every city will have different supply and demand characteristics

Also - within cities you will see the breakdown of home versus apartments – as we discussed last week, there are different breakdowns between each of these for what the historical average supply has been and where this supply is likely to come from

What to avoid would be apartments in suburbs surrounding CBDs – i.e. 10kms out from the CBD

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