Is the housing downturn over? 0

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Is the housing downturn over? What is going on? Sydney house prices fell 1% last month. Literally double digit price falls if you annualise it. The news is all about the biggest property decline in 40 years. It's a storm out there. Fixed rates are expiring and repayments are nearly doubling. Interest rates are rising. There's apparently 800,000 mortgage prisoners out there. Unemployment, employment is rising. Yet the question remains, is the housing downturn

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over today? I have my best mate, ex treasury economist and wonderful person, Curtis, still with me to discuss this question. Curtis, how are you?

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Yeah, going really well. It's an interesting one and, yeah, I think to start with, why are we bringing this up now? And I think there's some data that we're starting to see which is bringing on this question. We're 24 days into February and in the market that we follow most closely in Sydney, because it's where we are, where Sydney is on track to post an increase in prices month on month for the first time in a year, basically, since the downturn in prices started. 1s And last month alone, like you mentioned, there was a 1% fall, which annualized to double digits. So the Sydney results in February kind of showing a bit of a massive turnaround from a really substantial fall annualized in January to a slight increase, maybe 0.2, pretty small increase. But when you're coming off a 1% fall, a pretty big change in market condition, for

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sure. If you chop this out and put a picture of it, it'll look like a hockey stick. House prices falling from that negative 10% benchmark. When you annualize it to positive, then it'll be a small positive. If it is positive, but neutral level more positive. It looks like a hockey stick. Just a huge jump up in market activity. And we're also seeing this in the latest lead data as to what is going on in the housing market in Sydney and across the country, actually, in many parts. Um, in the auction results every week this weekend that just passed the final clearance rate. So this isn't the preliminary one. That comes out shortly after on Saturday evening, but the final results were at 72%. 2s That is the number one lead indicator for where prices are heading. And it correlates and auction clearance rates and house price data have a very close correlation and it correlates to actually a pretty substantial month to month price increase. So this hockey stick doesn't look like it's going to stop at mutual levels. It looks like, in the short term at least, price the prices for Sydney might be in the green and stay in the green for February and March, even if these clearance rates continue to start the year. Yeah.

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So given I guess this is the first kind of piece of data that might indicate some price rises or at least falls no longer continuing, we thought we kind of go through it and unpack it a little bit. To talk it through because it doesn't necessarily mean everything is. We're at the bottom, and it's all over and it's all uphill from here. But it is some signs that there's some new data heading in a different direction. So it's worth unpacking. Yeah, for sure. Do you want to run through, I guess, unpacking a little bit in terms of what's driving this change

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in prices? Really? I think we've got to look at this a little bit as this is the price activity now we have to explain it backwards. It's a little bit of a surprise that this is actually happening so quickly. 3s In the sense that there's a lot of demand out there at the moment. But why? Is is the question that we're trying to unpack a little bit here. I think the big underlying reason is is actually tied to the rental market. Rents in Sydney asking rents are up nearly 30% year on year. Actual rents are rising very, very sharply and have been rising very, very sharp for a year or so already. So when you have rental amounts up 2030, 40%, that increase in the income of housing. So rent is the income that housing produces. You actually have an increase in the fundamental valuation of housing. So that's probably triggered by migration levels, soaring, low levels of building. At the moment, 1s the rental market is driving a change in valuations. So I think that's the number one reason. It's not that much of a surprise that CoreLogic is reporting green. Now, we sort of suspected that in November December that it could happen in quarter one, and that was on the back of the clearance data that occurred in November December. CoreLogic, we find, is probably, you know, 30, 60 days behind what's going on on the ground. And that clearance data from November December was in the mid 60s, which suggested that there may be green. And now it's bumped up even a little bit further, and those green shoots in the price index have already come up. So rental markets will probably be my number one explanation for what else have we got? Curtis.

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Yeah, well, I think. There's a couple more factors. We have already seen relatively large price falls. So I think there's a bit of demand that's coming online from people that have seen these price falls and are now thinking, okay, this is the time to enter the market. Prices are a little bit more reasonable than they have been previously. People are trying to time the bottom, and I think they're trying kind of getting into that window where now or over the next few months is the time to jump in. That one's a little bit more speculative, but I think the one thing we have seen, particularly in our role is like, first home buyer. First time buyer activity has been up for sure. The 1.5 million option to take the property tax in New South Wales has, I think, made a big difference. Combined with some of the other first home buyer concessions, it's basically meant that we've seen a big increase in demand from first home buyers. I guess looking at the price falls, looking at the concessions they have that make the deposit of the cash requirements significantly easier for them, and that combination basically their time to jump into the market, for

