11 Predictions for the Aussie Property Market in 2023

In this episode, we go through 11 Property Market Predictions we expect in 2023.  

By the end of this, you'll know:  

• Why we are currently in the tightest financial conditions in nearly a decade in Australia.
• How regulators may change interest rates and lending assessments later in the year.
• Why inflation has PEAKED as at January 2023.
• Which investor pockets of Australia are more susceptible to volatile price changes.
• Why First Home Buyers will be back in the market in NSW.

Combining all of the above, we make some early insights to the next phase of lending and property markets in Australia.

We have released an E-Book with all the charts behind these predictions - available for download on the Australian Property Talk website in the links below (www.australianpropertytalk.com.au)

Reach out to us at www.australianpropertytalk.com.au

Transcript

In this episode, we make ten property market predictions for 2023. 2022 was a wild year for property. A year of extremes. Rates, rents and replacements, all off the charts, all at the same time. We believe 2022 was an anomaly. That level of volatility and change is unlikely to occur again in 2023, and possibly for a long, long time. But one underlying premise remains what happens to credit and debt markets will drive what happens to property markets? In this episode, we'll cover where the debt market is at, what we think will happen to house prices, what areas may be more at risk and exposed than others, what is likely to happen in the economy, and pinpoint exactly what to look out for, to know when the bottom for house prices sets in. This might just be the most exciting episode we've ever done. We're releasing this content into an ebook with lots of cool charts being presented, along with the release of our website, Australian Property Tour. While on the topic, huge thank you to all of you and our audience. We're approaching nearly 1000 downloads a week. It's fast becoming one of the main property podcasts in Australia. Curtis and I are just two extras economists having a chat, best friends in our office, and we are talking about what we love, and we love the support that we're getting from all of you. So a big, big thank you. Curtis, how are you? Yeah, 

U2

going really well and yeah, I echo that. It's kind of cool that anyone's listening to this, really. It's the chat that we did have by ourselves. Anyway, so, yeah, thanks to everyone. But, yeah, going really well. I love making predictions as well, so it's more fun than talking about stuff that's kind of obvious and has happened. It's more fun to try and speculate on what the future 

U1

holds. Yeah, definitely. So, a little bit of background. I spurt lots of opinions out there, so people who have followed me on property chat or LinkedIn will know this. And I'm starting the year putting my neck out, putting out ten things that we think will happen to property markets this year. Obviously, there's a lot of uncertainty to what we say, but we figured we'd put on record our opinion and share that with you and hope it helps inspire, educate and inform some decision making on your side. So, yeah, let's kick things off. Curtis, do you want to go through our first prediction? The debt cycle is about to hit its bottom, either now or in quarter 120 23. 1.3s

U2

Yeah, so the debt cycle is a little bit of, I guess, similar to the business cycle, which is what's probably more commonly put out there or referred to. But basically the debt markets, similar to the economy, go through expansionary and contractionary phases. So more credit becomes available in an expansionary phase and then contractionary phase if less credit becomes available. So essentially 1.1s our prediction is that we have been through a contractionary phase as a result of interest rates rising and that is likely. Or our prediction is that's going to come to the bottom of that phase where it's kind of the tightest point in quarter one or quarter 220 23. 1.4s That's kind of a bit of an explanation of it. I mean, we've seen 3% of freight rises, 25% cuts in borrowing power and those are the types of things that reduce the amount of credit which is to fit, I guess, what the RBA are trying to do in terms of inflation, it's necessary, but at some point it will hit the bottom basically. And yeah, we kind of see that we're getting close to that point, I guess. Yeah. 

U1

So a couple of additions to that is what's driving this bottom call is the interest rate cycle will peak at some point this year, we believe. So 1.6s with that in mind, borrowing power reductions will also peak off and level off. So that will stop occurring and effectively, we'll be at the bottom of that debt cycle conditions. And we're already seeing this play out in real life. So what we're seeing is new lending volumes are nearly 20% off their 2021 highs and we also know if you track debt conditions and property prices, we kind of have a really close correlation with new lending volumes and property price 1.1s changes. So it's generally got a six month lag. CBA has got this beautiful chart that just shows a really tight correlation between those applying for loans and what's happening to house prices. So our first prediction is the bottom is about to set in to debt conditions. That does not mean prices will bottom amount straight away, generally lags debt conditions by a few months. But we're expecting the debt condition bottom to be. Pretty much now. 

