Episode 99: Sydney’s Strength & the Economy’s Strain

Hosts Ciaran O'Brien and Peter O'Malley explore why Sydney’s property market continues to defy broader economic headwinds. As unemployment rises and central banks face pressure to balance inflation with growth, we examine how policy shifts, migration, and housing supply gaps are shaping today’s price dynamics.

We also discuss:

• Sydney’s housing resilience despite a softening national economy
• Central banks weighing inflation control against unemployment risks
• Imported inflation and the political pressures shaping RBA decisions
• Immigration settings fuelling demand without addressing skills shortages
• Construction sector strain from labour shortages and accreditation hurdles
• Vendor expectations outpacing genuine buyer depth
• First-home buyer incentives boosting activity at the lower end of the market
• Older walk-up apartments outperforming high-rise developments
• The ripple effect moving buyers across adjacent suburbs
• Investor yield realities and data distortions shaping perception vs. truth

As always if there is a specific topic you would like for us to cover, please reach out and let us know!

Chapters

• 0:00 Setting The Agenda: Rates And Property
• 1:32 NZ As Warning Sign: Inflation Vs Jobs
• 5:18 Markets Betting On An RBA Cut
• 8:40 Politics, Imported Inflation, And The RBA
• 12:05 Immigration, Jobs, And Corporate Cost Cutting
• 15:30 Construction Skills Gap And Housing Targets
• 18:05 On-The-Ground Demand And Vendor Expectations
• 22:02 Why Walk-Ups Beat High-Rise Right Now
• 24:28 Government Incentives And The Ripple Effect

Transcript

SPEAKER_01: 0:30

Welcome to another edition of Current Market Insights. I'm your host, Kieran O'Reilly, with me is Mr. Peter O'Malley. Peter, hello. Kieran, good afternoon to you. Good afternoon, my friend, and great to see you again. I want to talk today about uh the economy a little bit. I want to talk about the property market. Uh, I really just want to have a bit of a chat about how things are going now that we are pretty well entrenched uh in in spring and we're heading, or at least if the weather's any indication, we are well and truly headed towards summer. So I wanted to uh spend today talking about what you think the the market conditions are looking like across Sydney, whether the economy is having much of an impact, and whether you think it's likely to continue in its current trajectory as we move towards the hotter months and into the Christmas period.

SPEAKER_02: 1:19

Yeah, look, um interesting what's going on out there at the moment. The property market, I think, is performing pretty well, um, Kieran. Um I think the property market's performing better than the economy, yeah, is what I would say. Um we saw the jobless numbers, the unemployment rate come out last week and jumped above the RBA's forecast. And that's caused a lot of people to jump to the conclusion, rightly or wrongly, that the RBA will cut in November. Now, we've often discussed in our podcast what will central banks do if they're faced between fighting inflation and dealing with rising unemployment. Uh, New Zealand is already at this point where their inflation is surging again. It's now at the top end and ready to break through the Reserve Bank of New Zealand's target band, which is concerning, but it's also happening at a time where their unemployment is rising rapidly and their economy is really underperforming. New Zealand's a different economy to Australia. It doesn't have the minerals that Australia does, and it's got an exodus of people where Australia's dealing with an influx of people. Some from New Zealand, ironically. That's right, indeed. And um the Kiwi property market, after quite a number of boom years, is under real pressure. Um so much so that the New Zealand government have reversed their ban on international or foreign buyers buying into the marketplace, and I think they're looking at overturning that. Now, Australia was never subject to that ban because of a reciprocal rights agreement between Australia and New Zealand, but it just shows you um how little economies can be flying and they can get thrown around very, very quickly.

