January 9, 2024 • 23 mins
In this Preview of the 2024 Sydney Property Market, Louis Christopher offers his forecast for the year ahead. Louis outlines SQM Research’s tried and tested approach to understanding the nuances of the housing market and how the market will perform in 2024, under 4 given scenarios.
SQM’s base case this year suggests there will be a modest decline in the Sydney market, primarily based on the Federal Government reducing immigration numbers compared with 2023. If the immigration intake is elevated in 2024, property prices are likely to remain high due to a lack of housing supply.
In this edition of Talking Property, we also discuss hot button issues such as:
- Rental crisis – the market is set to increase another 10 – 15% in 2024
- The impact on property prices due to major infrastructure projects
- Why the RBA will have scope to cut interest rates, even if the inflation rate has not reached the targeted 2% – 3%
- How the market could rise, even if unemployment increased modestly
- Why more affordable apartments will challenge prestige property as one of the best performers in 2024
We hope you find this edition of Talking Property insightful as you embark on your property journey in 2024
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 2 (00:06):
Welcome to Talking Property.
Today, sqm researchers Louis,christopher and myself are going
to preview the 2024 Sydneyproperty market.
Louis, thanks for joining us.
As always, nice to be with youonce again, peter.
Straight up, louis.
What is your base case for 2024, please?
Speaker 1 (00:22):
Okay, it's more conservative this year.
So the forecast for our basecase nationwide is that prices
will change somewhere betweenminus 1 to about plus 3% Very
subdued compared to last year.
Absolutely it is.
We have elevated concernssurrounding current interest
rate settings, we have concernsabout the economy now slowing
(00:42):
down and we do believe thatwe've reached the peak in terms
of net overseas arrivals.
Speaker 2 (00:49):
Yeah, I know and correct me if I'm wrong here.
I don't want to put words inyour mouth.
Your base case was on thepremise that the government
would tone down immigration.
When I look at scenario onehere and scenario three, they're
closely aligned.
My question to you today isthere a chance that the
government come out with somegrandiose statement that they
(01:10):
hear the people on too muchimmigration and that we're going
to tone the numbers down but,when it's all said and done, the
border stay as porous as theywere throughout 2023?
Speaker 1 (01:20):
Yes, the Clayton's announcement, yeah, I think it's
a real risk.
They'll do that because we'rewell aware that federal labor
has their left faction, theirright faction, and that there
are a lot of forces playing outthere and this is a very topical
issue, a heated issue, Ibelieve, within the labor party.
(01:42):
So it will be interesting tosee exactly how it plays out.
But in all this, we do believethat there will be a natural
peak in migration numbers,driven by potentially less
overseas students coming intoAustralia and perhaps a little
bit more of an exodus ofuniversity students finishing up
(02:03):
and going back home.
So I must say, though, that theokay, our forecast number is
for migration to fall somewhereback to about 460,000.
Now, if we are correct aboutthat, that's still a pretty
strong result, and it will stillmean that we'll have rental
(02:23):
issues, with vacancy rates stillhovering around circa 1%, maybe
up to 1.3%, 1.4%.
Speaker 2 (02:32):
So, yeah, the impact would be more on the full sales
side in our view, just on thatpoint, that we're going to
continue to have rental issues.
I agree, I don't think therental crisis has peaked.
Indeed, I wouldn't even say itwas a rental crisis at the end
of 2022, but I do accept, by theend of 2023,.
(02:52):
Yeah, we were in a full rentalcrisis by that stage, weren't we
?
Speaker 1 (02:56):
Absolutely, we were.
So rental vacancy rates in ourlargest capital cities in many
regions actually fell and theystarted falling again after a
little bit of a reprieve in thefirst few months of 23,.
They started falling again frommid-year.
Speaker 2 (03:10):
Yeah indeed.
So my question to you, Louis,on that point one gets the
feeling there's going to be veryspirited debate in Sydney,
particular between the stategovernment and local councils,
because the new New South WalesLabor government are really
determined to get extra supplyin the inner city happening and
(03:31):
they feel that they have amandate for that, but by and
large local councils don't wantanything to do with it.
Speaker 1 (03:37):
I'll get you spot on.
And so when we consider thatissue, let's be right up front
here Even if there wasresolution between the state and
local councils today, we stillwouldn't see an increase in
supply for another two yearsfrom now.
So, in terms of our 24forecasts, our total estimate
(03:58):
for dwelling completions iscoming in around 153,000, which
is about 25,000 less than whatwe have for 23.
Speaker 2 (04:06):
So the supply is locked for the year, no matter
what really on my mind, whathappens from here, it's unlikely
to change.
Speaker 1 (04:12):
If anything, we might see an improvement in
cancellation rates and thatmight mean an extra 5,000 or
10,000 dwellings completed, ifthat does occur.
But it's not as though we willbe back up to, say, 240,000
dwellings completed, which isLabor's vision for the next five
years in terms of hitting 1.2million dwellings built
(04:32):
nationwide.
Speaker 2 (04:33):
Let's cut across to inflation.
In late 2023, the inflationrate got down to 4.9%.