U2

Yeah. And I think that correlation between debt conditions and property prices, or asset prices, really debt funded assets is true. And like you mentioned, there is a bit of a lag. So the bottom of the debt market is probably a leading indicator of the bottom of the asset market or the property market. So, yeah, that's definitely something to look out for and to track. Obviously, what happens with inflation and the economy will kind of dictate when that bottom occurs. But I think from our perspective, we're starting to see signs that that might be, I guess, sooner rather than later, in the sense that maybe the first half of this year rather than continuing to tighten over the next 18 months or two 

U1

years. Yeah, definitely. She'll get onto prediction number two here. 1s

U2

Yeah. So this one around inflation. Now, I've seen on my LinkedIn today that you've been picked up on LinkedIn News with your thoughts on inflation as we've just got some new data that we did some analysis on. So yeah. Do you want to talk us through inflation, your predictions on inflation? Yeah, sure. 

U1

So, inflation data, it's the 25 January when we're recording this inflation data has just come out for Cord for 2022. And the call we're making is this is the peak in the headline inflation rate in this period. It's also the peak in the headline inflation rate in decades. It's just under 8%, which is roughly what the RBA forecasted and have in their forecasts. The reason why we're suggesting that this is the peak isn't so much because inflation is going away, it's more of a data measuring issue. So 1s what we report is a headline inflation figure. It's really just the addition of four quarterly numbers. And by the time the next data release comes out in April, we'll be removing the largest quarterly increase that was four quarters ago, which is quarter one 2022. That will be removed. That was a 2.1% print that will be removed 1.2s and it will be replaced with whatever is happening on the ground at the moment. So we'll need prices to be running really, really hot this quarter for inflation to actually rise above the current peak. So that's why we're predicting that the inflation peak peak may have just set in as a matter of hours ago. So if you go on the ABS website and you take a quick look at what they say on inflation there just on the homepage, that peak may have just kicked in. I'm pretty sure it's on the RBA website as well. 1.8s That's the main prediction that we've got there. It's just come out. So it's hot news. Yeah. 

U2

And I think logically that does make a little bit of sense as well. We've been through a large increase in interest rates to slow inflation, so it kind of makes sense that the largest percentage change in prices should have occurred historically, now that those RBA changes are feeding through the economy. So definitely doesn't mean prices aren't rising, it just means that they're not rising as quickly as they were, say, twelve months ago. Yeah, 

U1

exactly. And inflation is a measure of a rate of change in prices. So the base that we're using now is the December so the 1 January 2023 price level, which is already 8% higher than the 1 January 2022 price level. So with that measurement factor in, the base is higher. So that makes the inflation rate effectively be that much harder to maintain at this level. So that's another big reason the base effect. And we're seeing this globally in and around the world who are probably six to twelve months ahead of us on this inflation challenge. We're seeing inflation rates come down in those countries too. 1.1s Albeit from very high rates. Yeah. 

U2

And that doesn't mean that there might not be any more rate rises or things like that, but I guess it's another indicator that the tightening cycle is probably coming. We're getting towards the end of the tightening cycle, I guess, as the rate of change gets lower and lower. 

U1

Yeah. We'll touch on that in later predictions. But yes. What about number three? This one is about prices, so we are predicting this one's not that great of a call or even that big of a deal. The largest property decline on record in 40 years will be reached maybe in quarter one or quarter two this year. So this is a national price level change, driven by Sydney and Melbourne, but national indices, and we're also 1.3s tossing up so this is more of a 50 50 call. So we don't know where this one will land, but a 50 50 call that for the first time in 40 years will record two consecutive years of negative price growth. So. 1.7s Did you know that? Did you know that house prices have hadn't moved backwards twice? 

U2

No. To be honest, not until we did the research for this. I just kind of assumed that there would be two years of backwards, two years of negative growth somewhere. Yeah. But yeah, it's kind of a little bit surprising when you look at it and you're like, wow, they're actually yeah, it only ever goes backwards temporarily. Very temporarily. 

U1

Yeah. Yeah, I thought I thought that when I first saw the chat. I'm like, oh, really? So, you know, just lay of the land at the moment. So house prices have fallen as at the beginning of 2023, your house prices nationally have fallen nearly 9%. 8.6% nationally, while the total largest house price drawdown that has occurred was in 2017 to 2019. So not that long ago that was opera. Assic living expense issues and lending issues at the time. Not driven by interest rates, but lending supply issues. At the time we've touched on that in a different pod, that drawdown was 10.2%. So we're actually not very far away from achieving, like hitting that. Yeah, not a good record to pass, but, you know, I'm pretty sure we'll eclipse that because the pace of price falls are still going at a decent enough clip. I think it was 0.7% this month. So it only take a few months to eclipse that. What do you think? 