SPEAKER_01: 2:56

Yeah, New Zealand's a really interesting market, I think. Uh, you know, I I spent quite a lot of time over there, as you know, in Auckland. And what always I found interesting was one that the Chinese government was so heavily involved in the development of Auckland and New Zealand more broadly with their Belt and Road initiative, and they put so much money into infrastructure and housing. And then, of course, uh the Ardurne government, I think it was, were quite firm with the band hammer on foreign investment, and they wanted to make sure that New Zealand was for New Zealanders, uh, which is fine. Uh, but really it hasn't been all that long that they've now had to somewhat reverse course because the Chinese investment money has trickled away and it's a very expensive place to live, and salaries aren't that great, and there's a whole range of things that are great about that country and a whole range of things that aren't. Uh, and I do find it interesting that they've reversed course so quickly. But I'm also not surprised. I mean, uh, you know, we mustn't also forget New Zealand's a different property market in the sense that a lot of their cities are lease hold as well, as opposed to free hold, which is a you know a pretty foreign concept, I think, to us here. I you you mentioned that a lot of people are talking about the fact that the Reserve Bank now might look to cut in November, which, you know, again, at an individual level, I'm sure everyone welcomes. Uh, some of the commentary I've seen and some of the articles I've read have suggested somewhat the opposite, that now that the numbers have come out, the RBA will just sit on the heels now for the rest of the year at a guaranteed kind of uh path, and there's no way we'll get a cut, uh, you know, at the very least until sometime next year, if at all. That aligns with what you and I spoke about, you know, a couple of episodes ago, maybe two, three episodes ago, that we think we're and the major banks, some of the commentators think it might be mid-next year. Do you think, in your own opinion, that the unemployment figures are strong enough for the RBA to take action, or is it a bit premature?

SPEAKER_02: 4:43

So the reason I mentioned New Zealand is that the uh the Reserve Bank of New Zealand has played their hand and they are playing to unemployment. And we often speculate what will central banks do? And I think in the cold light of day, every central banker would like to say, no, if we're faced between unemp rising unemployment and rising inflation, we'll deal with inflation first and primarily. Yeah. But the reality is that America went first where it was faced with this challenge, fighting off stagflation. Do we deal with inflation or um by leaving rates on hold or even increasing them? Or do we deal with the worsening economy and the uh rising unemployment and cut rates to stimulate? And clearly, Powell um against um wiser head's uh view um uh cut rates at a time where people felt that he should have left them on hold or or or increased them. And we've seen what that's done to the gold price. You mentioned offline that you'd like to mention the cues out the front of the ABC gold bullion that we keep seeing uh on on the media and social media at the moment, which we can come back to, but that's primarily driven by America cutting interest rates at a time that inflation is rising, and New Zealand is now doing the same. Yeah. Um, people believe, so when I say there's an expectation the RBA will cut rates in November, that's not a personal opinion. That's the money markets, which is hovering somewhere between 70 and 80 percent that the RBA will cut rates on Melbourne Cup Day. Um, I'm probably certainly not 70 to 80 percent certain that that will happen. I think Michelle Bullock has it within her to stare the market down as she did in July and said, no one wants to see rising unemployment, inflation's too high. I'm gonna sit on my hands. We must keep in mind that compared to nearly every other central bank globally, the RBA has been less volatile in their rate cycle movements, where they don't tend to increase as much as what New Zealand and the US did. Uh, equally, they're not as prone to cutting. Like New Zealand has has been slashing for over 12 months now. Yeah and they'll be going again, according to reports and the way that that that central bank is thinking. So that's why I wanted to raise New Zealand as an interesting test case because it's the second economy that's of interest to Australians outside of America that's gone down a certain path. And I think it's fair to say that the Australian economy is looking, looking likely where the RBA, maybe not this year, but certainly early next year, will be faced with fighting inflation, v fighting unemployment.

SPEAKER_01: 7:26

Now, I fully acknowledge that this is not your expert area. You know, we must remind Ellis that this is a real estate podcast primarily, but we do touch on money markets and particularly the Reserve Bank. But do you have an opinion on which one of those levers is, I guess, the most impactful for the RBA? And what I mean by that is if they were to make a decision based on inflation versus job, like job figures, what do you think has the greatest impact on the economy? You know, is it rising job, like rising unemployment is more impactful to us as a nation, or is it inflation? Because I suspect that's the question in a lot of people's minds.

SPEAKER_02: 8:02

I think there's a view if employment, unemployment got to a certain level high enough, that that would naturally start to bring down inflation because the activity and demand wouldn't be in the economy. That's how central bankers would like to theorize in the cold light of day. But there's political realities. And what we've got here in Australia is that we probably would have seen rising unemployment sooner, except the government stepped in to absorb so much labour that was coming out of the private sector, to the degree that you keep hearing in the media is the government represents such a large section of the economy at the moment. So yes, there's the theory to all of this, um, but when they're faced uh with the dilemma bowled at them, middle stump, um, well that you've seen in America with Powell under the pressure of Trump and the Reserve Bank of New Zealand, they are they are folding to political pressure and cutting rates, even though economic theory says you don't cut interest rates when inflation is going up. The other challenge that economies like um New Zealand and Australia face is that the inflation is is is largely um imported from offshore. Yeah. It's not necessarily manufactured locally due to an excessively strong economy. So some people would say you put up interest rates and you'll kill inflation. Well, if the inflation is being imported from America and Europe, um, but domestically our economy's struggling, all you're doing by putting up interest rates is is giving the poor mortgage borrower a belting that they don't need.

