This episode was recorded on the land of the Wurundjeri people of the Kulin Nation. We pay our respects to their elders, past, present and future.
Hello and welcome to another episode of Precisely Property. I’m your host Richard Temlett. I’m excited to be with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property with a focus on dynamic discussions with industry leaders. In this episode, we’ll be talking with Sherman Chan of the API. So, sit back, relax, and let’s get started.
Sherman is the inaugural chief economist at the Australian Property Institute with over 20 years of combined experience in government, banking, consulting, membership associations and university lecturing. Sherman enjoys applying economic analysis to a broad range of topics. In her role at the API, her key publications include the quarterly market update, which guides members to focus on the economic indicators that matter the most to the industry, and the Australian property market outlook, which equips members with insights on emerging trends.
Welcome, Sherman.
Sherman: Thanks for having me, Richard.
Richard: Sherman, as we discussed offline today, I’m really keen to talk to you about your new role at the API, but also in particular, some of the reports that you’ve prepared and in particular the market outlook report, which just talks about the sentiments, which I understand is a quarterly report. And I think it’s really important and really timely to share these findings just so that our listeners who are in both the public and the private sector, as well as across all the states and all the asset classes. just get some insight into what’s happening across these asset classes in different states. Before we get into that though, I did have an icebreaker question for you. If you could jump on a plane tomorrow and spend a week anywhere in the world, where would you go and why?
Sherman: This is a very interesting question. If I only returned from holidays a few weeks ago and I went to Canada where it was freezing cold. So, for these upcoming hypothetical holiday, I think I’d choose somewhere a bit warmer. And I would pick Kenya in Africa because one thing that’s been on my bucket list is to watch the Great Migration. And because I just got back from holidays, so I probably booked the trip now and travel in a few months’ time.
Richard: Fantastic. Well, I actually went to Canada last year, so we have to catch up another time to just talk a little bit more and share travel stories. As you know, I am from South Africa. I love my safaris and going to the game reserves. I’ve actually not been to Kenya, it is on my bucket list. I certainly would be highly recommending to yourself and also the audience, get to Africa if you can, go see the wildlife. It is absolutely spectacular. That being said, I thoroughly enjoyed Canada. And so I hope you weren’t too cold, but it is an absolutely beautiful country.
Sherman: Absolutely. Well, let’s swap travel notes offline.
Richard: Fantastic. All right. Well, for today’s episode, as we discussed, I’m really keen to just talk to you about the Australian Property Market Outlook Report. I believe this is the second version that you’ve published. It was in the headlines quite recently over the last week. I’m keen to talk to you a little bit more about really why I just prepared some of the methodology, just explain to the listeners the ranking system that you very intelligently prepared, I feel. And then let’s start talking in a little bit of detail about how the different asset classes are performing versus how they were compared to six months ago. In terms of the actual reports, why was it prepared and what is briefly, what’s the methodology?
Sherman: Okay. I think I’ll give you a bit of history here with regards to my role. My role was created in August, 2025. And the objective of my role is to actually generate insights for property professionals, especially property valuers, which make up a large part of our membership base. Our intention is to not duplicate existing property research out there because as you know, They are already very well-established research reports currently in circulation. But our goal is to provide additional insights. For example, we don’t do pricing forecasts, but we aim to identify underlying drivers of property prices. So that’s the main goal behind this product. And we really hope to support property professionals and even market watchers out there in terms of interpreting the emerging pricing trends and also understanding sort of what to expect given evolving economic developments.
Richard: Fantastic. Can you then just explain a little bit to both myself and then just to our listeners, just about the methodology that you use? You’ve started to explain to me and I actually thought it was really, really clever. So what is the methodology?