U2

Yeah, I think we're going to stay all past that, really. And I think it kind of just reflects the reality as well. It probably gets a little bit more pressed talking about when's the top of interest rates, some of the more positive stories about maybe conditions will improve going forward. But then there is just the reality that we've been through one of the most drastic tightening cycles and the result of that is going to be probably the largest fall in house prices and the first time it's happened for two years in a row. So in some sense, that's the balance of it. That's the reality of what's happened and I think that's kind of the balance of 

U1

it. That makes sense. Let's get to the nugget of this episode. Curtis, I love this prediction. This one is something that I thought about. Not sure if it's going to hold true or not, but let's get to this one. So what I think is going to happen, we're running calculators day in, day out with a lot of investor clients and what we're seeing is they're more stuck than other borrower types, so they are finding it more difficult to refinance. They have been hit with the biggest borrowing power changes than everyone else. So. 1.1s What we're calling is this is the year, probably one of the biggest years of the investor sell off. So typically it's all about investors purchasing property. We're mortgage brokers, we deal with buyer's agents. That's kind of what bread and butter is. But what we're seeing is the opposite end of that, the investor sell off. So I think this time around, portfolio investors will be looking to adjust their portfolios and deleverage by selling their properties. It goes against one of the 1.3s anecdotes that people have when they think of property investing is never sell. So I don't really prescribe to that theory, but it is a theory that people have. It goes against that because we're going to suggest that finance markets are going to drive a bit of an investor sell off. What do you think about that idea, Curtis? 

U2

Yes, I think this is one of the more interesting ones and it's really just digging a little bit deeper into the fact that the changes to borrowing power and interest rates. 1.7s Doesn't affect everyone equally, both from a factual standpoint in terms of investors have a much larger reduction in borrowing power or people who hold debt are hit much harder by the change in borrowing powers and interest rates than people that hold less debt or no debt. So that's kind of factual. But then I think there's also the psychological element of it, that investors, investors might be more willing to liquidate assets that they kind of are no longer interested in holding. It's a bit of a different psychological proposition for an investor to let go of an investment asset interstate than it is for an owner occupier to push out of their home. So I think a combination of those two factors mean that investors, like you say, are going to be in a position where it's harder for them to potentially refinance. They might not have the options to get their interest rate down when their fixed period comes off or whatever it may be, and their behavioral response might be more inclined to go and look, rather than deal with these higher interest rates, I've got the option to sell and just 1.2s get out of this position and move on. Sure. I think on average, they're much more likely to take that option than, say, an owner occupier. They're going to find a way to kind of get through it. Yeah, 

U1

definitely. So I've got relevant experience in that. I know my mum and dad, when we lost our home, they did everything they can to keep it. While investment decisions, it's kind of based around the numbers. It's far less emotional, you're far less attached to these investment properties that you have. So that may be part of the story here, that behavioral element that you just talked about. 

U2

Yeah. And I think we see that in, like, in terms of our predictions, we see that in what areas are going to see the biggest price changes, biggest price falls and I guess what types of dwellings. So I guess our thoughts are for 2023, that the areas that hold, you know, are more investor. 1.4s Owned rather than owner occupied owned. And the dwelling types that are more investor owned, they're the ones that could see the bigger reduction in values just as a result of that difference between how investors and owner occupiers are going to respond to these changes. 

U1

Yeah, that's very true. And part of this story is when this rate rising cycle began eight months ago, owner occupier type dwellings actually fell in value the most to begin with. So if you look at charts of Sydney, you'll see that the eastern suburbs, Manly, the Inner North, the Inner South, Inner East, all these areas, the $2 million plus medians, really, those areas got hit significantly. So it was debunking a little bit of a myth that interest, that these areas are not interest rate sensitive. That was fairly obvious, really, of bigger mortgages. People in these areas have bigger mortgages, so they were more sensitive to interest rate changes, big changes in the underlying valuation from doubling the interest rate there. So that's already happened. So these areas have already tapered off 15 odd percent, roughly, in that vicinity. But the outer areas, there's a lot more new dwellings there, there's a lot more family homes there. Those areas also grew later in the cycle, so they were still rising in 2022, at the beginning of 2022, so they were about six months behind in the cycle, so they can attach the slight delay in prices falling as well. So I expect there's a chart that shows how different areas of Sydney have fallen and risen differently. I suspect those outer areas will have larger proportional price falls versus those inner areas. And part of the reason for that is those inner areas have already had their price fall, and now they're becoming more attractive. They're great owneroxpire locations. People want to live there. It's always going to be the case. They're attracting demand again because their price yeah, exactly. And rental rises in these areas have been enormous, too. So equilibrium is being reset in these areas. While these investor market locations seem a little bit frothy at the moment, so I suspect there will be price movements in those areas, particularly out of Sydney and areas in Melbourne that exhibit the same profile. 

