The future direction of property prices is a hot topic right now.  Unfortunately, the mass media is more interested in click bait than providing useful information to readers and many of our property statistics are unreliable at best – a topic we have canvassed previously.

The Negative View

The mass media is very keen to broadcast tales of property doom and gloom.  My personal favourite is an article titled “New home sales drop by 42 per cent as buyers renege on contracts” dated 26 January, 2023 that appeared on news.com.au.  The article suggests that new home building contracts are down by 42% compared to the previous year.  But there is no indication whether prior year figures were inflated by the Homebuilder Grant. Hence, in my view, the article really conveys no information of value.  There is also the counterintuitive claim from the HIA that owners, not builders, are reneging on building contracts.

However, if we look beyond the headlines:

  • It seems, based on reports from a number of companies that monitor property prices, that property prices have eased as interest rates have increased;
  • Increasing interest rates are limiting what many aspiring home buyers can borrow;
  • Whilst some part of our community has not felt the pain or higher rates as they have fixed rate mortgages higher inflation is causing issues for many;
  • Higher building costs are causing some developers to cancel proposed developments; and
  • The international situation seems unusually unstable for a range of reasons.

The Positive View

On the other hand, there are those that see a positive outlook for property prices.  The key themes here are that supply is limited, some parts of the community have more cash than ever, Australia is a safe haven, property is a hedge against inflation, immigration has resumed and we are seeing a return of overseas students.

To be fair, anecdotal evidence suggests that there is a shortage of quality property in the market. The result is some exceptional price results – and there are some indications of resumed offshore buying. Perhaps the slight warming of relations with China is having some effect?

It should also be said that higher interest rates are not a zero sum game. There are members of our community that have savings and saw their income slashed by ultra low interest rates and are enjoying an increase in the interest rates they earn on their savings.

Lower Volumes

One of the more thoughtful articles I have seen in recent times suggested that the market is being supported by lower volumes.  That is, property prices would be falling further and faster if the number of properties being sold hadn’t been sharply reduced.

It is certainly true that the REIV is reporting significantly lower sales volumes:

18 March, 2023                685 properties (72% of which sold) vs 1127 last year

11 March, 2023                272 properties (70% of which sold) vs 492 last year

4 March, 2023                  608 properties (76% of which sold) vs 1170 last year

25 February, 2023            780 properties (75% of which sold) vs 1342 last year

18 February, 2023            557 properties (73% of which sold) vs 1162 last year

5 week total –                   2,922 properties this year vs 5,293 = 55% of last year

There is a risk that if job losses, inflation, higher interest rates and other issues force more people to sell the increased volume could see larger property falls.

Where to From Here?

In the face of this uncertainty, I am inclined to resort to some simple logic. 

Whilst studying, I worked in a florist.  It was recognized that when an election was called (state or federal) sales would drop by around 10% until after the election was held.  The explanation was that the uncertainty of an election caused one in ten customers to not want to spend $5.00 on a bunch of flowers.  If you talk to appliance salespeople, car salespeople and estate agents, the effect is more noticeable as the price of the item increases.

If the uncertainty of an election will cause some people to not spend $5.00 – the range of uncertainties that presently affect the property market must surely cause a significant number of people to defer buying a new home.

On its own, this reduction in demand cannot be a good thing for property prices.  With the increased risk of forced sales (an increase in supply) the downward risk for property prices has to be higher.

Naturally, there is no such thing as a single property market in Australia, Victoria or even Melbourne.  Some pockets will continue to outperform for a range of local reasons.  However, in my humble view, the risk with overall property prices has to be on the downside in the short term. 

Put another way, all things being equal in a rational world, higher risks should mean that buyers want higher returns which means lower prices.  But then – how rational are property prices?

If you have any property related legal issues or other questions in relation to property law matters you can book an appointment to speak to me – click here. Legal issues are better addressed sooner rather than later!

Lewis O’Brien