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sure. I think we're also seeing the general sentiment of, I've been looking to buy a property and I've been waiting through 2022. I've been waiting for that price fall to occur, and I've just viewed 2023 as my benchmark reason for jumping back in. So maybe there's a little bit of impatience from people who are looking. Stock levels remain low, so choices out there haven't been that great. We're reopening, I guess, the housing market for the year. So there's that little sugar hit that kicks in in February that some real estate agents are reporting, some friends of ours. 1s There's all of these reasons as to why the downturn is over. I think the key really is from a valuations perspective and assessing whether it's a good time to buy housing and whether we're at equilibrium again in in Sydney. House prices, I think 15% price fall, 30% increase in rentals. You put those two together, yields have just shot up. Yeah. So, yes, yields need to shoot up because the cost of credit also shot up. Another point that I've been mentioning as well is the total value of housing is at $9 trillion. The total value of debt is at $2 trillion. So the rental income of housing kind of applies to that $9 trillion figure. Whether it's you actually living in your home or whether you're renting your home, there's an opportunity cost for those that are actually living in their home. So that 30% rental increase on $9 trillion, it actually outweighs by a distance, the increase in repayments on $2 trillion worth of debt. 2s You know, feedback loop into valuations here is credit, of course, is really, really important to valuations and determining what the fair valuation of something is. But on the ground, the actual value of credit is, you know, 25, 30% LTV of the total value of housing, so maybe that factors into it as well. So rental rises are actually much bigger than we probably give

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credit for. Yeah, yeah. And I think one other factor that we haven't mentioned so far is migration. So migration levels are through the roof, 1s probably the first time post COVID that we're starting to post very, very significant incoming migration levels. And I think that definitely pushes a bit of demand up through as

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well. Yes, that's true. So that's probably feeding through to that rental market, and those rental markets are feeding into the housing market. So we just talked about this earlier, like, you are now participating in the rental market or have just found a house that you're going to be renting in. 1s One thing that we're hearing a lot from real estate agents is there's some buyers that are buying housing just purely because they rent to go rent a home and they're just like, Nah, I don't want to go through this down. So just it's just too difficult at the moment. Can you shed some light as to your experience?

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I think that's probably more anecdotal than than anything else, but no, that was almost my experience, where I was almost particularly in Sydney and in the inner suburbs, where I was looking, there's queues of 40, 50 people to get a rental

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property. So after a few of those, I was kind of like, I think I'll just pay my deposit and purchase, I can't be bothered. But it wasn't long after that I actually found a place, so it all worked out. But yeah, I think if you've got that, if you've like, I guess for me, because I'm no longer a first home buyer. I don't have access to those concessions or anything like that. But if I had them, there was no way I'm queuing up buying 30 people for a rental. If I was

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if I had access to those concessions again, no chance. Yeah,

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I think that's a big part of it as well, so that makes sense a little bit. My wife and I, we bought our owner Occupier a couple of years ago and renting actually suited us at that time. We're in the middle of building a home that we plan on living in. So renting suited us at the time, but then it just didn't suit our family arrangements, so we decided to buy at the time and it was during the COVID sort of disruption and there are a lot of expats coming back and we needed a family home for our circumstances and renting was just really, really difficult. So we ended up buying instead of renting and changing our plans. So perhaps there's an element of that. So it's all coming from this rental market and just the strength of this. 2s The rental market in general and the friction in being able to find a home that suits that's causing a little bit more demand for housing, potentially. That's some of it, too. It's very hard to measure that because it's behavioral.

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But I think, you know, in our business, we see some of that come through in the first home buyer demand. It's often 1s those renters who are first potential first home buyers that, you know, their experience in finding a rent rental property, or even if they have a rental property, copying the rental increase basically 1s makes it more attractive to buy. That relative equation has shifted a little

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bit. Yeah, for sure. For first time buyers listing out there the sub $900,000 level as well. So there's two benchmark levels that are kind of changing the sub $900,000 level. You could really buy now with the $45,000 deposit. So that's 5% of $900,000. That's $45,000. A couple of $1,000 for incidentals, you get a 5% deposit. Get on. That the FH dls. So no, no mortgage insurance, no stamp duty. You opt for the use of the property tax. That's crazy. You're buying a $900,000 house for $45,000 capital. So it's great leveraging potential if you're just trying to find a home to live in and build up an asset portfolio. So there's a demand in that sort of segment that's quite attractive. Usually, $45,000 wouldn't get you very far, but now it gets you a $900,000 house in Sydney to live in,

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actually, a budget you can work with in Sydney.

