Charter Keck Cramer and Precisely Property Podcast respectfully acknowledge the traditional custodians of country throughout Australia. We pay our respects to the elders past, present and emerging.
Richard: Hello, and welcome to another episode of Precisely Property. I’m your host, Richard Temlett. I’m excited to have you 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’re diving into the housing markets across Australia with Tim Lawless. So, sit back, relax, and let’s get started.
In this episode, I’ll be speaking with Tim Lawless of CoreLogic.
With more than 20 years’ experience in analysing housing trends, Tim is recognised as a leading authority on residential property trends. He regularly provides expert commentary on real estate market conditions and the interplay between housing markets, demographic trends and economic factors. As one of Australia’s most popular property market analysts and commentators, Tim’s expertise is frequently sought by a diverse array of audiences from government bodies and policy makers through to national and international corporate entities across the property, banking and finance sectors, insurance, valuations and consumers. Welcome, Tim.
Tim: Many thanks, Richard.
Thanks for the invitation.
Richard: Tim, before we get into our discussion today, which I cannot wait to have, I always like to just set the scene for our listeners, but also talk about some of the relationships that I’ve built up along the way. And just to let the listeners know, you and I do catch up. It’s typically on a monthly basis, and I am so grateful you take the time to talk with me and share information and ideas. I absolutely love our chats. I find a lot of your insights, as I know our listeners do, extremely informative, insightful, and I’m always very grateful that you’re able to take me behind the scenes, see some of the fantastic data, obviously, that you guys produce, and get a firsthand pick of your brain. And so today pretty much could be one of our monthly catch ups. It’s just that we’ve got microphones in front of us. So, I just wanted to welcome you on the show and thank you for that.
In terms of our agenda, there’s so much we could talk about. What I decided to do with yourself is basically three things. We’re going to talk about interest rates in APRA settings, and I’m going to please get your views, and I’ll certainly give mine on where they stand and where we believe that they ought to go. I’m keen to then also talk to you about the housing markets across the various capital cities. We’ll give an update as well as the outlook, which will be the final point.
In terms of framing the conversation for today, there are a couple of things I’d like our listeners just to keep in mind. Some of these are obvious, but I do like to state them because there’s sometimes a misperception when I read some of the media articles out there. The first one is the housing markets are actually very different across Australia. There are different points in the cycle and it’s important to actually understand what’s going on across the various sectors in which people are involved. They’re also incredibly important to Australia. Again, that sounds obvious, but that can’t be understated, and I’m going to quote some of Tim’s or CoreLogic’s stats in a second to frame how important it actually is to Australia.
But why I also raise it is I think everyone who I know, everyone has a view whenever I go to a barbecue or when I’m out, people always have views of what’s going on. But I’ve studied it now for the last 15 years, and certainly, my view is it is hugely still misunderstood. There’s just a lack of clarity of or transparency of a lot of the data. Certainly, both Tim and I are doing our best to get more clarity, more line of sight on all that data because that does need to help and inform investment and development decisions. And then I also wanted to just remind the listeners just how important the role of the RBA and institutions such as APRA are to the housing market.
It’s with that in mind I’m just going to quote because I do love my stats. This is a slide from Tim’s presentation, which we can certainly share afterwards. I’ve seen him present a number of times, but just to give our listeners context. As of today’s date, residential real estate is worth $10.9 Trillion. The value of Australian superannuation is $3.9 Trillion. The value of the Australian listed stock market is $3.1 Trillion, and commercial real estate, the value of that is $1.2 Trillion. Why that’s important is residential real estate is three times more than superannuation and the ASX. When you dig a little bit more deep into those stats, there are 11.2 Million dwellings across Australia, there’s $2.3 Trillion in outstanding mortgage debt, and 56.2% of household wealth is holding housing. That is very important and I think it starts and it frames the discussion that I’d like to kick off with you with respect to the RBA, and the impact of interest rates because another slide that I have in front of me, and again I can post this in our chat, is a chart slide prepared by the IMF where they’ve actually looked at the country level share of fixed mortgages across various countries. And I think that this is absolutely critical to understand because the devil’s always in the detail.