Sherman: So, the Australian property market outlook report is based on a quarterly survey that we sent to our members at the end of each quarter, asking them for the expectations for the upcoming quarter. So, for example, the recently published report based on Q2 expectations was actually done at the end of Q1. We try to keep turnaround time very tight so that the findings remain current by the time of publication. And in terms of sample size between the first two issues, as you mentioned, we only rolled out this product at the start of 2026. So, there’s only been two issues out there. Between the first quarter and the second quarter, we have an average of about 300 respondents. About three quarters of them are property valuers. And that’s pretty much a reflection of what the Australian Property Institute is. We were founded a hundred years ago as the Commonwealth Institute of Valuers. So even now we still have a large portion of our membership base that are still property valuers with them specializing in different areas. So that gives us insights into pricing trends in each of the key asset classes. So in terms of the analysis itself, we derive two main scores. So the first one is called the API Property Market Outlook Index. So that is a composite score that gives people a quick interpretation of the overall outlook. We provide state breakdowns so you can see how the five major states are trending. So, of the five major states, I mean, New South Wales, Victoria, Queensland, Western Australia, and South Australia, with the smaller states and territories obviously is a bit more difficult to provide an actual score because of the small sample size. But they are captured as part of the broader national score. So, the score is basically from zero to ten to make it easy for people to understand with zero being extremely weak and ten being extremely strong. And five is the neutral level that we see as kind of like the pass mark. You know, anything above five is considered positive or upbeat. Anything below five is considered sort of, you know, a bit more pessimistic or cautious.
You know, if we may describe it that way. So again, the score is designed in a way that allows people to quite conveniently summarize what the outlook is like. And then the second set of scores that we generate is called the property market sentiment scores. So this one provides a breakdown by asset classes. So, we captured the key asset classes that property professionals mostly follow. So, with that being residential, industrial, retail, office, and agricultural. So, we just hope that every property practitioner will find something interesting out of our report.
Richard: Great. Well, look, thank you for that very, very succinct summary. That was absolutely fantastic. I certainly can speak on behalf of a number of people who has had some very good feedback. I certainly read it with interest and I certainly use it also with our both internal and external research. And obviously when it’s external research, I refer to yourselves as being the authors. All right. Thank you that. Let’s actually jump into some of the findings before we get into the individual asset classes, because we were talking offline and I’m keen to talk to you about interest rates and building costs and things like that. Just at a high level, how are all the different States doing and how were they doing compared to say six months ago?
Sherman: So what we’re seeing is that we’re almost seeing two different tiers of scores when it comes to the property market outlook. So on one hand, you’ve got Western Australia and Queensland really leading the pack. The outlook despite the recent retreat in Q2, we’re still seeing a very healthy score for these two states along with South Australia. On the other hand, we’re seeing New South Wales and Victoria being a bit more cautious with their scores sort of gradually approaching that neutral line that I mentioned. So, we’re closely watching those two because once it reaches the neutral line, it means there are a bit of red flag that we need to be. I’m extremely careful about.
Richard: Great. All right. Well, in terms of the ones that are either doing really well or really poorly, what are some of your views as to why that might be? Was that teased out in the survey?
Sherman: Okay. I just want to quickly clarify one thing here, because I think people tend to look at the ranking and then think that, oh, New South Wales and Victoria are coming last. But what I always remind people about is that despite them being the lowest on the, on the leather, their scores are still about five at the moment. So we’re still seeing them as being neutral, except they’re sort of on our watch list more closely just to make sure that it doesn’t dip into negative territory. So in terms of what actually are the key differences behind these states is what I see from the latest findings is that there is a difference in terms of business confidence and consumer confidence. And I think given the current uncertain economic environment, confidence is playing a much bigger part, in terms of driving the overall sentiment or property market outlook. You mentioned interest rates. What we found in the latest research is that under the current circumstances, the interest rate outlook is now that single factor that is affecting every single asset class. Because if you remember about six months ago, people were still expecting more interest rate cuts and people were still talking about when the next rate cut would be, et cetera. And then came February disgee, all of a sudden the interest rate cycle has shifted. So that must have caught a lot of people off guard. And I think a lot of people are still adjusting their expectations with regards to this new interest rate cycle.
Richard: Great. I saw in one of the articles, congratulations by the way, I saw you in the AFR, which is a fantastic achievement, which is either AFR or another article in Green Street News where you were talking about confidence versus the structural unsupply. But then also the market fundamentals and you made a comment about confidence now actually having a greater impact than the market fundamentals. Let’s talk about that a little bit more because I certainly agree with you and as it applies to the resi market, can see in certainly locations or sub-markets, buyers are very unconfident. So I suppose in your view, in what you saw from the data, what, I suppose, what are your views on that in terms of that confidence?