U2

So probably Brisbane, too. And that's, I think, something important to consider when you're making decisions, really, is it's not just about, I guess, the very macro high level direction of the economy and debt markets and house prices. It's also drilling down into the specific asset types and suburbs and the breakdowns of them, because the results in terms of the change in value can be fairly different. 

U1

Yeah, definitely. I'm going to add one more here. So this is going to be eleven predictions, because we didn't and have this one I'm making this one on the fly here. This is a market level change. It needs. South Wales had that first home buyer land tax choice come out on 16 January, so last week. 1.1s And what that means is, if you're a first time buyer, you don't have to pay stamp duty anymore for transactions from 650 or onwards all the way up to 1.5 million. So these areas, as a first time buyer, you have this situation where you're looking at your capital position, you're seeing rents go up drastically and you're probably renting at the moment, or living with mom and dad, you're seeing the amount of capital you need to produce reduce significantly with a whole range of incentives out there. We're doing a loan for someone right now buying just under 900, and they're buying it with $45,000 in capital. They've got a 5% deposit under the Fhdls. So the first home deposit loan scheme, the national scheme that allows no LMI on 95% mortgages, and now on top of it, the state isn't including any stamp duty on that transaction. So their deposit requirement has just completely changed for a $900,000 purchase from upwards of $180,000 a couple of years ago to $45,000 today. So we're going to see first home buyer activity rise sharply. So we may see owner Occupier type because they've got to live in the home. So owner Occupier type areas, a sub 1.5 million, do fairly well, particularly if they've already fallen, because now we have a structural sort of demand change that's going to come in. And a lot of people have been waiting in the wings who cannot provide, who haven't been able to save those deposits, are now able to. So there's a demand influx coming in, hitting this market. So, yeah, this is Midway prediction, market prediction that's just hit New South Wales. Specific. 

U2

Yeah. All right, let's jump on to the next prediction. This one relatively close to our hearts working in this industry day and day out. So, assessment rates and I guess macro prudential policy, but basically APRA are going to have a look at the rules for borrowing powers and make some adjustments to make borrowing power easier for people. So, yeah, talk through 

U1

that. Yeah, definitely. So we touched on this in the last episode about the tightest financial conditions. So, effectively, borrowing powers are down 25% off their peak. The main reason for that is interest rates have gone up, but another reason is the buffer that APRA set is currently set at 3%. So what that means is, when you go get a mortgage, if you're getting an owner occupying mortgage, you're probably paying around 4.8% at the moment, 4.8 to five in that vicinity. Banks are assessing you at roughly 7.8% to 8% and seeing whether you can meet repayments if the interest rate was that high. So they're adding 3% to the actual interest rate to determine and your expense level, and then determining how much you can borrow based on that new 8%. Interest rate, that 3% level is a little bit temporary. We've typically been at 2%, but on the back of the price boom that occurred in 20, 19, 20, 20, 20, 21, they progressively dialed up that buffer to 3% to slow down the amount of lending that went to people who had what we termed skinny buffers. So those seeking to borrow the absolute maximum, at some point in October 2021, we had nearly one quarter of loans go to borrowers who had a DTI above six. So debt to income ratio above six, that's when that 3% temporary buffer kicked in. And APRA noted in their communication that it was temporary at the time and it was subject to change and review. 1.3s Now interest rates are much higher, unlikely to get to seven, 8%. Markets are pricing in rate cuts at some point in 2024, 2025. So is there necessarily a need to have such a high buffer when credit is going much slower and no one is getting a DTI above six, so there's no need for this buffer to be so high. So at some point, we suspect this buffer will come back down. Curtis, can you run me through? We've done some moddling on this. I'm pretty sure you did the work here. So do you mind running me through what a 2% buffer will do to borrowing capacities and how much it will boost it by? Yeah, 

U2

so if you go from the 3% buffer that's there now to the 2% buffer, that's going to get you a roughly 10% boost in borrowing powers just by itself. And I think to tie it in with one of our earlier predictions when we get to the bottom of the debt cycle and regulators are looking for ways to encourage more lending. So we've hit the bottom and we're trying to get more lending through. This is kind of one of the first things to go in terms of one of the easy changes that you can make without needing to make broader economic changes. It's one of the things that's within APRA's remit to make a tweak like this, to encourage things in the direction they want. And yeah, like I said, if they change it from three to two, that kind of gets a 10% boost in borrowing power, which would encourage some more lending. If we're at the very bottom of the cycle and we're looking to push some more lending through to grow things a little bit, 

