There’s an endless stream of news articles discussing the economic factors that influence property prices: interest rates, unemployment, the supply of new homes, rezoning, and population growth – just to name a few.
Having followed the property market closely for more than two decades, I have two observations to share.
First, I’d love to have a dollar for every forecast claiming that Australia isn’t building enough houses; this conclusion keeps resurfacing annually, often backed by analyses funded by the property industry.
Second, it astounds me how often property price growth predictions miss the mark.
I recently interviewed David Bassanese, the chief economist at Betashares, on this topic and thought it would be useful to share my insights here.
Keep in mind that most buyers and sellers may not be rational
When forecasting property price movements, it’s important to remember that two-thirds of property buyers are owner-occupiers. Their purchasing decisions are influenced by many factors, most of which are non-financial. For example, a buyer might not mind slightly overpaying for a home if they plan to live there for decades and benefit from lifestyle advantages like proximity to family, work, and schools.
In contrast, when we buy stocks, we carefully consider whether the price makes sense in terms of future investment returns. Stocks are traded thousands of times a day, allowing for a price-discovery mechanism that accurately reflects their intrinsic or technical value. This makes it easier to predict investor behaviour, as their decisions are typically based on logical financial data.
This is where many economic analyses and forecasts of property prices fall short – they often neglect the impact of behavioural finance.
Take the analysis surrounding the “fixed rate cliff”, which received significant attention in early 2023. Many commentators predicted a rise in mortgage defaults and arrears. However, they overlooked that homeowners would go to great lengths to avoid selling their homes. If unemployment remains low, a rise in interest rates and repayments is unlikely to trigger forced sales – but certainly a decline in consumer spending. Additionally, banks apply a 3% buffer when assessing loan applications, and credit conditions are relatively tight, so borrowers must jump through a lot of loops to get a loan approved. That’s why I wrote in early 2023 that the “fixed rate cliff” would likely be a non-event.
The key takeaway is that you can’t rely solely on data; understanding property owners’ psychology and lending conditions is just as important.
What factors are important to consider?
I discuss the indicators that I think are most useful to long-term property investors.
Interstate migration is more variable than overseas immigration
The long-term trend with interstate migration is that NSW loses about 5,000 people per quarter, Victoria loses around 1,000, and Queensland gains roughly 6,000 people. This is depicted in the chart below.
It’s important to note that between 2008 and 2018 (the black rectangle), Queensland’s net interstate migration averaged 3,000 people per quarter, which is 50% below the long-term trend. During this period, the median house price rose by only 2.3% p.a., roughly in line with inflation. Since 2018, both interstate migration and property prices have increased.
Although Perth isn’t shown on the chart, it’s important to highlight that interstate migration was negative from 2013 to the end of 2020. However, it has turned significantly positive since early 2021, leading to robust property price growth over the past 18 months.
Sidebar: A recent trend worth mentioning is that Victoria experienced significant negative net migration during COVID-19, with many people moving to Queensland. However, that trend has now reversed, and Victoria is seeing positive net migration, currently sitting 1,500 people above the long-term trend. While this isn’t a huge number, it indicates that things are moving in the right direction for Victoria.
When it comes to overseas migration, the distribution among states tends to be relatively consistent: 34% go to New South Wales, 31% to Victoria, and 15% to Queensland.
In my view, interstate migration serves as a good proxy for property market sentiment – essentially reflecting how homeowners feel about a particular state.
How much money is flowing into property
In Australia, about 75% to 80% of properties are bought with a mortgage, making access to credit an important driver of housing demand and price growth.
Interest rate settings can impact demand for property. When rates are lower, borrowing capacity increases and it makes property ownership more affordable. However, interest rates aren’t the only factor to consider. Right now, we’re seeing interest rates at a nearly two-decade high, yet lending volumes remain high – only 14% below the record levels of 2021.
What’s likely more impactful are credit policy settings, as these determine which households and demographics can secure loans. Banks use a benchmark interest rate, which is currently set at 3% above actual rates, to calculate borrowing capacity. This means they’re effectively using a rate of between 9% and 10% (amortized over 25 years) to assess an applicant’s borrowing capacity. As a result, lower- to middle-income earners are often locked out of borrowing to invest in property.
This is evident in data from CBA: in the first half of this year, 51% of investment borrowers had family incomes of between $200,000 and $500,000, while 24% earned over $500,000. In total, 75% of investment borrowers have incomes exceeding $200,000, indicating that borrowing to invest in property is primarily feasible for high-income earners. Even then, higher-income earners are having to navigate lower borrowing capacities too.
One consequence of restricted borrowing capacity is that investors and homebuyers must target more affordable areas. I believe this trend has contributed to property price growth in cities like Perth, Adelaide, and Brisbane.
Housing supply probably won’t be a factor
There’s been a lot of discussion about housing supply in Australia. For the past 20 years, I’ve consistently read reports stating that we’re not building enough homes and that there’s a supply shortage. Yet, from my perspective, the market appears relatively balanced.
For an increase in supply to significantly impact investors, we would need a dramatic influx of new housing and the necessary infrastructure to support it. The likelihood of this happening anywhere in Australia is quite low – we have a poor track record of building infrastructure efficiently and on time. Therefore, I don’t believe that investors focusing on high-quality, investment-grade locations should be overly concerned about the new housing supply.
In established investment-grade areas, the primary way to increase housing supply is through higher-density development, such as building more apartments and townhouses. Dr Peter Tulip has researched how development regulations and restrictions contribute to housing supply and affordability. His findings suggest that overly stringent planning regulations substantially contribute to worsening housing affordability.
The supply of apartments in capital cities can also affect price growth. For example, we saw a significant increase in apartment supply in Melbourne from 1999 to 2009, and in Brisbane from 2012 to 2016. During these periods, the surge in supply contributed to a slowdown in apartment price growth.
State governments are pressuring local councils to approve more developments in inner-city areas that already have the required infrastructure. Whether they will succeed is a topic for another day. However, increasing density in these areas could indeed influence property price growth and local knowledge and research are necessary to assess the likelihood of this risk.
Only a handful of data is important
To effectively predict property price growth, it’s essential to understand owner-occupier psychology. Buying a home is a long-term commitment, and owners are likely to endure various challenges before considering a sale.
Credit policy settings and borrowing capacity play an important role, as they determine the amount of money flowing into property markets and which buyers are active.
Interstate migration can also serve as an indicator of changing sentiment, often foreshadowing shifts in property price growth.
Finally, the stringency of planning restrictions and the level of apartment supply can significantly influence property price growth in specific locations.