When you look at the proportion of fixed mortgages in Australia, that’s around 18%. When you look at Canada, it’s at 62%, and then when you look at the United States, it’s at 88%. There’s definitely a very different transition mechanism when interest rates increase or decrease and how that flows through and impacts Australia. And I think it’s really important to keep that in mind, and I’ve particularly highlighted Canada because I know the Canadians typically seem to be about 6 months ahead of Australia in terms of raising interest rates, and they’ve recently decreased interest rates. And I know people are looking overseas, but it’s just interesting to know or to keep in mind that the transition mechanism is actually quite different, across different countries, and I encourage our policy makers and decision makers also to keep that in mind based on just the level of debts and the impact of the housing market and the impact of rates on housing.
So that’s just a bit of background. But Tim, what are your views on interest rates in the APRA settings, and where do you think the RBA is going to go over the next 12 months?
Tim: Well, yeah, I couldn’t agree more for starters that the transition mechanism in Australia is quite quick. It’s immediate because we do see so many borrowers on floating interest rates or variable interest rates. In fact, that number you quoted is probably a little bit higher than normal given the surge in fixed rate lending we saw through the pandemic.
With interest rates, clearly well, maybe clearly is the wrong word because there’s a lot of uncertainty around where interest rates are going to be going. I think the broad consensus now is the next move will be downwards. It’s really about the timing, and the RBA governor was quite clear to hose down any prospects of rates coming down later this year, although we still do see some forecast for a November rate cut. But it looks like the consensus again is now coming back into February of next year. Even financial markets, which have been generally quite bearish in terms of the timing for rate cuts, have now come back to February of next year as well.
So, with that in mind, interest rates are very influential on Australian housing markets. They’re not the only thing that influences housing trends. Other key factors would be things like credit availability. Consumer sentiment is another important one. Also, affordability, of course, which we know is quite challenging in Australia at the moment.
But broadly, once we do see interest rates coming down, if that’s February, then I’d expect there probably will be an improvement in sentiment. In fact, we’ve already started to see the small glimmers of sentiment starting to lift, it looks like. We did see the monthly consumer sentiment measure from Westpac and the Melbourne Institute did increase a little bit, through August, which is a good sign. It’s still very low, but my guess is that we start to see more momentum around a prospect and interest rates are coming down. We probably will start to see consumer sentiment lifting alongside, also inflation coming back in towards the target range.
Richard: Great. Well, look, thank you for that, Tim. I think a couple of points I’d just like to jump on. Everyone certainly asks me, no doubt they ask you the same thing, notwithstanding the fact that we’re both actually not economists. They keep going, “well, when do you think the RBA is going to cut interest rates?”
I thought I’d just throw in my views there, and again, the listeners you’d know when I chat with you offline, you’re much more interested in getting different people’s views and then you triangulate that through various different data points and you form your own views. In my mind anyway or keep in mind that a couple of years ago, the RBA said they were not going to raise interest rates to until 2024. I think they do, and they will continue to rely on the data, and it does need to be data dependent. In my mind, and I certainly follow and I speak with a lot of the economists, the general consensus seems to be that interest rates are in restrictive territory right now, and when you actually look at all the data, they are trending towards targets, and I can’t emphasise enough just how important or how relevant this variable mortgage rate and that transmission mechanism is because I genuinely feel that the RBA should already have cut rates. My gut, but not just my gut, when I speak with a number of economists, I still feel that there may be a rate cut in November this year, but leaving aside and assuming even if I’m wrong, February 2025, listening to Tim, I speak with the same people he does, that is roughly 6 months away.
I don’t know when the timing of the federal election will come in and how that is going to impact. There have been rate changes before an election. I recall that was maybe in 2007 that happened. I don’t know what the RBA is going to do there, but why I raise it with everyone is there’s a 6-month window where rates hopefully will start to stabilise. When they do get cut, I’m convinced there will be an improvement in sentiment that should hopefully translate into the start of buyer capacity.