U1

for sure. So I think APRA, the way I see this is APRA, the RBA, treasury and I believe assets sit on what we call the Council of Financial Regulators. So this is where all the powers that be that set the settings for policy that impact housing markets and debt markets and the economy in general. They come in and they sit together, I don't know, regularly, once a month, I assume, 1.5s they sit and they make decisions together or they consult each other on the decisions that they're making. So I imagine APRA sitting there being like this 3% buffer. We had it because we had a high DTA. High DTI lending. We don't have that anymore. Do we really need that? I'm going to change it. Maybe that's even what they're saying. But you know, I think their hands are a little bit tired because the RBA is sitting there and being like, no, we're trying to slow the economy down. Don't go offering people 10% boost to borrowing power because it defies the point of some of these interest rate rises. Let's clamp down and keep clamping and then eventually we'll free this up. So I suspect this change will occur at some point, point in later 2023, just because APRA's hands are tied. Even if it makes sense to do now, the economy, the broader settings probably rely on them to be a little bit prudent with this. Yeah, 

U2

but it's probably something that we see happening because it's one of the tools that is relatively easy to implement and it's relatively well targeted. So if they're looking to increase the flow of debt, then this is something that it's easier for April to make a change like this than it is to kind of ask the RBA to cut rates, which has broader economic impacts. So it's something that we see that when you get to the bottom of the debt cycle, that's probably a fairly obvious or conversational direction for APRA to head in as they're looking to expand the flow of 

U1

credit, for sure. Let's get on to point number seven that we've got here. So this is 

U2

about six and six. I know you threw me 

U1

out, I had a bonus room. 2.9s This one is about the fixed rate cliff. Got to love media terms. They got to make everything sound like ominous and scary and fearful. But do you mind running through what the issue is, Curtis, and what it means? 1s

U2

Yeah, so I guess it's relatively self explanatory, if not quite as dramatic as made to sound, but basically there's a large amount of fixed rate loans that are coming up to their expiry in the next, say twelve months. So normally, like, just if you take a general average, fixed rate loans might be about 15% of mortgages just historically. But over the last couple of years where we've seen rates 1.99% kind of fixed rate offers around there, it's been more popular for people to take it up. So that's gone up to kind of like 40 ish percent of the lending market is people who have taken up these fixed rates huge and they are all coming up for expiry at, I guess, different points, but either have just come up to their expiry now or expiring over 2023 and 2024. So those people, there's a large segment of people who are just going to feel the impact of those rate rises when their fixed periods expire and they roll on to, you know, the much, much higher variable rate that's applicable, you know, at the time. So for example, CBA have released some data on this. They're in a position where maybe fix. 50% of all their fixed rate loans are going to come up for expiry at some point this year. So, you know, they're a massive bank with a massive debt book and 50% of what's fixed is coming up in 2023. So that just kind of shows you that there is a large percentage of people who are going to have to adjust their, I guess, spending behaviors, those things, over the course of 2023 as they feel the impact. 

U1

Yeah. You're in this boat as well, Curtis, right? Yeah, 

U2

I'm actually on the CBO as well. So technically I'm one of these people who are coming up in 2023. 

U1

You might splitting it out for me. So did they narrow it down of the 50%? When are they happening? Do you have any sort of insight on that? Yeah, 

U2

so it's a little over 20% that are going to come up in the first six months and then about 25% that are going to come up in the second six months of 2023, which gets you to about the 50. So it's a relatively even split, but it's more just how sizable the amount is that's coming up in 2023. Yeah. So 

U1

kind of breaking it down a little bit more. We had a huge variable rate rise in 2022 1.4s for new mortgages. Roughly 60% of mortgages over the last few years would have been variable rate loans. So those borrowers would have experienced the cash flow hits from now already because those rate rises have already occurred. Takes a little while to feed through, but over quarter four and now they're experiencing those, the other 40% of 1.1s borrowers who got mortgages would be on fixed rate loans a very, very high proportion, much, much higher than usual. Roughly ten to 15% as usual. But 40% plus people got fixed rate mortgages. Those borrowers will be experiencing the cash flow hit in 2023. Half of those borrowers in the first half of 2023 and the other half at the end of 2023 or the second half of 2023. That's simplifying a little bit, but that's really the crux of the issue. So that's why people are saying this fixed rate clip, because all of these borrowers, these 40% of borrowers who haven't experienced these rate rises yet, they're going to, and they're going to have a repayment crunch. Repayments are going to go up nearly 40%. Fingers crossed, they're prepared for it. Banks are doing a lot of work, communicating with their clients, letting them know that this is going to hit, trying to forewarn people as much as possible so they can prepare for it before their expiry. 1.1s But realistically, what I think is this is an issue to cash flow of households. I don't think it's going to lead to serious household mortgage stress. I think that if it's going to play out, we'll probably play out anyway, regardless of the fixed rate issue. But it does slow the economy down because huge chunk of people are going to be having their cash flows hit, and they may be delaying their reduction in expenditures to this year. So it's the lag effect. With the RBA rate rises potentially being larger than usual and longer. Longer than usual because of this fixed rate anomaly that's occurred over the last few years. That wasn't usually the case. Yeah. And I think that's our real prediction here is that the impact of this fixed rate cliff, as it's called, is that economic activity is going to slow more drastically than anticipated 

U2

over 2023. 2.3s The size this fixed rate cliff means that the reduction in economic activity is going to be yet bigger than is currently anticipated. 