Sherman: Currently we’re seeing a mix of different forces at play that are affecting the various asset classes. What we’re seeing is that there are some structural factors that are still driving the underlying trends, but at the same time, the headwinds or the moderation in confidence is really having a bigger role in this latest quarter. Because I think given all the domestic and global challenges at the moment, For example, the war in the Middle East, no one knows when it’s going to end. And that is really putting a lot of people in this wait and see category. So, confidence is pretty soft at the moment, whether it is business confidence or household confidence. Because apart from the war itself, it’s more about the impact on how it affects people’s day-to-day lives, petrol prices, and it affects business operations as well, because businesses don’t know whether they can have access to the essential supplies, in particular, energy. So that is really affecting uh confidence. In that, what I mean is that it will affect people’s spending decisions, it will affect people’s investment decisions at this point in time. So, while sentiment is something that doesn’t really mean conditions, right? But it has a risk of actually you know, engineering a downturn if people are feeling a bit pessimistic about the outlook or if people are feeling overly cautious about the outlook. So that’s something that we are very mindful of in this second quarter. But as I mentioned before, there are still a lot of structural factors at play. So take resi, for example. What we’re seeing now is that there’s still, you know, this persistent gap between supply and demand when it comes to housing. So that shortfall is still putting upward pressures on property prices, except that the weak sentiment at the moment i-s limiting the growth or in some areas, probably even putting downward pressure on prices.
Richard: Gotcha. Okay. Look, let’s jump into the different asset classes. And then I’m, keen to talk about those asset classes against various key markets. So let’s start with residential. I saw initially, in, know, I think it was your first survey. Residential confidence was actually higher. was about 7.2, if I remember correctly, higher than the majority of the other asset classes that has reduced. And I believe it’s actually been overtaken by an industrial. You can obviously correct me if I’m not correct with that, but as it applies to residential and it’s start with Melbourne and Sydney, what’s other than interest rates, what else is happening on the ground that’s just weakened sentiments in the residential space.
Sherman: Yeah. So New South Wales and Victoria are the two states with the lowest sentiment scores when it comes to resi. And yes, the interest rate outlook itself is affecting every state across the board, but it probably affects New South Wales more than other states because property prices obviously are higher in New South Wales. And what, you know, if you look at the data, you can also see that the average loan size is also larger than the other states. So, what it means is that people are practically more sensitive, to interest rate hikes because it means it will affect serviceability, will affect people’s long repayment abilities. So that’s why it is having a more sizable impact on New South Wales. And in Victoria, sentiment has been soft for quite some time. People are concerned about the various taxes and also drop market outlook as well. That is another factor that is affecting the property price outlook because as you know, people need to have job security. And, a steady stream of income in order for them to actually feel comfortable about getting into the housing market. So, these are the two key factors that are affecting, property market sentiments. So if we want to look at these as to, to more temporary shocks, but as I mentioned before, there are still structural factors at play, across every state in Australia that are still sort of providing a bit of a buffer when it comes to supporting the residential, property sector.
Richard: Great. I must admit, when I read your report, I was surprised that, sentiments in the resi space in New South Wales is lower than Victoria. Is that right?
Sherman: Yeah, just. So, um, the latest score for Victoria is 5.5 and for New South Wales is 5.2. And as, as you pointed out earlier, you know, we’ve seen a bit of a, um, you know, decline in, across every state, but it’s just been a bit sharper in New South Wales, , this quarter. than the decline in Victoria. Cause otherwise for the past two quarters, New South Wales was sort of a bit higher than Victoria in terms of the outlook score.
Richard: Very interesting. Okay. I think it’s just important for our listeners to hear, and especially those like myself that live in Melbourne and Victoria, they are very different market conditions right now. Its sentiment that is very weak in the state. When I come up to Sydney and I try to up to Sydney every four to six weeks and the same with Brisbane, I just, can feel it on the ground when I walk around the city center and when I speak with my colleagues in the different offices, especially in Queensland, we’ll get onto Queensland in a second, sentiment is very different. And so, I was surprised because I did think that New South Wales would be not as high, obviously, as Southeast Queensland or WA, but certainly it would be higher than Melbourne. And so I think that is one, an interesting finding for everyone to keep in mind, but two also for the Melbournians to just be reminded that it’s not necessarily all doom and gloom and biggest and most expensive city actually has sentiment that right now is lower than Victoria.