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Yeah, you can buy a two bedroom apartment in most parts of Sydney. You can't buy everywhere, but you can buy an apartment by housing out west as well. So there are options,

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but yeah, previously, before the Flhds, we were looking at 650 for your stamp duty exemption. And in Sydney, for a lot of people, that didn't really provide attractive options for housing, whereas, like now at 900, you got a bit more room. That kind of makes all the

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difference. Yeah. And then there's the big one, which is the $1.5 million amount. You typically need a fair bit more capital here. Most of our buyers at that sort of level aren't buying with a 5% deposit. But there's a lot of people access to mortgage insurance waivers, can get in with the 10% deposit. So many professions qualify now. So you could be purchasing for 1.5 million with $150,000 worth of capital. The time to save, I guess, how difficult is it to actually go and buy for 1.5 million? And how long does it take to save the deposit there? Saving $150,000 is much easier than saving $350,000. And typically, to be able to borrow 1s 1.5 million that you want for that purchase price, or 90% or 80% of it, you'll be on a fairly good income as well. That probably translates to a 250,000 plus income household income. So 1s those. 1s Those demand segments exist. There's a lot of people in Sydney that fit that profile and those are actively looking a little bit more now because of these grants that are there and the short term incentive boosts that exist, that it's just lifting up demand a little bit. We've noticed that already to begin the year. Yeah, for

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sure. So if we take a bit of a step back and have a look at a broader assessment, what are your thoughts? I know we've mentioned that there's a bit more demand and the February numbers are a bit more promising, but yeah. What's your overall sentiment?

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That's good. So I think it's way too early to make the call the housing downturn is over. We can't make that call with any confidence at the moment. And we did do this in May 2019. I'm on a podcast with Smart Property Investment, and I use the word boom and I recall people just being like, wow, it's spruce up to saying the market is about to boom. But the reason why I said it is, it was the weekend after Scott Morrison won the election. Tax changes were wiped. Borrowing power changes had just been announced by Opera. Rate cuts had kicked in the following month, there were tax cuts that just happened in stage two of the tax cut plans. Those are all these things that changed the financial conditions underlying buying a home, and it just completely changed all the factors, the debt to income ratio. So this is just like, what's your gross income versus multiply it to work out where you can kind of borrow went from like six to eight at the time. That's a pretty substantial improvement in borrowing capacities. We don't have any of those push factors now, sure, we have some underlying drivers of demand for housing and some good fundamentals for housing in general, but credit conditions are still like our platforms. Yeah, yeah. The tightest they've ever been, and they're getting tighter. And this is the number one reason why I can't say that the downturn is over, is. It's actually a little bit of a surprise like conditions probably point to financial conditions probably point to a little bit more to go with price falls. The reason for that is it's from our last podcast and we've got more information coming out as well. The RBA have changed their tune. Yeah, that's clear. As clear as day now. You know, we're trying to read the first message on February right after the February Rate call and with the podcast a couple of weeks ago we're trying to read between the lines as to what they were saying but now what they are saying, what they mean is absolutely crystal clear. They've taken a hawkish pivot. They've made it absolutely clear they will do what it takes to beat inflation and even further, they've made it clear that collateral damage be damned, like businesses be damned, households be damned. Sure we feel bad about this but that's not our job. Our job is to get inflation down. The cost of inflation sticking around is extremely dangerous for our economy and we will do what it takes to beat it. The minutes that came out a couple of days ago, they discussed either a 25 bit or a 50 bit increase. And my read of the minutes is the reason why they didn't do the 50 bit increase was largely because they've already pivoted to. And the communication when they pivoted down to 25 bits and they, like, sounded a little bit like maybe we made a mistake there. Maybe we should have kept 50 bits going in November and possibly even December rather than now, and pivoting backwards again and scaring everyone. 1s That's a pretty big change in communications and the markets just seem to take it in stride or either doesn't know about it or it's just excluded it altogether.

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Yeah, and I think definitely the minutes revealed that that was really the choice they were making. There was no discussion of potentially holding it was 25 or 50 and they went for the more conservative route, I guess at 25 but yes, like 50 was on the table and zero wasn't on

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the table. 2s Filipo was in Parliament last week for like 6 hours. Did you catch the. 2s The sitting. Did you watch? Yeah,

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yeah, but not the whole 6 hours. My node level is not quite that high, but I caught a lot of it, so my node level is relatively high. My