U1

I think that's our next prediction. 1.5s Looking at it, what we're kind of predicting, we've done a whole episode on this, is after one, maybe two more rate rises, the RBA's work is done and inflation will begin to subside fairly drastically later in the year. And going further, we're going to predict that by the end of the year there may even be a rate cut that occurs, maybe multiple rate cuts, but we shift from this tightening, increasing interest rate cycle to completely change of narrative by the end of the year. We're sitting back here in December and I think we're going to be talking about, hey, interest rate cuts are either happening or on the agenda. 1.5s And a big part of that was just the last issue. We talked about households having higher interest costs. Bulk of households already in this situation, the other 40% are going to be in this situation this year. Big drag to liquidity, big drag to cash flows, fairly skinny buffers. Christopher Joy did this beautiful article in November, I believe, where he showed some RBA research where he said that ten to 15% of all borrowers will have their spare cash 1.1s turn 1.3s close to negative so they won't have any spare cash. 15% of borrowers. This is just modeling and it's based on a 3.6% cash rate. So two more rate rises, ten to 15% of borrowers don't even have any leftover surplus to make these repayments. That's a scary figure. If this modeling is right, it means that a lot of people don't have the money day to day to actually meet these repayments. So they kind of have to start making changes to their lifestyle to be able to do that. And the economic impacts of all that slowing down inflation will likely kick in from these households doing it. Yeah, 

U2

and I think to talk it out a little bit more, 1.8s you hit the peak of the interest rate cycle or the tightening cycle at some point and then I think there's two possible directions which you can kind of make your prediction. One is that you kind of reach a little bit of an equilibrium there and things stay there for prolonged period of time, maybe a couple of years. Rates don't really move, they stay around that same level, everything keeps kind of ticking along. The other kind of direction it can head is you go, okay, there's actually a fairly big reduction in economic activity and you move quite quickly from a tightening cycle to being in a position where, okay, things actually need to be loosened again. The economy starts needing support. It's not capable of just. Sitting in that state for an extended period of time. And I think that second pathway is probably more how we see it, that once we get to the end of that tightening cycle we are going to relatively short space of time move to a situation where the economy starts needing help rather than having just a bit of an equilibrium that lasts for a couple of 

U1

years. Yeah, exactly. So we've, you talk about V shaped recoveries a lot. This is the opposite with interest rates. It's an upside down V. Interest rates go up, tightening cycle, interest rates go back down fairly quickly. 1s They might not go back down to the same level or anything like that. Like a little upside down tick is more accurate than a V. 

U2

But there's going to be that transition where it's not going to sit at the top of the cycle for an extended period of time. We think there's probably going to be some economic weakness, I guess that is going to sink in and it's going to change to rate cuts or, you know, trying to get the economy moving. You know that's that's going to be the end of the 2023 discussion. Like you say, the discussion is going to change from how do we slow things down or how do we slow inflation down and, you know, as a result slow the economy down to okay, we slowed it down too much, too slow. How do we, you know, speed it back 

U1

up? Yes, that makes sense. When you have an inflation problem you have to go hard at it. The RBA has gone hard. They are criticized for being dovish but their rate rises have been aggressive. The rest of the world has been very aggressive too. So that's how you keep inflation down. So that's part of the reason why we expect the tightening and cutting cycle to be close together and play out in that way that Curtis just mentioned. The second way. 