Let’s jump onto still with residential at the other end of the spectrum, I do see that Southeast Queensland, WA and even South Australia actually still have high levels of confidence and sentiment, is that correct?
Sherman: Yeah, that’s correct. Like you, I also visit different states as part of my job. And two weeks ago I was in, in WA and I share, I share your observation about the difference in terms of the confidence level and just the feeling that people are feeling uh more optimistic or people are, or let’s just say sentiment is a lot more solid in some other states. And there are some reasons that I think we can relate to. So, for WA, for example, there’s always the mining sector providing support for employment. And then with Queensland, we all know that there’s upcoming Olympics as well. So that’s really helping to support confidence, whether it’s business confidence or household confidence, because it means that demand for workers remains strong. You know, with a secure job outlook, I can’t emphasize enough how important it is in terms of sustaining household sentiment. And even if you look at some of the household spending data, you can see that, for example, in Western Australia, households are still spending a lot more than in other states in terms of growth. You know, despite all the cautious sentiment out there that we’re feeling across the board, you can see that, WA in particular is, , showing a lot more resilience. All right. Look, let’s shift gears and jump into industrial. When I read your most recent report, seems that industrial has the highest levels of sentiments. And I appreciate that industrial is a, quite a, diverse asset class, but when I reviewed some of your findings, it does seem that things like data centres, last mile logistic centres, warehouses have the, I suppose, are perceived by the industry to have the greatest levels of positive sentiment compared to some of the other asset classes. So, is that the case and what were some of your findings in the industrial sector?
Sherman: The industrial sector is looking increasingly fascinating to me, I must admit. So, looking at the latest results, what we found is that the industrial sector has been the most resilient across all the different asset classes. Because as I mentioned before, given the global and domestic economic uncertainties, we’re seeing a moderation across the board when it comes to market sentiment. But industrial is looking the most solid. It’s even overtaken resi to have the strongest outlook. So that in itself is something that I found very interesting. And just going a bit deeper in terms of what the key drivers are. What I found in the first issue of our report, we already identify that gone are the days when people immediately associate industrial with manufacturing activity. So right now, what’s supporting the industrial sector is actually e-commerce being the biggest driver. And that’s understandable. I’m sure like, you know, everyone can relate to this. We’re increasingly shopping online, which means that the mindful warehouses remain strong and that is still the case. And at the same time, we’re also seeing rising demand for data centres as well. So that is another source of support for the industrial sector. So this underlying economic transformation that we’re experiencing is actually providing very, very strong support for the industrial sector to the point that is almost shielding them away from some of the more temporary shocks like, you know, the change in interest rate outlook or, you know, the broader retreat in business confidence.
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Richard: In terms of industrial across the different states, which are the states that are actually performing the strongest? I have to say the scores are definitely even more even for industrial compared to other asset classes. you’re seeing Victoria having the lowest score, but that’s 6.4, which is still firmly in the positive zone and the highest being Western Australia,7.5. So as I mentioned before, the range of scores actually is quite tight for industrial, which again shows that the sector itself is showing a lot of resilience and even strength, would say.
Richard: Great. Yep. I must admit that did when I reviewed the report that made a lot of sense. Okay. Let’s jump then into the commercial office market. I’m interested to know what your findings were there, given that we do have the structural changes in working from home. And we’ve got on the one hand, Victoria, which seems to be mandating that office workers can work from home at least two days per week. Conversely, you’ve got New South Wales, it has basically asked everyone to come back into the office. That obviously drives demand for commercial office floor space. What are you seeing then in terms of the levels of sentiment across the commercial office markets?