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wife was looking at me over the weekend. I think I was watching cricket. It was a cricket that occurred over this weekend. And Steve Smith, my favorite batsman, that might be controversial, but he loves the shadow bat. And what I was doing was listening to, to the Senate estimates, and these senators can be very aggressive. And for a little period, I was shadow Philip, lowing it and trying to answer these questions. Just he paused and tried to answer the question as to what the senators were asking. And I found myself being very aggressive to the Senators, being like, wow, that's a stupid question. Like, come on, you should know your homework. What are you saying? What are you insinuating? And I thought he handled it with grace, with a lot of communication, very clear. And I was very surprised by the quality and how difficult that job is to actually sit there and be grilled by senators who are just literally baseball batting, asking for your resignation. Essentially, yeah. And the key thing here was there was so much information, like 6 hours of Philip Larry speaking and talking and answering questions. He gives a lot away. And 2s the thing that was so clear was. 1s The economy be damned. Like, inflation must go what I got out of it, and inflation must go in an urgent way, because he talked about psychology and how inflation could seep through the economy and if we don't beat it quickly, then pricing behavior change. Yeah, yeah, we're seeing that. I understand that as business owners, when you see inflation around, you probably have more scope to change your prices and you're able to it and you want to. So we're seeing that play out. And 1s he talked about preserving the gains in employment and it's desirable to go and do that and try and keep the economy on an even kill. But there's a clear strength in message. Inflation must be beaten. So that is scary because we might have inflation in quarter one. That data coming out, it might be a bit sticky, it might take a little bit of time to come down. And the forecast in the statement of monetary policy, the benchmarks that he set was inflation this year at a little bit about 4%. So the quarter on quarter inflation needs to be in and around that 1% level. I don't know if that's going to be met. That needs inflation to half. The last reading, to this reading, 1s he needs a big steep drop in inflation. So that's a bit scary as well. It

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is a bit scary, but it was far less traumatic than that second innings with the cricket. 3s There's nothing in the economic news, nothing the Reserve Bank governor can say is

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worse than that. That was like kicking my guts. Yeah, definitely. To any Indian cricket fans listening, congratulations and good on you 3s to see as an Aussie cricket supporter, but 1s congrats. That was wonderful to see for the Indian cricket fans out there, but yeah. Anyway, shall we carry on? So my summary is, it's too early to say that the housing downturn is over. There are these downside factors and the RBA. 2s Changing their tone on inflation and their action and market outcomes of where interest rates will head. I think our base case we said two to three rises was our base case. I think I'm going to push it up even further after hearing all these communications. Like all the other economists, I think they might I think I think the base case might be 4% now or 4.1% for where the interest rate is heads up. The statement of monetary policy, sorry, the minutes that came out used 3.75% as what they need the rate to be to get these inflation outcomes as well. So I think the summary of that is basically further tightening of lending conditions over the coming months, likely based on what the RBA's expectations are, an increase in unemployment, all of which lead to a weakening of demand for housing and should all other things being equal, result in further price falls or prices moving backwards. So that's kind of the summary of the broader economic environment and how that's expected to infer show

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prices over the next month. But then we do have the data in February that's heading in the other direction. So I kind of agree with you that it's too early to call and a lot of it will depend on what decisions the RBA take over the next three, four meetings.

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Yeah, for sure. So what are all our conversations with borrowers that we're having? What are they telling us? 3s What are you finding in your conversations with yeah,

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so 1s anecdotally we have good access to the market basically through running our business. So demand is strong is what I would say. There are lots of borrowers who are looking to get into the market and purchase, I'd say on both fronts. First, home buyers and owner occupiers, but also investors who are coming to us. A lot of our investor clients are coming to us being like, look, let's redo the borrowing capacity numbers. A lot of time does work but nevertheless they're coming to us being like we've identified that now is the time, now is a good time to purchase, let's see if we can make it work. For sure. So I think on the demand side people want to get their foot in the door 1s but yeah, on the flip side there are borrowers that we're speaking to that are looking at their overall repayment burden basically now at higher interest rates, particularly as fixed rates come off. And we are having more conversations with people who are looking at do they have to sell in order to, I guess, maintain their cash flow. So yeah, it's really two sides of the coin, I think.