U2

Yeah. So switching it up a little bit to another prediction away from, I guess the monetary policy side of things to something that love this flows under the radar, the fiscal like side of things. So what are your thoughts on the budget 

U1

position? Yeah, I love this one. I was out with a friend on Saturday night talking about this. 1.4s I wonder if he's still going to be friends with me given how I was talking to him about this. But we're fiscal policy notes here. Both Curtis and I were ex treasury, so we've read lots of budgets, we understand how it works. What is really cool and interesting is inflation is really helping the government's bottom line. So why is that the case is because fiscal policy and budget balances work off nominal figures. The actual price we pay, so real figures is the amount of production that we do. Nominal is the prices that we actually pay that's going out. So with prices of goods and services increasing so much so quickly. The government is collecting more and more money on every transaction that we're making. 1.1s Maybe not for house prices, maybe not stamp cheese, but for a whole range. Of transactions. If you think of GST just going out there buying coffee, that used to be $5. If it used to be $4 and now it's $5, it's increased by a dollar in a year or two from rapid inflation. The government's collecting an extra $0.10 there. So I know that gets spread out to the states, but that is how fiscal policy is improving big time or the government's bottom line is improving proving big time. So we're going to go out there with a wild call. I don't know how accurate this is, but we may achieve the first budget surplus in a decade plus. I know ScoMo's government got very close to it and got to a budget neutral position, but we might get into surplus if they don't go and spend it. Because the nominal GDP is so high at the moment on the back of inflation 2.1s that impacts property markets quite indirectly. But 

U2

I think interesting one to look out for because it's something that doesn't really get spoken about, 1.4s it is a little bit removed from people's direct household position and investing choices and things like that. But for, I guess, economics nerds like us, that's something we, we kind of look at. And yeah, probably not, you know, a very, very likely chance that there's a budget surplus. But I think it might be something that, you know, there's a, you know, 25% chance or something, a higher chance than people are talking about. A side effect of these economic changes is strengthening of the budget. Bottom line, basically, 

U1

for any of you that are interested in this. But a smaller anecdote. I studied monetary economics at ANU for a little bit, and one of the professors there, one of the smartest people I've ever met, to be honest, he talked about inflation and said that why do we target 2% inflation? And part of the reason for that is governments want inflation. It helps erode away budget deficits over a period of time. So countries that run big budget deficits, they can inflate their way out of it over a period of time. And that's why we actually have a targeting regime above 0%. A big part of that is governments want a little bit of inflation because it helps adjusting. So we call that adjustment cost theory. So it helps the adjustment process of economies go through. So, yeah, we're probably deviating a little bit away. But something interesting for economic nerds out there listening. Yeah. So I guess back to the more exciting one for people. What do you think 

U2

in terms of the lending market and in particular, I guess, refinancing? 

U1

Yes. So we talked about new lending volumes falling quite drastically, nearly 20%. On the flip side, refinancing activity is going through the roof. It's probably increased by more than 20% inside a year alone. The reason for that is interest rates have risen so, so much and discounting from banks has increased so, so much, so it's wild. If your loan is less than a year old, you're probably paying 20 to 30. 30 basis points more than you need to be. That's super unusual. One of the banks, one of the digital banks, talks about their big promotion here is we'll give you 0.1% discount every year for 30 years. That's a .3% discount in total over 30 years. People are getting those discounts in six months. You don't have to wait 30 years for that. You can do it in six months. It's just a complete anomaly. It's a market anomaly that's occurred in in the mortgage market. So refinance activity has gone through the roof. 1.3s So I suspect it's going to be the biggest ever year of refinancing, particularly in quarter one, quarter two that's ever occurred. We're seeing that in our business, but it's crazy that this amount of people are refinancing. It's purely a function of the rates that they're paying versus the rates that they can get. Yeah, 

U2

exactly. And, you know, the increase in interest rates, banks passing it on one to one. But their costs aren't just made up of what the RBA cash rate is. They have branches, they have staff, they have a whole range of things that get input into their cost structure. So when the cost of interest rates goes up, that's one factor, but it doesn't mean all their costs go up by the same amount. So they have a little bit of capacity basically, to start increasing their rate of discounting. And that's kind of what we've seen is banks are offering bigger and bigger discounts. And unfortunately, the way it kind of plays out is they offer it to new customers. They don't just knock it off existing customers as a thank you, they offer it to new customers to try and win new business. So that essentially puts a lot of borrowers in the position where if you can refinance, there's often a better deal for you at the end of it if you do. And 1.1s we're already seeing this play out in our day to day work, that refinance activity is up, but that's kind of unpacking what's driving that. Yeah, 

U1

one thing we do with all of our clients is 1.1s first thing we do when someone talks about a refinance is we get their existing bank to reprice their mortgage. This is so simple to do. Call your bank, call your broker, just simply send out an email and say, can you please reprice my mortgage? You know, we do this for our club, our own clients, periodically without those problems. But, you know, if you're direct to bank approach, just send an email or pick up the phone, you'll end up saving thousands from just doing that. Because the time to ask for that discount is now. Discounting is ridiculously high at the moment, might not always be like that. So it's all about asking at the right time. The time is now. Ask the question. You will be rewarded, particularly if your rate starts with a five and you're an owner. Occupier, you're likely to get that down interest only investment rate loans above five and a half. You probably get that down a little bit. Those are little benchmarks. A little hot tip to save yourself thousands. We've been repeating this message over and over again because it is a great time to do it. And yet, on a business level, we've been aggressively repricing as many loans as we can through January, in December and November, since there was a clear, obvious discounting room that's. Being. So yeah, this is why refinancing levels will be so high this year. 1.5s And it's a little bit unfortunate for those that can't refinance due to serviceability. So hopefully banks play ball and provide them good discounting and updated discounts and updated pricing. Regardless, they're getting a bit more sophisticated now with all their AI. So fingers crossed they do provide those discounts. 