Sherman: Sentiment is definitely not great when it comes to the office sector. It’s almost painful to see the downward trend. So last, in the first quarter of this year, the sentiment score was already 4.9, sort of just below that neutral level. So, it was on my watch list for sure in terms of how things are trending. And then in Q2 nationally, the score even fell to 4.6. So that’s a bit concerning. for two consecutive quarters of sort of, know, sub-neutral scores. And if you look at the state breakdown, you also see that, you know, three states have scores below five and that even includes Western Australia at 4.9, sort of just below that neutral level. And then you have New South Wales at 4.4 and Victoria at 3.6. So just like every other asset classes, you can see that there are structural factors, underlying factors that are affecting this sector. And as you mentioned, you know, working from home is, one of the key drivers really. And that along with the evolving nature of work, like how roles are structured these days, there are some jobs that are created to be entirely remote based, in which case demand for offices would be different, you know, given these changes in the, you know, in the corporate trends. So you’ve got these factors that are affecting uh the office sector. And then at the same time, you also have the current headwinds such as the interest rate outlook, general economic conditions and very cautious business sentiments. So basically, this is a perfect storm. You have both the structural factors not working in favour for the sector. And at the same time, there are plenty of headwinds as well that are affecting the sector. And what I’m sure a lot of people have seen is that there’s also the flight to quality as well. So demand is now more geared towards the newer office space, you know, where you have sustainability priorities, where you have, you know, better amenities. So in some, in some markets, we’re probably even seeing a bit of a two tier sector.
You see the, newer stocks being of high demand, whereas the older stock is probably struggling a bit more.
Richard: Very interesting. What are you seeing in the Brisbane office markets that seems to be emerging as a much more mature market? There seems to be quite a lot of activity. And is that being reflected in some of the sentiment results? So in terms of the office sector, Queensland actually has the highest score when it comes to the office sector and you know, despite that being the highest, I have to say is still relatively cautious at 5.6. But having said that, the outlook for Queensland is definitely very, very healthy, as I mentioned before, because of the upcoming Olympics. So people know that a lot of infrastructure work will have to happen. A lot of stakeholder engagement or investment activity will be happening. So, the job outlook is positive and, and the work from home culture is not as strong in Queensland compared to other states like New South Wales or Victoria. So that’s definitely helping the Queensland office sector stay solid.
Richard: Very interesting. All right. Let’s jump into then retail. And I must admit, this was one that I was surprised at when I saw some of the results in your report, because I had, I had at least thought on some of my discussions that there was certain segments of the retail sector were actually starting to improve and perhaps they are, but I’m interested to know with your results, how is confidence in the retail sector? It is a very well understood asset class, especially compared to say residential, whereas retail seems to be a lot more institutionalized. So, what’s happening with the retail sector and which states are performing the best and the worst?
Sherman: So, in terms of the retail sector, we’re seeing South Australia actually coming first, a risk of 6.5 followed by Western Australia and Queensland at 5.9. Other than that, it’s a similar picture. You see New South Wales and Victoria being a little more downbeat, both with sub-neutral scores. And what I should point out is that the retail sector is particularly sensitive to consumer confidence, as we can all relate to this. If people are feeling uncertain about the future, they probably hold back on spending, and therefore it directly impacts on retail performance. So right now, confidence is definitely not doing great because of the uncertainties. So retail is definitely filling it firsthand and very immediately as well. And job market conditions, of course, even though the official data are still showing a very tight Labor market, but they are increasing talks about layoffs and about roles being restructured, given the AI trends. So, there are a lot of people actually feeling a bit cautious with regards to their jobs outlook. All that would be having an impact in terms of consumer sentiment, which then affects the retail sector’s performance. And not to mention interest rate outlook as well. In some states like New South Wales, as I pointed out before, people are in higher debt, which means that they’re extra sensitive to interest rate hikes. Every time the LBA announces a rate hike, you can see these people immediately doing calculations about how much more they need to set aside, which means that that would be taken away from the spending in retail activity otherwise. And what we’re also seeing is that there are underlying factors here as well, such as the changing consumer shopping preference. People are increasingly shopping online. So, what I mentioned before was people holding back on spending, but then if you think about it, even if people spend these days, a lot of the spending is actually done online. So what it means is that it’s probably benefiting. the industrial sector in terms of demand for warehouses, but at the expense of the retail sector, where people walk in and actually shop in person.
And what we’ve found in our research, both last quarter and this quarter, is that this is putting more pressure on shopping centres to maintain their appeal to shoppers. And there’s also pressure in terms of precinct revitalization so that you can improve the appeal to potential shoppers. So again, this is I think the retail sector is also undergoing this transformative stage. You basically need to adapt to changing consumer preferences in order to survive or to thrive.