SPEAKER_01: 9:40

So it's interesting times ahead. Yeah, certainly. I think it's um we've made that well, you certainly have made that point for a long time that the imported inflation really is we're beholden to decisions of major economies around the world. There's not a lot we can do other than get punished purely for living here uh from an economic perspective.

SPEAKER_02: 9:57

It's it's all part of the economic gamesmanship of the Trump administration. His job is to make America great again. Um so um I'll let others decide whether he's achieving that, but he is America first. And the reality is that the RBA and the Albanese government need to be Australia first, um, which again um they shouldn't be criticized for. But there is there is a uh disconnect between what the RBA and the government are saying. And it's very, very interesting that the RBA came out two weeks ago and reminded everyone house prices are not our remit. Yeah, what house prices does from here has got nothing to do with what the RBA's uh policy monetary policy is. We're managing the broader economy, not one sector, i.e., the house prices. And that was really interesting timing from the RBA because that was around the time that this incentives for first home buyers was introduced, which is inflationary and it's it's flaming property prices from the bottom up. There's no doubt about that. We saw some sales last week that just indicate there's a boom going on in certain suburbs at certain price points. And the RBA know that if they need to cut rates to offset uh rising unemployment and the housing market goes because the government are importing too many people and not building enough houses, the RBA are not going to allow themselves to be the fall guy for that government policy at the other end.

SPEAKER_01: 11:29

Yeah, look, I think it is interesting that the RBA talk about it, and you know, it's something, again, we have talked about a lot, is that the RBA's role is purely cash, like that's their job. Uh, and they do have limited vehicles by which they can manage the economy here. I wanted to ask you a question. You mentioned, and uh we've talked about this a lot, but immigration is a major driver of the housing crisis at the moment, and the fact that there is just not enough supply to meet demand. Does the excess immigration also factor into the rising unemployment rate? Are we potentially bringing numbers of people into the economy or into the country that then, you know, theoretically aren't contributing from a productivity perspective? Could that be artificially increasing the unemployment rate at this period? Maybe, you know, not a true reflection of what's actually going on in the small to medium business economy here.

SPEAKER_02: 12:21

Look, I I can only assess things anecdotally. We as a real estate agent, as we've said before, you speak to a hundred people a day, you get a sample, a cross-section sample of how people are going. Um, I think there's a lot of um corporates um that are that are cutting jobs, as we've sort of felt with both tenants and people that we've been speaking to that have been uh unfortunately laid off. And uh, once upon a time, if they'll laid off, they'd sort of bounce into another equal role and they're sitting around high quality, um, high quality executives, um, um, you know, with with mortgages uh and families and private school fees that can't get a job that that's that their talents are worthy of. That was starting about six months ago. I found that really interesting. Um, I think a lot of corporates are doing their very best to cut costs through AI. So there's a view in the corporate sector that's very hard in this environment to raise revenues. So to increase profits, the way to do that is cut costs. And AI is clearly something that uh a lot of a lot of corporate um uh entities have gone down that path, Kieran. Uh equally, um, you know, I'm dealing um with a um a recruiter who's in the construction sector at the moment and uh never been busier. Yeah. Never ever been busier. He can hardly scratch himself from day to day uh with how much work he he's getting as a recruiter in the construction sector. So I think it varies from industry to industry, probably varies from suburb to suburb and city to city in some ways, based on one skill set. I don't know that they've pushed so much labor in into the uh into the economy that that in itself is pushing the unemployment rate up. Um, but there's um there's some forces out there where companies are you're seriously trying to cut costs, yeah.

SPEAKER_01: 14:12

It's interesting, just before we move on, that you mentioned the construction sector. I only read an article this morning actually talking about how one of the great mistakes that this government's made with its immigration policy is not enforcing the construction sector workforce kind of limits and encouraging people to come in that are going to rebuild and uh help us kind of meet the housing target. And one of the the like white papers, for lack of a better description, uh suggested that I think there was needed something like six or seven percent of the incoming workforce needed to be in the construction sector to meet current demand and provide supply. And at the moment they were 3.2% of people coming in, uh, which in a way, you know, fits with your anecdote that the recruiter can't get enough people because we need heaps more people to meet the housing demand. But at the same time, the government's also not prioritizing the people that Australia actually needs to fix our current problem. You know, uh it's it's all good and well to get in skilled occupation for sectors that require it, but at the same time, you can't ignore the ones that desperately need it.

