Residential Market More Complex Than Ever
I’m asked many times a week how I would characterise the current health of the residential property market? The answer is never easy, the market is very convoluted mix of policies, economics and shifting demographic and emotions, and a decade after the GFC of 2007-2008 even more so.
There’s a labyrinth to navigate and I suggest that no single factor will be the one neat answer, as there’s a maze of factors that influence today’s residential market however, it is useful to look at the key dynamics and so build a reasoned perspective.
One key part of the puzzle is that property prices respond to a wide range of influences and trends and they are never uniform across the country. Different sectors in the same city can also, and do exhibit varied conditions.
Trends can also appear contradictory as we see different headlines pointing in opposite directions.
For example, one property does not sell, while another just a few suburbs or streets away sells for a price well over auction reserve. Then we read about a pending over-supply of apartments in a market only to read a few days later that the rate of development has slumped and potential new supply is set to fall dramatically.
This always begs the question, are these figures pointing to a structural slump or just a blip, or is this simply the normal functioning of a free market?
Supply and Sentiment
Sentiment and supply are two factors that attract a lot of attention. Too few homes for sale, a shortage of land an apartment glut in one area and strong demand with little new supply in another, it’s the sort of comment we see all the time.
If you’re an active buyer or seller it can be confusing to navigate all this information.
The price of established homes falls and in response there’s an immediate slowing of supply as sellers, with little motivation to sell abandon their plans to sell. We often see the price variations move in fractions of a percentage, and the variations are never universal, the figures are based upon only a very small sample of the entire market.
Another example is when a hand-full of new apartment projects are delayed or sites put up for sale, slowing supply almost over-night. Supply can be erratic and reversing a slowdown can take months to impact and this creates uncertainty among buyers.
Sentiment is tricky and can fragment markets as different sectors of the market either benefit or are disadvantaged by a range of factors. Many of these factors will always be driven by personal circumstances that will drive the need to buy or sell at one time.
These are as diverse as general economic sentiment, political instability, with an election being a prime example, taxation policy and the location of new infrastructure are others. Interest rate sentiment is a big one that tends to have universal impact while other factors can create both pluses and minuses for the housing market.
Interest Rates and Taxation
We’ve had a long period of low and stable interest rates which of itself creates some nervousness in the market as expectations of a change in direction dominate debate.
If there’s a combination of negative sentiment driven by economic uncertainty, combined with the potential for higher interest rates then confidence can be squeezed. This in-turn creates pressure points that influence demand and directly flow-onto impact prices.
Taxation policies always make a strong impression on market sentiment and so do government policies applied to areas like property investments and off-shore buyers. We have recently seen measures applied in both these areas very bluntly, and both groups have been impacted.
However, like all policy changes the impact is not quarantined and flows to the wider market and often well beyond the intended targets, confidence suffers.
Currently we see that the negative sentiment created around investors and off-shore buyers has done little to boost first time buyer affordability.
Housing and infrastructure and tightly linked, both new and existing infrastructure can have a remarkable impact on demand and prices selected areas. The value of a walkable neighbourhood has been on the increase.
Infrastructure has a strong impact on all major urban centres but also extends to regional areas and the purchase of new inner-city trains for NSW is one example. This sort of investment can help affordability as buyers are happy to move outside the more crowded city markets.
Government policy is a two-headed monster because on the one-hand government’s taxation take from the development industry and housing market is huge.
Then government policy can be a direct benefit to the market in the form of housing policy incentives.
These incentives operate at both the federal and state levels of government. State policies mainly involve stamp rebates and limited FHB grants and federal policies currently range across superannuation savings, infrastructure and policies to allow older homeowners to move and invest for their retirement. Policy settings are not always directly applied by government but via APRA through its regulation of the banking and finance sector.
Not So Lucky
While the build-to-rent sector might soon contribute to the local housing market it has been the private property investor, sometimes called the mum and dad investor and of late SMSFs that have traditionally provided the bulk of rental accommodation.
However, as prices increased over the past few years, investors were handed a big part of the ‘blame’, but I suggest that this is largely miss-placed sentiment.
Now as investors are hit with varied financial disincentives, including higher interest rates and as government taxation policy remains in a state a flux any withdrawal of investor demand may well aggravate the supply of rental accommodation and further disadvantage sections of the housing market.
We can say much the same about off-shore investors and the way these buyers have been discouraged is at odds with our ambition to create Sydney and Melbourne as global cities.
There are cycles in the residential property market that reflect many of the aspects I’ve been talking about here. The factors are varied and complex and the resultant cycles in the market will always create peaks and troughs.
What we are now seeing in Australia is that some markets like Sydney and Melbourne are driven by global factors.
More locally based markets are driven by interest rates and affordability and are receptive to government and planning policies and the delivery of infrastructure.
My conclusion is that there’s no single or neat solution to question ‘what’s the health of the market’ and in a free market nor should there be.
However, there’s one final factor that I’ll describe as the ‘emotions of the market’.
Despite a mountain of advice, endless reports and no shortage of ‘experts’, people still do make property related decisions with the hearts, and not their heads. Emotion has and always played its part. Emotion can be driven by many factors and that includes FOMO.
It's an aspect of the market that's related to sentiment but emotion is much harder to quantify. Big unexpected events happen that un-settle markets, but there are a million emotional impacts that we can never sort into neat boxes, it's part of the dynamics that make the residential such an all-consuming area to be involved with, part of the challenge and part of the joy.
For more articles like this click here