Richard: Really great summary. Thank you for that. That makes a lot of sense. And I must admit having gone through the majority of the asset classes and we’ll jump into agricultural shortly. The word that continuously keeps jumping out is what you said previously, sentiment. And sentiment is driving behaviour, whether it’s buyer behaviour or rent behaviour or occupier behaviour. I mean, I suspect that’ll be probably one of the key words for the rest of 2026. Talk to me a little bit more about agricultural. I don’t do a huge amounts of it, but I am fascinated by it. And I know obviously it is a important segment and of a major interest to your members being, being that valuers. So how is the agricultural sector actually performing?
Sherman: Interestingly, the agricultural sector is not as sensitive to confidence as the other asset classes that we’ve talked about today. That is because it is more dependent on some actual factors. So what we’ve found is that the agricultural sector has been flying under the radar, I have to say. The score has been positive from our research and for the latest quarter, the overall market outlook has a score of 5.7 out of 10. Not spectacular, but it’s holding up pretty well. And you can also see that apart from New South Wales with the lowest score being 4.9, every other state is actually looking pretty good with Victoria scoring 6.2 and Western Australia scoring the highest at seven. What we found is that there are some really practical support here when it comes to what’s maintaining prices here. So first there’s still market demand for agricultural products and What we are also hearing is that the quality of agricultural land has improved. So thanks to the recent rainfalls, there’s moisture in the soil that allows some farmers to even start their winter crops early. So, all of these factors are actually helping to support the sector. And like every other sector, it is nevertheless still exposed to the interest rate outlook in terms of any downside impacts and also physical climate risk. But at this point in time, we’re still seeing a pretty solid agricultural sector. That said, we’re closely watching the development of the war in the Middle East because increasingly we’re hearing farmers about scaling back their operation if they can’t access sort of, you know, the inputs that they need in order to produce or, but at the end of the day, the export outlook is still looking, it’s still looking pretty solid. So that bodes well for our agricultural sector.
Richard: Really interesting. Okay. The two issues that I was keen to just close this session off with you, and I’ll certainly give you my views too, are both interest rates and then also construction costs. So, let’s start with interest rates. We do have a meeting next week in the RBA. I’m interested to know what your views are and what you think they’re going to do. And then for 2026, what you think the outlook for interest rates are.
Sherman: Okay. So what I’m seeing is that with inflation continuing to pick up even before the war in the middle East, even the RBA has admitted that inflation will keep accelerating for at least another year before we see it retreat and it probably won’t return to the RBA’s target zone for quite some time yet. So, the outlook has always been more interest rate hikes. And now that there’s the war in the Middle East that is putting even more upward pressure on prices, definitely we’ll see more interest rate hikes in the near term. And the only difference is in terms of timing whether it’s going to be the next meeting or the meeting after. But I think we just need to be, we just need to be pragmatic about this interest rate outlook. In terms of whether interest rates are the solution to the current inflation issues, my view does differ from some other people because I think the current inflation shock is mainly attributed to supply-side issues. Whereas interest rates deal with demand side issues. So, is it the perfect way to, deal with inflation or to try and bring inflation down? I don’t think it is, but that’s, but that’s the only tool that the RBA can use to bring it down. And we all know that inflation is the, is the KPI. So, you know, they have to act.