From peaking at 7%, it peakedat about 8%, about 8% okay, that
high, so it peaked at 8%.
It's down to 4.9% in late 2023,which is the market.
Celebrated because they werebraced for a reading of 5.2%.
(04:55):
Yes, but big.
But the RBA's target rate is 2%to 3%, yes, so is the RBA going
to win the inflation battle in2024?
Are we going to see theinflation rate hit 2% to 3%?
Speaker 1 (05:10):
I think we will see a significant improvement in the
CPI.
We're already starting to seeit overseas and I think that
will be imported to Australia.
So we believe when we get tothis time next year we're likely
to see inflation rates cominginto 3s.
It might not hit 2% to 3% butit may well be just above 3% and
(05:33):
that should give some comfortto the RBA, possibly to the
point where they can cutinterest rates towards the end
of 2024.
Speaker 2 (05:41):
So you're feeling the RBA could cut interest rates
above their target rate?
Speaker 1 (05:46):
Yes, yes, they could.
The reason why it goes back toreal interest rate settings yes,
okay.
So with a current cash raterunning at 4.35%, if you see the
inflation rate run below 4%,you're running a real positive
rate which is highly restrictiveupon the economy.
Okay, yes, so they could cuteven if they haven't hit the 2%
(06:08):
to 3% range.
I think they'll have a lot oflanguage surrounding that,
saying we strongly believeinflation is now coming back to
2% to 3%.
The economy is slowing.
We're seeing a rise inunemployment.
We'd like to provide a littlebit of stimulus out there.
Speaker 2 (06:22):
The terminal rate when we talk interest rates is
the rate at which the currentinterest rate setting is driving
rates down in and of itself anddoesn't need to be increased
again.
Yeah, yeah, Are we at theterminal rate in Australia?
Or are the RBA going to have totake the market on again?
Speaker 1 (06:39):
That's data dependent .
So Good news is that we've hadsome recent data to suggest
inflation is definitely slowing.
I'm potentially slowing quickerthan what the RBA forecasted,
so that may well mean we're atthe terminal rate now.
The RBA, though, made it veryclear in their last statement
that they believe inflation inAustralia has been more demand
(07:01):
driven.
Now I think, when we see somemore information coming out from
the RBA which I think we'll seein later January and into
February that we will see somenoise from them saying that
they're starting to be morecomfortable with the situation.
Speaker 2 (07:18):
Still on the RBA.
The RBA have made it known thatthey want to see unemployment
rise.
Can unemployment increase andproperty markets hold or even
rise?
Speaker 1 (07:31):
It depends to what they increase to.
If they were just to increasefrom say 3.75% to say 4.25%, I
don't think they would have amajor bearing on the housing
market.
If we were to start to seeunemployment trend upwards above
5%, I think you would see animpact upon the market because
(07:52):
you would see a rise in forceselling activity and you would
see a lot less qualified buyersout there.
Speaker 2 (07:58):
The biggest non-issue in the property market in 2023
turned out to be the mortgagecliff.
That's right.
Will the mortgage cliff returnas an issue in 2024, or has it
been?
Speaker 1 (08:10):
cleared.
Only if we see an aggressiverise in the unemployment rate,
then it will become an issue, inmy opinion.
But we have actually passed thepeak now in fixed mortgage rate
resets.
There's still some a lot ofresets occurring, but we've now
part.
The peak was actually roughlyat about August 2023.
(08:31):
So we've passed that peak.
So far, so good.
We've only a minor rise in thestress selling activity from
what we can see.
So overall the economy's donebetter than expected, borrowers
have done better than expectedand so long as the economy
(08:51):
doesn't take, that shouldcontinue on.
Speaker 2 (08:54):
I did see a slide that you produced recently.
I'll try and bring it up here.
There it is, and it talks aboutAustralians living off their
savings, something that youdon't feel can go on
indefinitely, for obviousreasons.
So we're compensating for thehigher interest rates by drawing
on savings we otherwisewouldn't have.
(09:15):
But you say that's got a limit.
Speaker 1 (09:18):
That's right.
So, as we can see, during theCOVID years, with all the
economic stimulus that we had,australians saved quite
substantially over that time.
But given the rise in interestrates and given the turn back of
that stimulus for like a betterwords Australians have been
(09:39):
drawing down on those savingsand, as you rightly say, that
can only go so far.
What happens then is thatpeople cut their spending and
indeed we've seen a slow down inretail spending, and I believe
that will continue on into 2024.
Speaker 2 (09:55):
And that's music to the RBA's ears, to that one.
Speaker 1 (09:58):
Well, it creates a slow down in the economy, which
should see a rise in theunemployment rate or certainly a
slow down in the employmentgrowth, which is what the RBA's
objectives are.
Speaker 2 (10:09):
Louis real estate agents that I speak to report
that existing landlords areselling out and have been
steadily for the last 18 months,and they're not being replaced
by buy and hold investors.
If I can bring up yourexcellent slide here about gross
yields, if you just want towalk us through what's happening
(10:30):
here, please, louis.