We desperately need the established housing market, and we’ll get into that in a couple of minutes time, to start repricing upwards because the gap between houses and units across all the states and territories is the most pronounced it’s ever been, and it’s a lot of that established stock that actually needs to reprice upwards. We’re in the middle of the State of the Market report that we do for the apartment markets across Australia, and a lot of the established units, that’s townhouses and apartments, across most cities seem to be 15-20% undervalued. Getting that improvement in sentiments and a change in rates cuts, hopefully downwards, will start to pull demand into the market. So maybe in terms of pricing your risk, the next 6 months are certainly critical.
Tim, in terms of APRA settings, I know we’ve debated this separately, what are your views? Obviously, APRA plays an incredibly important role. I don’t envy them like the RBA in terms of having a really good responsibility, and I do believe that they’ve done a really good job, in terms of just protecting the economy. But I’m interested in your views with where they are now with the serviceability buffer. Is it actually reflective of where the current property market and the property cycle is? Keeping in mind that they were set up at a very different point in the cycle during the pandemic. And even before that, there were different buffers in 2017 and 2018 when there was a concern that the market was going to be overinflated by investment. Could you please let our listeners know what your opinion is on the APRA settings?
Tim: Personally, I’d be surprised if APRA started to reduce that 3-percentage point buffer, which essentially means on the mortgage rate that you’re applying for as a borrower, you’re being assessed to repay that debt 3-percentage points higher. So, it is a barrier to entry into the housing market. Arguably, as interest rates start to come down, APRA would be considering to reduce that buffer back to, say 2.5-percentage point, which is where it was during sort of the middle of the pandemic, and they lifted it I think it was October of 2021.
Richard: I believe so. Yes.
Tim: Maybe ‘22. So, the whole idea of a buffer is to make sure that borrowers are able to continue to make their repayments if interest rates rise. I think we’re now in an environment where further rises in interest rates seem highly unlikely. Definitely not off the tables. I think anything can happen, and the RBA governor, again, has been very clear that, as you say, Richard, it’s all data driven. If we did see a rebound in inflation, for example, you know, arguably, we could start to see more pricing in of a rate hike, but I think that’s probably off the table now.
The other toolkit for APRA, of course, is macroprudential policies outside the buffer, which we saw back in December 2014, and March of 2017. And those policies have a fairly immediate impact on the marketplace. If you remember some of the things I mentioned about what really influences housing markets, it’s credit availability is a really key one. So, any changes in macroprudential policy from the regulators will have a big influence on the housing market. I think it’s one to watch, even if we did see the serviceability buffer coming back down to, say 2.5-percentage points, I have a sneaking suspicion that the Council of Financial Regulators will be watching the trend in investment activity. Investors are now about 38% of mortgage demand, nowhere near what they were when we saw the first rate of macroprudential, which was about 46% of demand back in 2014. But it’s happening at a time when we’re seeing the yield generally quite low and mortgage rates very high. So, the spread between mortgage rates and rental yields is quite significant now.
So maybe that’s just a cautionary note from APRA that they may be getting uncomfortable with the level of what they might describe as speculation in the market from investment activity at a time when rental yields are generally pointing towards negative cash flow.
Richard: Great. Well, thank you for that, Tim. It’s always fascinating to get insight into how your mind is working. And again, I know how many different stakeholders and participants you talk about in the market, so you’re ideally placed to speak to that.
Let’s jump into the different housing markets, the different capital cities. I’ll let you decide where you want to start. You seem to have some of the best data that I love going through, whether it’s auction clearance rates or vacancy rates or prices. What’s happening across the different capital cities? Has anything surprised you or concerned you based on the most recent data?
Tim: Well, maybe a good place to start is the diversity in the market. Based on annual growth rates, we’ve never seen a market this diverse before. So, we’ve got at one end of the spectrum, you’ve got somewhere like Perth, where housing values are rising at nearly 25% per annum. At the other end of the spectrum, you’ve got Hobart, where values are down roughly 2% over the past year. Melbourne’s pretty much flat.