Richard: Really great response. Thank you for that. Just to close that loop out. I do speak with as many chief economists, including yourself, and to try and form, and then obviously I’ve got my own views. And your points about rates rising over the course of the year, almost being baked into a lot of forecasts and decisions by various developers, financiers, builders, I think is well made and certainly is what I am consistently hearing. I do believe that rates will increase over the course of the year. I’ve also actually taken the same approach as you in terms of going, well, it’s less so about timing and more about the fact that it is likely to occur. I mean, that’s certainly been put into a lot of the advice that we’re giving. I do feel that we just need to immensely prepare ourselves for a high-interest rate environment, which obviously then impacts in the resi space, for example, buyer purchasing power. But there’s also opportunities as we know, especially if you’re in private credit and debt, suddenly it does look more attractive. The market does respond, especially New South Wales and Victoria, because they are the most heavily indebted states to change in the cash rates. But I think that a lot of buyers or investors, they’re certainly not idiots. They would be factoring a lot of this uncertainty and the fact that there’s like to be a higher rates over the course of 2026 into their investments and their development decisions. Let’s jump into building costs. I’m interested to know what you’re hearing on the ground from building costs. I’ll start answering this, but I would like to get your view and obviously what you’re hearing from your members. I do remember over the pandemic, was rapid escalation typically because of the cost materials and with borders being closed and supply being reduced. And over the last couple of months, I have started to see similarities to back of the days where we saw toilet paper hoarding by consumers and people trying to put fill their warehouses with bricks or timber and stuff like that. Certainly I am, when I speak with people, we are seeing building costs increasing and the forecasts don’t look that great for the next couple of years in the sense that they’ll cost of delivery will be much greater. What are you seeing in this space? What do you think? Is it materials specific? Is it sector specific? What are you seeing and hearing?
Sherman: I agree that the construction cost outlook is actually quite concerning. So I’ve been studying the trends of construction costs over the last decade. And what I’ve found is that prior to the pandemic and even during the pandemic when construction costs basically skyrocketed, raw material price increases and construction wages were increasing pretty much hand in hand at the same pace. But ever since we started talking about the worker shortage across the board from about 2023, see wage pressures being even stronger than the raw material cost increases. Even before the war in the Middle East, we’re already seeing construction wages putting a lot more pressures, upward pressures, I mean, on overall construction costs because there’s a shortage of workers across the different types of work. If you look at jobs and skills, Australia’s detailed breakdown in terms of the different occupations, you can see that electricians, painters, carpenters, you name it, there’s a shortage in every single state and there’s a shortage in both metropolitan and rural areas. So when we talk about wanting more to be built, basically we’re fighting for a fairly limited pool of available qualified workers. So therefore, what we’re seeing is that construction wages have been rising very rapidly. you know, now that you know, with the war in the Middle East, what we’re seeing now is that fuel costs or you know, just general energy, energy costs is rising. So that means that, you know, what I mentioned before, the raw material cost that has, you know, that has been rising a bit slower than wage costs is also likely to pick up. So, you know, given the sector is still pretty much catching their breath from the pandemic, the outlook is that price increases are going to accelerate. And what we’re hearing from the ground is that a lot of people are still thinking that prices are probably at least 20% higher than what they would be comfortable with, given the longer-term trends. So I always encourage people not to expect prices to fall because falling prices isn’t a great thing for the economy.
You don’t want deflation, but at the same time, people do want to see a more reasonable increase in prices as opposed to the very rapid price increases that we see. Not to mention the uncertainty when it comes to accessing the resources that they need, whether it is about the raw materials or whether it’s about the workers needed to get the jobs done.
Richard: Really great answer. Thank you very much for sharing that. I’m sure there’ll be. a number of listeners that’ll get some good insights and ideas out of that part of the discussion. Look, I know we’re almost out of time for today. I will just let our listeners know that I’ll be putting a link to your most recent reports and some of the other articles that I’ve seen that you have prepared on your website. Thank you very much for coming on the show. Just to close off, is there anything else you want to let our listeners know either with respect to the reports or just in general, as it applies to the property market.
Sherman: I just want to highlight the fact that the outlook is very uncertain at the moment because of the war in the Middle East. Because I think at the start of the war, a lot of people dismissed it as a temporary shock. Some people even argue that it wouldn’t have any material impact on the economy. But the longer it drags on, the more it changes the outlook, not just for the Australian economy, but for the global economy as well. So that’s definitely something that we should closely follow in order to readjust our assessments as needed.
Richard: Ithink that is very, very good advice. I’ve had similar discussions a couple of weeks ago with certain clients and I agree. I think if the pandemic has taught us anything, really must not underestimate the depth or the length of some of these global events. And I think we need to just do our different scenario modelling, having a base case, a higher or more positive outlook and then a lower outlook and make decisions through that lens. Because I agree with you, the war seems to be taking a lot longer, playing out more dramatically and impacting asset classes quite differently. And you’re right, the longer it plays out or goes on, the longer it actually takes to return back to market equilibrium. Certainly we saw that with the pandemic. So let us hope that things do start to get resolved as soon as possible, but your point is very well made. And I’d encourage our listeners to just keep that in mind when you’re making your investment and your development decisions.