SPEAKER_02: 15:10

That's a great stat, Kieran. Uh well done for ripping that one out. Um, because you know, that really flies in the face of the government justifying their immigration policy by saying we're importing construction workers to build these 1.2 million homes that they were but were promising us, and they're um, you know, they're not even achieving their uh their own set targets by half. So yeah, what a what a stat that is.

SPEAKER_01: 15:32

Yeah, I mean the article went on further to say that they also weren't getting the skilled you know builders and labourers uh and you know uh Sparkies and Chippies and whatever else it might be because of the stringent training and accreditation requirements here, a lot of the workers didn't meet them anyway. Yeah, uh so effectively we're getting the a less amount that we need, and we're uh from from what best estimate in the article suggests is we're getting unskilled labour, which I'm sure there's plenty of it here, you know, but that's for a that's for a different discussion, I'm sure. Yeah, indeed. Thinking more domestically then, uh, with everything that's happening, the RBA's kind of pressure, the the money market's suggesting there might be a cut, other central banks making similar decisions. What we given that we're pretty well in transition spring, the property market's been firing for a little while now, uh, post the start of September. How do you see and what's your experience with the market on the ground? Is it actually responding as strongly as you mentioned some pockets are, but as a general sense, is the the market responding well and is there enough supply and demand at the moment?

SPEAKER_02: 16:32

Look, there's a there's certainly enough demand. There's buyers out there that want to buy a house, need to buy a house, will buy a house and will make an offer. Um, every vendor has their own expectations on price, uh, which is which is fair enough. And um sometimes the buyers willingly um come to the vendor's you know minimum price and above. Uh, other times there's a disconnect where we've had a number of campaigns where the vendor will get you know somewhere between six and ten offers, and uh each of the offers are below what the vendor wants. They don't deny the market reaction, um, but they question whether they want to go on and sell the asset at at this point in time. Now I've got one of those on my hands at the moment, and that's driven by not me getting the price wrong because funny enough, the the the offers are well within what I told the vendor to expect. What I didn't know um until I was three quarters of the way through the campaign is before they gave me the job, they interviewed other agents, and another um another agent promised them 20% above. Now they never bought into that figure, but that's where their elevator price expectation came from. Uh so that's that's really interesting out there at the moment. I think I said in the podcast a few weeks ago that with stock being as tight as it was over the winter due to that rain, to get listings, agents were out there overquoting. And um they ended up bringing a lot of stock. Agents brought a lot of stock to the market at once, which was then suddenly all competing with each other for the buyer's attention. And um, if you were someone that won a listing on the basis of overpromising the price to get the sale, you were forced to go back and have a pretty tough conversation with the vendor. Um we we had a sale of a basic uh brick and tile walk-up two-bedroom apartment last week, and we had over 60 parties inspect in three inspections, and we had about eight or nine offers, and it went for 10% above what I told the owner.

SPEAKER_01: 18:34

I I saw that one. My wife and I both commented that that was to us a like I'm assuming that's uh in the in Ashfield there, that was a like a crazy price in our view. Yes, great, you know, great spot, all those things, but it definitely wasn't what I would have expected as a result.

SPEAKER_02: 18:50

Yeah, we've got a lot of apartments and properties at the moment that appeal to first home buyers under these new rules. Um, and some are performing better than others. But what's interesting is the demand is not consistent across the city, Kieran. So there's some sever some suburbs that are oversubscribed with buyer demand from first home buyers, and then there's others where it's like um double check the internet to make sure the time's up. Yeah, yeah. Um, where is everyone? Um so it's just really interesting, is demand doesn't come in a straight line and it doesn't come evenly spread across the city. So, from a vendor's perspective, I think being patient is important if you're not getting the response you want and you are selling an apartment. Sooner or later, if you've got properties like that one we just discussed where the price expectations suddenly exceeds um all expectations by 10%, it's only a matter of time before the underbidders and the other inquiries say, I'm gonna go and hunt around at other different suburbs to see if I can get a bit more value for money. And over time those buyers will spread. We call that the ripple effect, um, if you like, in property, and you will see those buyers spread across the city into those other markets that are probably not as hot at the moment.