U2

You should think of it as a bit of a no lose situation. Your rates can't go up, the worst thing they can say is no. And 1.3s essentially you're not going to get anything if you don't ask. So now is the time to be asking that question. The worst thing that can happen is nothing. But what we're seeing is the most likely outcome is that there's a bit of a saving to be had just as a result of asking the question. 

U1

Yeah, exactly. Let's get on to our last prediction. So this is summarizing and compiling all of our predictions together. So what we have here is we're saying that the debt cycle is at or near its bottom. We're saying that interest rates are at or near their peak. We're saying that borrowing capacities are at or near their bottom as well. So combine all of those things. And we're also suggesting that there may be rate cuts towards the end of the year a little bit unknown. Inflation may be coming back down, we may have peaked a little bit unknown. 1.1s We have the conditions here for the bottom of this cycle to be occurring at some point this year. We also have a prediction that APRO is going to loosen up lending and give everyone a 10% borrowing power boost. We also know that there's a legislated tax cut that improves borrowing powers by roughly 10%. That might change, there might be some conversations about that, but it is currently legislated to begin in roughly 18 months. We know these things. So if you combine all of these factors and put it all together, 1.3s we are sowing the seeds for an extremely strong 2024. So for those thinking of buying and wondering whether now is the bottom or not, property is a long term investment, it's a long term play. You're going to be buying in conditions where rental price migration is high. Property values have fallen dramatically already. You're buying at 1015 20% discounts and you also have all these underlying debt condition factors that are going to likely change at some point this year. Property prices can move very quickly in Sydney. I've repeatedly said that there's $100,000 weekend that occurs sometimes in Sydney where you go in, you think you're going to pay 900, but there's been an interest rate cut that weekend and wow, it's just like crazy. Clearance rates go up 1015 percent and it's like crazy on the ground. So you don't want to be buying in those conditions if you can avoid it. So there may be some investors who sell off this year forced to or want to help manage their cash flow. So compiling it all together, we think that the bottom will be in at some point this year. Probably around now or a little bit later. We're getting close to. It. And the seeds are being sown for a fairly strong recovery in 2024, just like it was in 2019 after the decline, then after the biggest decline in 40 years, that was previously the biggest decline, prices shot up nearly 30, 40, 50% in a very short amount of time. The seeds are being sown with these potential debt changes that occur later in the year for a big price movement to recover much of those losses that have occurred. So that's putting all of our predictions together into one. 1.9s I 

U2

think, from my perspective, like Reedham said, we're going to hit, I guess, the bottom of the conditions at some point this year. And then our prediction is that the changes that occur once we hit that point are all going to be to encourage activity. And some of those may happen quickly, some of them may play out over a little bit of time. But basically, as we get towards, say, 2024 and into 2024, the changes that are going to be coming through, whether it be for making borrowing power easier, the RBA potentially cutting rates, regulators, governments, everyone's going to be looking to do things that are going to try and drive more activity. And once we get to that point, that is like once we hit the bottom and we're starting to come out the other side, so that is when we would typically see prices start to recover, basically. So I guess that's a bit of our prediction for how we see things going 

U1

longer term. Yeah. Awesome. The final word from Curtis. That was brilliant. Thanks for doing this with me again. It's always fun talking economics with you. This was very fun episode to produce, culminating all of our predictions for the year into one little episode. Get 

U2

to see how well they age. 1.9s

U1

Nothing about that for now. Let's live in the moment. So, thank you, everyone for joining. As I said, huge thank you. Where this is going off at a level that we just could not foresee. Absolutely loving the feedback that we're getting on our calls. It means a lot to us, it means a lot to me. We're putting a lot of effort and work into this and just hearing these thank yous and the kind words. I was at a wedding and so many people came to me saying, I'll listen to your podcast. Thank you. It's educational. Can you do something like this? 1s It's great. So we really appreciate it. And, yeah, there'll be a website out, Australian Property Talk really soon. Just wrapping that up. And all of this, we'll in ebook format with a wonderful set of graphs to unpack as well that you can go to. So we should have that out in the week as well. So, yes, thank you all and we'll see you next week.