Sherman, I just wanted to thank you again very much for coming on the show today. You’re a wealth of knowledge. I would encourage the listeners to reach out to you, particularly along the valuers in the space. No doubt that there’s stuff that you’d be able to help them out with in terms of insights. You’ve been very kind with your time. So thank you again for coming on the show.
Sherman: Well, thank you very much for having me. I really appreciate the opportunity to highlight the research that we’ve got. And we do welcome feedback, you know, from the, from the industry, whether, you know, people are members or not, because we just want to produce research that benefits the sector.
Richard: Fantastic. Well, as I said to you at the beginning of the show, it definitely is having a very positive impact. And the feedback I’ve had from the valuers in my office is that the outputs are substantially a substantial improvement compared to previous times. And that’s a very good compliment to yourself. And I know how hard you work to drive these outputs. So thank you very much and certainly keep going.
Sherman: Thanks, Richard. No doubt we’ll keep improving our product over time.
Richard: All right. Thanks everyone. I hope that you have a lovely day.
Hi everyone, hope that you really enjoy the episode between myself and Sherman today. I certainly found it really fascinating. The three key take-hards that I’d please like you to take away with yourself and have a think about separately are as follows.
The first point that certainly resoundingly came up to me in this episode was the concept of sentiments. Now I appreciate that the actual survey that Sherman and the API are carrying out does really come back to sentiment, but when you actually really unpack that. And it reminded me as I was talking with her that when you chart consumer sentiment against price growth, it’s one of the best predictors of where prices are actually going. And her point about sentiment being such an important indicator right now and actually superseding the market fundamentals of a number of areas and asset classes is very well made and investors and developers and I suppose the valuers in industry do need to be aware of that, especially at this point in the market cycle. So that’s sentiment. I actually believe that sentiment may be a really critical and key word for 2026.
The second point that I’d like everyone to just keep in mind is, I really like reports and research that carry out benchmarking and have a time series. And this report, even though it’s only in the third iteration, does some very good benchmarking. It benchmarks different asset classes against each other, but more importantly, it benchmarks different geographies against one another. That’s very important because if you are only active in a particular asset class or geography, there’s the risk that you operate in a silo or have a silo mentality. You don’t look up and all look around and understand what’s happening across other sectors or other asset classes. This is particularly relevant for Victoria where sentiment is very negative as you learned about today. But also I think it is important for people in say, for example, Southeast Queensland, WA or South Australia where sentiment is very positive to also just lift your head up. And obviously not keeping it in the sand, lift it up, look around what’s happening across the country. The markets actually are interrelated with one another, but they do feed off one another. And that’s important to just keep in mind, especially with something like the change in the cash rates, which will flow through different markets separately, but it does still impact buyer or rental occupier behaviour, which then will ultimately drive the impact on pricing or yields. I think that’s really important to keep in mind.
And the final one on that obviously is just with the time series, it’s important to then look back at historic averages and how the markets moving are the periods of time and then reflecting and going well during the periods of these metrics, what was actually happening in the markets. And often does give you bit of context or perspective as to how the markets are performing. And again, that’s really important to just help you with your investment and your development decisions. The final point then, and I’ve kind of started to touch on it in the second point is the fact that I just want to remind everyone that the markets are cyclical. Again, that sounds obvious, but when we’re at a certain point in the cycle, sentiments and so forth is either very positive or very negative, but it’s not going to always be the same or the case. And it’s important to form your own views. We’re all property professionals. Form your own views as to where in the cycle we’re at, knowing that there will be peaks and troughs, knowing that property and investments or development decisions typically needs to be undertaken over a period of seven to 10 years. And you need to be also asking yourself not only where are we now in the market cycle? Where do you think we’re going to be in one to two to five years this time? I think that’s really important. Again, as you just work out where to allocate capital and also from a valuer perspective, where or how you’re landing on your estimate of valuation, and then the financiers, how they price risk. Anyway, that’s all I need to say today. I hope you got a lot out of the episode. Thank you very much. Bye.
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