Speaker 1 (10:31):
Yes, so for the period through to 2021, gross
rental yields were higher thanthe average lending rate and, by
the way, the red line is theinvestment lending rate, not
owner occupied, so generally alittle bit higher.
But this was very conducive forproperty investing to have this
(10:51):
situation, and it also explainswhy negative gearing risks
effectively weren't thatparticularly high over this
period, because there wereactually quite a few cash flow
positive properties out there.
But with the rise in interestrates, we've got the situation
now where the lending rate is ahigher than the gross rental
(11:12):
yield, even though gross rentalyields have risen thanks to an
acceleration in rents.
This is a situation where thiswould be deterring property
investors from entering into themarket somewhat,
notwithstanding the rise inrents.
And let's also consider toothat, okay, negative gearing now
(11:33):
kicks in, so we should beseeing more negative gearing
deductions being claimed.
Speaker 2 (11:38):
This helps explain the rental crisis as well in
another way, doesn't it?
You can see quite clearly theway lending costs mortgage rates
have gone for investors, yes,why they've felt the need to try
and claw some of that backthrough higher rents and also to
move towards short-term leasingproperties, which is definitely
hoping to be able to cause a 21and 22.
(12:00):
Now, louis, the market requires,always requires, incoming
investors, property investors tohelp supply the the rental
market.
Yes, why is it that you feelproperty investors are so
demonized in society, wherepeople are trading the share
market or in collectibles orantiques or index funds are not
(12:22):
subjected to the same criticismthat property investors often
are by the commentary.
Speaker 1 (12:28):
Well, good question.
I mean, look, housing and andand rental properties has always
been an emotional thing.
Here we're talking abouttenants rights versus landlords
rights and there's often a clashbetween the two.
There always has been.
Of late, with the rental crisis, has been more angst with
(12:50):
tenancy groups and somepolitical parties about the
rights of tenants shrinking, butreally it's been more about the
rental shortage.
My concern has been in all thisis that if we hit the hammer
over landlords, we will see evengreater shortages going forward
(13:10):
.
As you rightly say, whether welike it or not, we live in a
market economy and we need toprovide incentives for property
investors to come in andbasically invest in new property
to help increase supply.
That's one thing I certainly dobelieve in.
Speaker 2 (13:29):
So let's talk about.
You're talking about incentivesfor property investors to come
in, and one side of the debateis the negative gearing.
It's a it favours people thatare in property, which I accept
as has been partly true, butthere's a lot of disincentives
for investors at the moment.
I think that goes a long way toexplain why they're not
partaking in the market the waywe need.
(13:50):
When it comes to housing,investors are crippled by land
tax.
Every year we regularly seethrough our rent roll landlords
who don't actually keep a dollarof rental income from January
to out to April because they'vegot to pay a massive land tax
bill.
And those that are not inhousing in or in apartments are
(14:11):
paying big strata levies in manycases, whether it be for
increased insurance costs in thestrata or, you know, gyms,
lifts and pools and amenitiesthat they don't use.
So the investors do what anymoney flow does when it doesn't
work for them it stays on thesidelines or finds other avenues
.
So my question to you here isthat the state government of you
(14:32):
know, in fairness, dominicPerotay had a go at fixing the
land tax issue, but a stategovernment's sort of cooking the
goose that lays the golden eggswith the way they over tax and
over regulate investors in theproperty market.
Speaker 1 (14:49):
Yeah, look, I would agree with that notion for sure.
Or you have higher holdingcosts in the form of taxation,
you have high transaction costsin a form of bracket creep on
stamp duty that's going to deterinvestor activity.
That will mean that we'll seeless property that's been built
over the future and we'll seeonce again a move towards
(15:10):
existing property owners findinga way to get more income from
their property, and that meansultimately potentially leasing
in the short term market.
Speaker 2 (15:19):
Yeah, indeed, you know they're throwing not that
it's a market based issue, butthey're throwing regulation over
the top of property managersand landlords where you must
accept pets, and coming up withall sorts of rules here which
make investing in property lessdesirable.
Yes and we need them more thanever.
Speaker 1 (15:36):
Yes, yes, that is correct.
Now, I am a believer in somefundamental tenancy rights, of
course, and we sadly have somevery unscrupulous landlords out
there who do not play fair, noquestion.
But this thing, there needs tobe more balance, there's no
question about that, andpotentially the pendulums just
(15:56):
swung a little bit the other way, to the point where landlords
are looking at the numbers andthey're saying this isn't
working and they're walking awayor, as mentioned, they wish to
lease their property out viaAirbnb or states.
Speaker 2 (16:11):
Yeah, and I think that comes back to the primary
point we're making here is morelandlords are selling out than
are buying in, that's right.
And has been the case for a fewyears ago, a few years now,
which fundamentally reduces thestock of rental properties
available, making it ultimatelyworse for the tenant.
Yes, that's right.
Yeah, louis, in 2023, thepremium end, the prestige end of
(16:33):
the market, was clearly thestrongest performer.
It seemed like it was easy tosell a house for 10 million in
an apartment for a million.
That's right.
Bizarre, but there you go,segmenting the Sydney property
market in 2024,.
What do you think is going tobe the best performers?
