I hope those of you in NSW and Queensland are enjoying your (slightly) increased freedom this weekend. In Victoria, we are holding out…
If you are thinking: “tl;dr” (“too
long; didn’t read”) when you opened this email, here is a summary:
In my view, property prices are only determined by two basic factors.
Within these, we can break them down to make them meaningful and measurable.
The three main drivers are Supply, Population Growth, Interest rates.
Two of these are positive for prices, one is unknown but you can take a view.
Want more? Read on!
Last week we opened up the property prices theme (always a favourite) and looking at what the commentators have been saying. Today, I wanted to add a framework to this rather than be pulled around by headlines and random commentaries we all come across.
Back in a February note, I offered the key items that I believe drive prices. To me you want to keep this simple but also comprehensive to ensure all factors are considered. The simplicity is really what many of you learnt in economics at high school: there are two ultimate factors in the prices of anything: Supply &Demand. Prices of anything increase when demand is greater than supply and vice versa.
Remember that??!!
The factors behind those are of course comprehensive but all quantifiable and not emotional. Emotions will change week to week (humans!) but over any length of time these factors should make the difference:
We went through this earlier in the year and dismissed others that pop up which are mostly distractions. We highlighted that if there were only three to choose – marked as arrows above:
- Supply
- Population Growth
- Interest Rates
To me, these are still worthy of scrutiny in the years ahead, although given the extraordinary times, the “Ability to buy” section may come into play. I will cover that in the next few weeks if you would like me to do so: hint – that's what I'm looking for feedback requests (!) For now, let’s do an update of these three:
‘1. Supply
Supply is determined by sales of existing properties plus new developments each year. In Australia, there are approx., between 100,000 and 500,000 properties sold each year. Interestingly this has been dropping for the last five years and especially 2018-’19 when the market weakened. People tend not to sell their homes in a weakening market:
Source: AFR 31/1/20
There is going to be a huge drop in supply of new properties in the next few years, indicated by new approvals that again have been declining and likely to steeply fall over the next 12 months:
Conclusion: Supply is already decreasing and will continue to do so, for months to come. This supports prices as buyers have less choice.
‘2. Population Growth
You will be sick of me talking about this as the key underpinning the underlying increasing demand for property (and the economy in general). This is one to watch. It
has taken a pounding this year with the borders closed and will likely to do so for a while yet.
Look at this one to show the distortion:
What happens next is key.
There are two sides: 1.Strong and increased migration/population growth
a. It will rise stronger than ever as people see Australia as one of the best countries in the world to handle this supported by a stable government structure, and a world-leading health care funding system.
b. This will be pushed by governments, despite any political rhetoric, to boost the economy (and justify/fuel infrastructure spend).
2.Lower population growth long
term
a. Potential Immigrants will be restricted from being able to travel for many years to come, from their own countries and/or Australian travel restrictions
b. The public and political mood against immigration will be stronger, especially while unemployment is high.
‘3. Interest Rates
The biggest expense for most owner-occupiers and investors is repayments. These have been reducing substantially and in the last year alone have dropped from 4.2% to 3.4%. This
may not sound like much but is effectively a 20% decrease in your interest expense. Most of you should be paying well under this.
Summary:
1. Supply is decreasing – good for prices
2. Demand – population growth – short term much lower, beyond that, hard to know at this stage
3. Interest rates – decreasing – good for prices
Ability to buy?
If you would like some analysis of this, let me know.
Take Special Care, and for those outside of Victoria: enjoy your hint of freedom!!