SPEAKER_01: 20:02

Purely from uh an experience perspective, if if there are two apartments equally priced, let's say a million dollars, why, in your experience, do you think one in the inner west can attract 60 people on three inspections, and one perhaps in the let's say the inner south, like a Zettland area, for example, why that might not get the same frenzy? Is it tied to the international market or are there some other factors at play you think that influence?

SPEAKER_02: 20:28

I think the subtlety in what I said about that other one was a brick and tile walk-up yeah, unit where not a hundred percent, but the majority, when you say Zettland, most people think oversupply, yeah, a lot of apartments, and modern. And there is um there is caution um amongst uh anything that's been built in the last 15 years, high rise, high strata, elevators, those sorts of things. Right, rightfully so. So I think those well, yeah, I think you've you've got to judge every property on its merits. Um, I understand why buyers are looking to avoid high high strata levies, there's no doubt. Um, but if it's all reflected in the price and it's a good build otherwise, it might be okay. But there's definitely a preference at the moment to walk up 60s, 70s, and 80s built apartment blocks, yeah.

SPEAKER_01: 21:21

Yeah, interesting. And I I wonder then, yeah, how much of the government's incentive will actually impact that part. You know, is that is that result that you guys achieved, which is outstanding? Is that just reflective of what, as you say, it's an inflationary kind of decision by the government to give these incentives? Is this just a a precursor or a likely explanation of what's gonna happen from here on out in that first home buyer pocket?

SPEAKER_02: 21:43

Uh, I think part of it will depend on um the how the rental market performs, what sort of supply comes to market. Um, we always felt that um the market the government were going to try and turbocharge the bottom end of the market to inspire builders and developers to build. Um and if builders start hearing that you know um uh basic units are uh are in boom-like conditions, that might be the impetus there to say, let you know, let the shovel turn, let's uh let's start you know building on those sites that we've been sitting on, but but not building. I think that's what the government would be would would be hoping.

SPEAKER_01: 22:19

Oh, I have no doubt. I mean they they've got to do something to fix their massive shortfall, that's for sure. Look, as we wrap up today, then Peter, I really only have one other question for you. And I know that um we've talked about this a little a little bit recently, but I read an article, I'd love to get your thoughts. Uh it was written by PropTrack, who I think from memory are realestate.com's research arm, uh, and they were suggesting that in fact investors are flying back into the Sydney market. Now, I know you've said that's not your experience, and you've been in you know doing this for a long time, and you you uh have a sense that it's really not reflective. But uh given that they're making such a point of this, I'd just love to get your thoughts on why they why you think they're suggesting that investors are back and whether or not you think the conditions actually suit. Because to me, when I look casually, the yields look terrible. Uh it doesn't look like a great time to invest in a market that's raging. Uh, I'd love to get your thoughts.

SPEAKER_02: 23:11

Yeah, thanks, Kieran. Look, um uh I think there's a real case here of to maximize borrowings, buyers will go to a financial institution and say, I'd like to buy a property and I'm gonna rent it out when I've bought it. Yeah. And we write lots of rental letters for buyers. Um, we uh don't get to see the loan um approvals, of course, but I have no doubt that there's um to to be able to compete in the market and in the environment that you've just outlined there, that a number a number of uh new borrowers are saying to a financial institution, uh, I'm going to rent this property out at settlement, and then they move in. Yeah. And that's distorting the numbers. Just gaming the market. Well, um, they wouldn't see it as gaming the market if I can say that bankers, mortgage brokers will often say to help get your um to help get your uh your loan across the line, this is what I encourage you to do. So they're just kind of taking the advice and not really seeing that they're not being the fact they're not being completely truthful on their loan application is not the greatest sin in the world.

SPEAKER_01: 24:21

Yeah. Oh, look, you don't blame them at the moment, that's for sure. Look, Peter, really great discussion today. I think it's uh, well, we said a few times in the last couple of months that it's going to be an interesting year because there is just so much going on that can influence the the property sector in Sydney. Uh so I certainly look forward to to catching up a few more times before Christmas and see if we can get a bit of a sense of what's happened in 2025. But as always, I really thank you for coming in and talking with our listeners. My pleasure. Thanks, Kieran. Thanks, Peter, and thanks to everyone for listening to Current Market Insights. We look forward to speaking with you next time.

SPEAKER_00: 24:51

Thanks for joining us on the comments, pop comments.