Speaker 1 (16:49):
Provided the economy holds and doesn't slow down too
aggressively, we will see thetop end continue on.
I say that because the top endof the market is driven by cash
buyers predominantly, whereasthe market we've in, say, the
one million to about threemillion mark, are actually
(17:11):
driven by borrowers, and withthe rise in interest rates our
expectation is that borrowerswill find it harder to actually
come into the marketplace, sodemand should fall away in that
segment.
Hence the reason why, forSydney itself, we're a little
bit more negative onfreestanding houses.
For properties between one andthree million, we believe units
(17:33):
are actually going to outperform.
When I say units I meanestablished units and especially
units under a million dollars,because of mortgage.
Speaker 2 (17:40):
So you're saying they don't rush out and buy off the
plan and blame Louis?
No, I'm not.
Speaker 1 (17:45):
But yeah, so we're expecting units to do better.
What we've been noticing inmore recent cycles is that
during downturns, units havebeen outperforming, and during
upturns, units have beenunderperforming.
Speaker 2 (17:57):
Ah, very interesting, Great points there.
Just coming back to theprestige end of the market, set
to outperform again in 2024.
If there is one thing that'sreally unhealthy that we've seen
in Australian society in thelast few years, it is that the
wealthier seem to be gettingwealthier and the mainstream
seem to be falling furtherbehind.
(18:19):
How do governments sort of fixthis widening wealth gap that's
occurring in our society so?
Speaker 1 (18:26):
it's got to be done, in my view, by rapidly
increasing supply, in a similarway that we did in 1950s, 1960s
and early 1970s, so you get agood supply side response that
creates more affordable housingAt the same time.
I believe we need caps onmigration, so I think that would
(18:47):
help the situation as well.
But in all, all said and done,the reality is that as an
economy becomes more prosperous,you're going to find properties
which are in the greatestdemand.
Let's face it, that's your verytop end affluent properties.
Harvest side properties willcontinue to remain in demand and
(19:09):
will continue to be very rareproperty since the reason why
they sell for absolute topdollar.
No amount of supply is going tochange that.
Speaker 2 (19:17):
We know that there is a lot of money and cash around
at the top end, but there was anoticeable increase in offshore
buying in 2023 as well forforeign buyers and a bit of
expat buying coming back home.
Have we got some sense of therole of foreign investment
played in the market rally of2023?
Speaker 1 (19:38):
Well, sadly, the data which comes from the foreign
investment review board isseriously lagging, so we cannot
confirm through formal data.
We know the numbers of 2022 didshow a little bit of a pick up.
I suspect 2023 will show asignificant pick up and I think
the numbers will be higher againin 2024.
Yes, because we're relying onanecdotal evidence, agents
(19:59):
talking about what they'reexperiencing on the ground, and
we've got to be careful ofhearsay and sometimes it's hard
to basically identify ifsomeone's a foreign investor
versus a third or fourthgeneration local.
Speaker 2 (20:14):
There's some pretty wild stories out there about
offshore buyers paying cash andoutbidding the local crowd,
though wasn't there?
Speaker 1 (20:22):
Yes, there has been stories about that, and I recall
similar stories back in 2013 aswell, and then back in 2005.
So these do come along.
I do think it does happen.
Let's keep in mind that thereare rules in place.
Sadly, some of these rules youcan get around.
Yes, no question about that,but as a percentage of the
overall market, I still thinkit's a relatively small
(20:43):
percentage in terms of foreigninvestors breaking the rules.
Speaker 2 (20:48):
Coming back to infrastructure in Sydney, which
obviously the West Connects hada pretty rough start.
Yes, it was infrastructure thatwas hoped would redefine many
things in the city.
Yes, the Sydney Airport, theWestern Sydney Airport, I should
say, is close to completion.
Yes, massive infrastructurehappening in Western Sydney.
(21:08):
Yes, what do you see that doingto residential property markets
in that part of the world?
Speaker 1 (21:15):
History has shown us that when we've completed major
infrastructure projects inSydney that there's been a
benefit for those suburbs nearby.
So back in the early 90s, whenwe completed EDM II, all those
suburbs in that areaoutperformed the city-wide
average for the next 10 years.
So I wouldn't be surprised tosee outperforming locations in
(21:39):
the West benefiting fromindirect employment growth from
people wishing to live closer toa greater amenities and
facilities there,notwithstanding localities which
are right under the flightcorridor.
Speaker 2 (21:55):
And millions of people now live west of
Parramatta.
Yes, and when they need at themoment, when they need to head
overseas or interstate, they'reheading through the city into
mascot, where they can head westto Badgeris Creek to get a
flight now.
So you would suspect that thatwill hopefully these traffic
(22:17):
movement around the city.
Is that going to give somevalue capture to inner parts of
the city that are used?
To airport rat runs.
Speaker 1 (22:24):
I think it will to an extent.
That said, though, if the citykeeps growing at, say, 2% to 3%
per annum, turns a populationexpansion, that benefit will go
pretty quick.
Speaker 2 (22:35):
So all this infrastructure?
As we saw, the tunnels inWestConnex were full on week one
, not only due to poor signage,but too many people.