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Yeah, for sure. I think that investor story is really interesting. There's changes in how an investor can participate in the market. Now all these lending conditions mean that investment strategy is also changing the concept of being on a fairly average sort of income. So a household income, 150,000 for example, between two people that will cover the bills and and be enough to, you know, have a fairly comfortable life. But that sort of income and investing and owning a home without existing substantial equity, it barely works at the moment, particularly in Sydney. So just trying to buy an investment property will probably mean that you can't buy anything else and trying to buy an owner occupier property, you'd be using all of your borrowing capacity. So we're finding that actually being an investor is trickier at the moment. So investment opportunities will the window is closing on the people who can actually do this now it needs to be people who have fairly good incomes or fairly good equity positions and advanced sort of investors or advanced home buyers tapping into their equity to go purchase. We're finding that's the case at the moment that different credit environments, if you had more modest set of incomes you could purchase an investment property, maybe buy your own occupier. But now it's a little bit of an either or proposition and the reason why I mentioned this is because it forces selling. So if you have an investment property and you have your own home, and you just want to upgrade your home, or you want to make some even small little pivots, you often have to sell a property to be able to do something. And most people choose to sell their investment property to do that, especially after all the equity gains that have occurred over the last five to ten years as well. That's some market level things that we're seeing. Conversations about selling. And we talked about this in the eleven predictions the investor sell off, this is it sort of and how it's speeding through

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and yeah, we are definitely having more of those conversations with people consolidating their portfolio around what their, I guess, primary objectives are rather than any secondary or tertiary objectives. So yeah, having to reallocate the limited borrowing power they have to what they really want, which like you say, if they want to upgrade the owner of the fire it can mean you're, you know, selling off the investment property to reduce the debt in order to make that happen. Whereas three or four years ago, 1s different lending environment, that might not have been a decision you had to

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make. Yeah, for sure. You just touched on the key point there scarcity of borrowing power. So treat it, and especially in these sort of credit environment, treat it as a scarce sort of resource that you might have if you're an investor and you're thinking of investing, your borrowing power is extremely scarce at the moment. You won't be able to go buy properties to infinity. You'll have a limited amount of borrowing potential 2s that's tied to your incomes and when you treat it as scarce it can change investment strategies a little bit in my mind. It pushes off decisions away from high yielding, low growth sort of assets to assets that focusing on growth over a period of time because that's where capital gains will be made and that's kind of what you want from your property portfolio. So obviously holding power is a bit difficult at the moment too. Yeah, and I think it also pushes a lot of the conversations we have are people looking to grow a portfolio over time and trying to map out multiple purchases. And I think the scarcity of borrowing power means it's put an increasing focus on maximizing your first purchase or the next purchase that you're going to make in terms of the quality of asset that you're going to buy. Because of that scarcity of borrowing power, there's less value in trying to plan or trying to two, three, four purchases out because it's harder and harder to get there and the environment is likely to tighten further in the short term. So a lot of the conversations I'm having is kind of advising people that look, you're not going to buy three yeah, you really need to make this next one. Just focus on doing as good a job and making the best decision possible on that

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and don't try to compromise that for future potential purchases because that's becoming increasingly tenuous. 1s You don't essentially over complicate it and then compromise when if you just go all in on the next one, get the best asset you can and then kind of take your next

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steps from there. Yeah, for sure. I think with the rise of buyers agents, there's a lot of buyers agents sort of approach which is transactions based. So they often promote strategies where you buy. There's a guy on YouTube saying, buy 14 properties at 250,000 Apop. 1s That used to work. It used to be a fairly creative way to maximize your potential, build your portfolio as much as possible. But. Credit environments have changed and what's realistic is different. So 1s when you're on normal sort of income, planning around having one property or building around your scarce borrowing capacity is probably a more prudent approach. And this gives rise to focusing in on quality rather than short term hot spot ink strategies. Picking an area that's going to do well in the next twelve months and then using that equity go by again, 1s using that equity buy again step might not be realistic. Maybe you want to think beyond the short term benefits and think more of a 510 year plan and be like, look, is this going to do well? But yeah, that's tricky to ascertain.

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Yeah. So how about we sum it up basically, what's your kind of conclusion of what we've spoken about today? We've got some data in for February showing Sydney potentially having some price rises. We've also got a pretty decent amount of jawboning from the RBA.

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They jawboned me into believing them. So it's working. My conclusion is that Sydney is doing really well in February and March. It's a surprise everyone will be talking about it very soon, probably be a week or two after this podcast gets released. Media will pick it all up. That's true, the market is doing really well, but it's way too early to say definitively that this housing downturn is over. We talked about the number of reasons why with extremely tight credit conditions and with the risk of what these credit conditions are due to the economy and due to household, there's uncertainty as to whether there's a double dip, I guess, if you want to call it. So it's way too early to say that this housing downturn is over. For me to say that and feel comfortable in saying that. I think there needs to be a change in financial conditions, either rate wise or April wise, something that actually creates a push factor for housing demand. So yeah, that's our summary. Thank you all for joining us again, and if you have any questions, jump on Australian Property talk. Our ebook is There Eleven Property Predictions and you can also reach out to us directly through that website and see you all next week.