So that's the risk forgovernments is they fill the
place up as quickly as theybuild infrastructure.
So there's no net benefit forthe locals, correct?
Speaker 1 (22:53):
Correct, and that's happened in the past, yeah.
Speaker 2 (22:55):
Louis.
That's an interesting andterrific forecast on what's
happening in 2024.
And we look forward to catchingup mid year to review
everything.
Thank you, peter, thanks forjoining us today and thank you
for joining us on TalkingProperty, and we look forward to
catching up with you next time.
Welcome to Talking Property.
Today, sqm researchers Louis,christopher and myself are going
to preview the 2024 Sydneyproperty market.
Louis, thanks for joining us.
As always, nice to be with youonce again, peter.
Straight up, louis.
What is your base case for 2024, please?
Speaker 1 (00:22):
Okay, it's more conservative this year.
So the forecast for our basecase nationwide is that prices
will change somewhere betweenminus 1 to about plus 3% Very
subdued compared to last year.
Absolutely it is.
We have elevated concernssurrounding current interest
rate settings, we have concernsabout the economy now slowing
(00:42):
down and we do believe thatwe've reached the peak in terms
of net overseas arrivals.
Speaker 2 (00:49):
Yeah, I know and correct me if I'm wrong here.
I don't want to put words inyour mouth.
Your base case was on thepremise that the government
would tone down immigration.
When I look at scenario onehere and scenario three, they're
closely aligned.
My question to you today isthere a chance that the
government come out with somegrandiose statement that they
(01:10):
hear the people on too muchimmigration and that we're going
to tone the numbers down but,when it's all said and done, the
border stay as porous as theywere throughout 2023?
Speaker 1 (01:20):
Yes, the Clayton's announcement, yeah, I think it's
a real risk.
They'll do that because we'rewell aware that federal labor
has their left faction, theirright faction, and that there
are a lot of forces playing outthere and this is a very topical
issue, a heated issue, Ibelieve, within the labor party.
(01:42):
So it will be interesting tosee exactly how it plays out.
But in all this, we do believethat there will be a natural
peak in migration numbers,driven by potentially less
overseas students coming intoAustralia and perhaps a little
bit more of an exodus ofuniversity students finishing up
(02:03):
and going back home.
So I must say, though, that theokay, our forecast number is
for migration to fall somewhereback to about 460,000.
Now, if we are correct aboutthat, that's still a pretty
strong result, and it will stillmean that we'll have rental
(02:23):
issues, with vacancy rates stillhovering around circa 1%, maybe
up to 1.3%, 1.4%.
Speaker 2 (02:32):
So, yeah, the impact would be more on the full sales
side in our view, just on thatpoint, that we're going to
continue to have rental issues.
I agree, I don't think therental crisis has peaked.
Indeed, I wouldn't even say itwas a rental crisis at the end
of 2022, but I do accept, by theend of 2023,.
(02:52):
Yeah, we were in a full rentalcrisis by that stage, weren't we
?
Speaker 1 (02:56):
Absolutely, we were.
So rental vacancy rates in ourlargest capital cities in many
regions actually fell and theystarted falling again after a
little bit of a reprieve in thefirst few months of 23,.
They started falling again frommid-year.
Speaker 2 (03:10):
Yeah indeed.
So my question to you, Louis,on that point one gets the
feeling there's going to be veryspirited debate in Sydney,
particular between the stategovernment and local councils,
because the new New South WalesLabor government are really
determined to get extra supplyin the inner city happening and
(03:31):
they feel that they have amandate for that, but by and
large local councils don't wantanything to do with it.
Speaker 1 (03:37):
I'll get you spot on.
And so when we consider thatissue, let's be right up front
here Even if there wasresolution between the state and
local councils today, we stillwouldn't see an increase in
supply for another two yearsfrom now.
So, in terms of our 24forecasts, our total estimate
(03:58):
for dwelling completions iscoming in around 153,000, which
is about 25,000 less than whatwe have for 23.
Speaker 2 (04:06):
So the supply is locked for the year, no matter
what really on my mind, whathappens from here, it's unlikely
to change.
Speaker 1 (04:12):
If anything, we might see an improvement in
cancellation rates and thatmight mean an extra 5,000 or
10,000 dwellings completed, ifthat does occur.
But it's not as though we willbe back up to, say, 240,000
dwellings completed, which isLabor's vision for the next five
years in terms of hitting 1.2million dwellings built
(04:32):
nationwide.
Speaker 2 (04:33):
Let's cut across to inflation.
In late 2023, the inflationrate got down to 4.9%.
From peaking at 7%, it peakedat about 8%, about 8% okay, that
high, so it peaked at 8%.
It's down to 4.9% in late 2023,which is the market.
Celebrated because they werebraced for a reading of 5.2%.
(04:55):
Yes, but big.
But the RBA's target rate is 2%to 3%, yes, so is the RBA going
to win the inflation battle in2024?
Are we going to see theinflation rate hit 2% to 3%?
Speaker 1 (05:10):
I think we will see a significant improvement in the
CPI.
We're already starting to seeit overseas and I think that
will be imported to Australia.
So we believe when we get tothis time next year we're likely
to see inflation rates cominginto 3s.
It might not hit 2% to 3% butit may well be just above 3% and
(05:33):
that should give some comfortto the RBA, possibly to the
point where they can cutinterest rates towards the end
of 2024.
Speaker 2 (05:41):
So you're feeling the RBA could cut interest rates
above their target rate?
Speaker 1 (05:46):
Yes, yes, they could.
The reason why it goes back toreal interest rate settings yes,
okay.
So with a current cash raterunning at 4.35%, if you see the
inflation rate run below 4%,you're running a real positive
rate which is highly restrictiveupon the economy.
Okay, yes, so they could cuteven if they haven't hit the 2%
(06:08):
to 3% range.
I think they'll have a lot oflanguage surrounding that,
saying we strongly believeinflation is now coming back to
2% to 3%.
The economy is slowing.
We're seeing a rise inunemployment.
We'd like to provide a littlebit of stimulus out there.
Speaker 2 (06:22):
The terminal rate when we talk interest rates is
the rate at which the currentinterest rate setting is driving
rates down in and of itself anddoesn't need to be increased
again.
Yeah, yeah, Are we at theterminal rate in Australia?
Or are the RBA going to have totake the market on again?
Speaker 1 (06:39):
That's data dependent .
So Good news is that we've hadsome recent data to suggest
inflation is definitely slowing.
I'm potentially slowing quickerthan what the RBA forecasted,
so that may well mean we're atthe terminal rate now.
The RBA, though, made it veryclear in their last statement
that they believe inflation inAustralia has been more demand
(07:01):
driven.
Now I think, when we see somemore information coming out from
the RBA which I think we'll seein later January and into
February that we will see somenoise from them saying that
they're starting to be morecomfortable with the situation.
Speaker 2 (07:18):
Still on the RBA.
The RBA have made it known thatthey want to see unemployment
rise.
Can unemployment increase andproperty markets hold or even
rise?
Speaker 1 (07:31):
It depends to what they increase to.
If they were just to increasefrom say 3.75% to say 4.25%, I
don't think they would have amajor bearing on the housing
market.
If we were to start to seeunemployment trend upwards above
5%, I think you would see animpact upon the market because
(07:52):
you would see a rise in forceselling activity and you would
see a lot less qualified buyersout there.
Speaker 2 (07:58):
The biggest non-issue in the property market in 2023
turned out to be the mortgagecliff.
That's right.
Will the mortgage cliff returnas an issue in 2024, or has it
been?
Speaker 1 (08:10):
cleared.
Only if we see an aggressiverise in the unemployment rate,
then it will become an issue, inmy opinion.
But we have actually passed thepeak now in fixed mortgage rate
resets.
There's still some a lot ofresets occurring, but we've now
part.
The peak was actually roughlyat about August 2023.
(08:31):
So we've passed that peak.
So far, so good.
We've only a minor rise in thestress selling activity from
what we can see.
So overall the economy's donebetter than expected, borrowers
have done better than expectedand so long as the economy
(08:51):
doesn't take, that shouldcontinue on.
Speaker 2 (08:54):
I did see a slide that you produced recently.
I'll try and bring it up here.
There it is, and it talks aboutAustralians living off their
savings, something that youdon't feel can go on
indefinitely, for obviousreasons.
So we're compensating for thehigher interest rates by drawing
on savings we otherwisewouldn't have.
(09:15):
But you say that's got a limit.
Speaker 1 (09:18):
That's right.
So, as we can see, during theCOVID years, with all the
economic stimulus that we had,australians saved quite
substantially over that time.
But given the rise in interestrates and given the turn back of
that stimulus for like a betterwords Australians have been
(09:39):
drawing down on those savingsand, as you rightly say, that
can only go so far.
What happens then is thatpeople cut their spending and
indeed we've seen a slow down inretail spending, and I believe
that will continue on into 2024.
Speaker 2 (09:55):
And that's music to the RBA's ears, to that one.
Speaker 1 (09:58):
Well, it creates a slow down in the economy, which
should see a rise in theunemployment rate or certainly a
slow down in the employmentgrowth, which is what the RBA's
objectives are.
Speaker 2 (10:09):
Louis real estate agents that I speak to report
that existing landlords areselling out and have been
steadily for the last 18 months,and they're not being replaced
by buy and hold investors.
If I can bring up yourexcellent slide here about gross
yields, if you just want towalk us through what's happening
(10:30):
here, please, louis.
Speaker 1 (10:31):
Yes, so for the period through to 2021, gross
rental yields were higher thanthe average lending rate and, by
the way, the red line is theinvestment lending rate, not
owner occupied, so generally alittle bit higher.
But this was very conducive forproperty investing to have this
(10:51):
situation, and it also explainswhy negative gearing risks
effectively weren't thatparticularly high over this
period, because there wereactually quite a few cash flow
positive properties out there.
But with the rise in interestrates, we've got the situation
now where the lending rate is ahigher than the gross rental
(11:12):
yield, even though gross rentalyields have risen thanks to an
acceleration in rents.
This is a situation where thiswould be deterring property
investors from entering into themarket somewhat,
notwithstanding the rise inrents.
And let's also consider toothat, okay, negative gearing now
(11:33):
kicks in, so we should beseeing more negative gearing
deductions being claimed.
Speaker 2 (11:38):
This helps explain the rental crisis as well in
another way, doesn't it?
You can see quite clearly theway lending costs mortgage rates
have gone for investors, yes,why they've felt the need to try
and claw some of that backthrough higher rents and also to
move towards short-term leasingproperties, which is definitely
hoping to be able to cause a 21and 22.
(12:00):
Now, louis, the market requires,always requires, incoming
investors, property investors tohelp supply the the rental
market.
Yes, why is it that you feelproperty investors are so
demonized in society, wherepeople are trading the share
market or in collectibles orantiques or index funds are not
(12:22):
subjected to the same criticismthat property investors often
are by the commentary.
Speaker 1 (12:28):
Well, good question.
I mean, look, housing and andand rental properties has always
been an emotional thing.
Here we're talking abouttenants rights versus landlords
rights and there's often a clashbetween the two.
There always has been.
Of late, with the rental crisis, has been more angst with
(12:50):
tenancy groups and somepolitical parties about the
rights of tenants shrinking, butreally it's been more about the
rental shortage.
My concern has been in all thisis that if we hit the hammer
over landlords, we will see evengreater shortages going forward
(13:10):
.
As you rightly say, whether welike it or not, we live in a
market economy and we need toprovide incentives for property
investors to come in andbasically invest in new property
to help increase supply.
That's one thing I certainly dobelieve in.
Speaker 2 (13:29):
So let's talk about.
You're talking about incentivesfor property investors to come
in, and one side of the debateis the negative gearing.
It's a it favours people thatare in property, which I accept
as has been partly true, butthere's a lot of disincentives
for investors at the moment.
I think that goes a long way toexplain why they're not
partaking in the market the waywe need.
(13:50):
When it comes to housing,investors are crippled by land
tax.
Every year we regularly seethrough our rent roll landlords
who don't actually keep a dollarof rental income from January
to out to April because they'vegot to pay a massive land tax
bill.
And those that are not inhousing in or in apartments are
(14:11):
paying big strata levies in manycases, whether it be for
increased insurance costs in thestrata or, you know, gyms,
lifts and pools and amenitiesthat they don't use.
So the investors do what anymoney flow does when it doesn't
work for them it stays on thesidelines or finds other avenues
.
So my question to you here isthat the state government of you
(14:32):
know, in fairness, dominicPerotay had a go at fixing the
land tax issue, but a stategovernment's sort of cooking the
goose that lays the golden eggswith the way they over tax and
over regulate investors in theproperty market.
Speaker 1 (14:49):
Yeah, look, I would agree with that notion for sure.
Or you have higher holdingcosts in the form of taxation,
you have high transaction costsin a form of bracket creep on
stamp duty that's going to deterinvestor activity.
That will mean that we'll seeless property that's been built
over the future and we'll seeonce again a move towards
(15:10):
existing property owners findinga way to get more income from
their property, and that meansultimately potentially leasing
in the short term market.
Speaker 2 (15:19):
Yeah, indeed, you know they're throwing not that
it's a market based issue, butthey're throwing regulation over
the top of property managersand landlords where you must
accept pets, and coming up withall sorts of rules here which
make investing in property lessdesirable.
Yes and we need them more thanever.
Speaker 1 (15:36):
Yes, yes, that is correct.
Now, I am a believer in somefundamental tenancy rights, of
course, and we sadly have somevery unscrupulous landlords out
there who do not play fair, noquestion.
But this thing, there needs tobe more balance, there's no
question about that, andpotentially the pendulums just
(15:56):
swung a little bit the other way, to the point where landlords
are looking at the numbers andthey're saying this isn't
working and they're walking awayor, as mentioned, they wish to
lease their property out viaAirbnb or states.
Speaker 2 (16:11):
Yeah, and I think that comes back to the primary
point we're making here is morelandlords are selling out than
are buying in, that's right.
And has been the case for a fewyears ago, a few years now,
which fundamentally reduces thestock of rental properties
available, making it ultimatelyworse for the tenant.
Yes, that's right.
Yeah, louis, in 2023, thepremium end, the prestige end of
(16:33):
the market, was clearly thestrongest performer.
It seemed like it was easy tosell a house for 10 million in
an apartment for a million.
That's right.
Bizarre, but there you go,segmenting the Sydney property
market in 2024,.
What do you think is going tobe the best performers?
Speaker 1 (16:49):
Provided the economy holds and doesn't slow down too
aggressively, we will see thetop end continue on.
I say that because the top endof the market is driven by cash
buyers predominantly, whereasthe market we've in, say, the
one million to about threemillion mark, are actually
(17:11):
driven by borrowers, and withthe rise in interest rates our
expectation is that borrowerswill find it harder to actually
come into the marketplace, sodemand should fall away in that
segment.
Hence the reason why, forSydney itself, we're a little
bit more negative onfreestanding houses.
For properties between one andthree million, we believe units
(17:33):
are actually going to outperform.
When I say units I meanestablished units and especially
units under a million dollars,because of mortgage.
Speaker 2 (17:40):
So you're saying they don't rush out and buy off the
plan and blame Louis?
No, I'm not.
Speaker 1 (17:45):
But yeah, so we're expecting units to do better.
What we've been noticing inmore recent cycles is that
during downturns, units havebeen outperforming, and during
upturns, units have beenunderperforming.
Speaker 2 (17:57):
Ah, very interesting, Great points there.
Just coming back to theprestige end of the market, set
to outperform again in 2024.
If there is one thing that'sreally unhealthy that we've seen
in Australian society in thelast few years, it is that the
wealthier seem to be gettingwealthier and the mainstream
seem to be falling furtherbehind.
(18:19):
How do governments sort of fixthis widening wealth gap that's
occurring in our society so?
Speaker 1 (18:26):
it's got to be done, in my view, by rapidly
increasing supply, in a similarway that we did in 1950s, 1960s
and early 1970s, so you get agood supply side response that
creates more affordable housingAt the same time.
I believe we need caps onmigration, so I think that would
(18:47):
help the situation as well.
But in all, all said and done,the reality is that as an
economy becomes more prosperous,you're going to find properties
which are in the greatestdemand.
Let's face it, that's your verytop end affluent properties.
Harvest side properties willcontinue to remain in demand and
(19:09):
will continue to be very rareproperty since the reason why
they sell for absolute topdollar.
No amount of supply is going tochange that.
Speaker 2 (19:17):
We know that there is a lot of money and cash around
at the top end, but there was anoticeable increase in offshore
buying in 2023 as well forforeign buyers and a bit of
expat buying coming back home.
Have we got some sense of therole of foreign investment
played in the market rally of2023?
Speaker 1 (19:38):
Well, sadly, the data which comes from the foreign
investment review board isseriously lagging, so we cannot
confirm through formal data.
We know the numbers of 2022 didshow a little bit of a pick up.
I suspect 2023 will show asignificant pick up and I think
the numbers will be higher againin 2024.
Yes, because we're relying onanecdotal evidence, agents
(19:59):
talking about what they'reexperiencing on the ground, and
we've got to be careful ofhearsay and sometimes it's hard
to basically identify ifsomeone's a foreign investor
versus a third or fourthgeneration local.
Speaker 2 (20:14):
There's some pretty wild stories out there about
offshore buyers paying cash andoutbidding the local crowd,
though wasn't there?
Speaker 1 (20:22):
Yes, there has been stories about that, and I recall
similar stories back in 2013 aswell, and then back in 2005.
So these do come along.
I do think it does happen.
Let's keep in mind that thereare rules in place.
Sadly, some of these rules youcan get around.
Yes, no question about that,but as a percentage of the
overall market, I still thinkit's a relatively small
(20:43):
percentage in terms of foreigninvestors breaking the rules.
Speaker 2 (20:48):
Coming back to infrastructure in Sydney, which
obviously the West Connects hada pretty rough start.
Yes, it was infrastructure thatwas hoped would redefine many
things in the city.
Yes, the Sydney Airport, theWestern Sydney Airport, I should
say, is close to completion.
Yes, massive infrastructurehappening in Western Sydney.
(21:08):
Yes, what do you see that doingto residential property markets
in that part of the world?
Speaker 1 (21:15):
History has shown us that when we've completed major
infrastructure projects inSydney that there's been a
benefit for those suburbs nearby.
So back in the early 90s, whenwe completed EDM II, all those
suburbs in that areaoutperformed the city-wide
average for the next 10 years.
So I wouldn't be surprised tosee outperforming locations in
(21:39):
the West benefiting fromindirect employment growth from
people wishing to live closer toa greater amenities and
facilities there,notwithstanding localities which
are right under the flightcorridor.
Speaker 2 (21:55):
And millions of people now live west of
Parramatta.
Yes, and when they need at themoment, when they need to head
overseas or interstate, they'reheading through the city into
mascot, where they can head westto Badgeris Creek to get a
flight now.
So you would suspect that thatwill hopefully these traffic
(22:17):
movement around the city.
Is that going to give somevalue capture to inner parts of
the city that are used?
To airport rat runs.
Speaker 1 (22:24):
I think it will to an extent.
That said, though, if the citykeeps growing at, say, 2% to 3%
per annum, turns a populationexpansion, that benefit will go
pretty quick.
Speaker 2 (22:35):
So all this infrastructure?
As we saw, the tunnels inWestConnex were full on week one
, not only due to poor signage,but too many people.
So that's the risk forgovernments is they fill the
place up as quickly as theybuild infrastructure.
So there's no net benefit forthe locals, correct?
Speaker 1 (22:53):
Correct, and that's happened in the past, yeah.
Speaker 2 (22:55):
Louis.
That's an interesting andterrific forecast on what's
happening in 2024.
And we look forward to catchingup mid year to review
everything.
Thank you, peter, thanks forjoining us today and thank you
for joining us on TalkingProperty, and we look forward to
catching up with you next time.
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