You’ve got about a 25 or 26-percentage point spread between the best performing market and the worst performing market, at least across the capitals. We’ve never seen a range or a spread that significant before, so it highlights the diversity. When you look at somewhere like Perth, this market has very strong fundamentals. Even though it has seen values rise so substantially, it’s still reasonably affordable compared to, say Sydney or Melbourne. It’s kind of middle of the pack now for all the different affordability metrics that we measure, like a dwelling value to income ratio or how much income do you need to dedicate to serving a mortgage.
We’re also seeing yields in Perth are generally much higher than average. They’ve still got a four handle in front of them and on a gross level. Very strong rates of interstate migration, overseas migration is strong, and under supply of housing. So even though we’re seeing very strong growth rates in that market, it looks like it still has some legs. At the other end of the spectrum, the markets that are going backwards now, Hobart and Melbourne, arguably, Melbourne’s leading the cycle at the moment. I think we’ll probably soon see some other markets moving into some negative territory, particularly a market like Sydney, for example. Melbourne’s really been a factor of a lot of things. It was quite disrupted through the pandemic. Don’t think I need to talk too much about, Melbourne and the pandemic, but that did have a lot of economic disruption. And that has a legacy in significant levels of government debt now in Victoria, and of course, Victoria has a lot of property taxes that other states don’t or maybe even lower thresholds for land tax would be probably the best example, high stamp duty rates as well.
But we’re also seeing other factors that are probably slowing demand into the Melbourne marketplace. We’re not seeing anywhere near as much investment in the Melbourne marketplace, so investors are about 30% of in Victoria. That’s still about average, but it’s nowhere near the levels we’re seeing nationally, which is getting close to 40%. And in some markets like Perth or Queensland or South Australia, we’ve seen more than a 50% uptick in investment lending over the past 12 months. So, Melbourne has less investment activity, higher debt, higher taxes, arguably some affordability constraints, although that’s becoming less and less a challenge simply given the fact that prices are falling, incomes are rising, so Melbourne’s now improving from an affordability perspective.
And finally, there’s also the supply side of things. Melbourne’s done arguably a much better job of having a healthy housing supply. Not recently, but leading into the pandemic, we saw Melbourne delivering a lot more housing supply than most other markets when you adjust for, say, the population, much more than New South Wales for more than a decade. So, I think that legacy of higher supply is probably another factor that’s weighing on the market to some extent. Go to Sydney. Sydney is still in positive territory in terms of growth but clearly losing momentum. We’re seeing that the monthly growth rate has dropped from about 1.3% a year ago down to, about 0.4-0.5% month on month now and still losing momentum. It’s a very unaffordable market. It’s very expensive. Yields are the lowest of any capital city, down the low threes gross.
And, of course, it doesn’t have the strongest migration trends either. Once you remove overseas migration, which mostly fuels rental demand, interstate migration has been consistently negative and deeply negative through the pandemic as well. So, I think that really speaks to the diversity. I mean, Brisbane and Adelaide, also very strong markets. Amongst those three, Brisbane, Perth and Adelaide, which are all growing in value by more than 1% month on month at the moment, Perth about 2%.
I’d probably point towards Adelaide as being the riskiest. Adelaide is now sort of number one or number two in the affordability stakes in the wrong way when you adjust for local incomes. It’s got negative interstate migration, and the economy is quite strong. That’s probably what’s holding up the market to some extent, and investment demand seems to be okay as well. But those underlying fundamentals of affordability and migration really do seem to be more of a challenge in Adelaide than Perth or Brisbane.
Richard: Thank you for that, Tim. I’ve been dying to also jump on board and add some of my own comments and observations. I’d encourage our listeners, I’ve been very outspoken about the market being very distorted and needing to recalibrate, and it’s been distorted because of the pandemic and some of the government actions and things also like with incentives or interest rates. In a balanced market, and it’s very easy, you can use Tim’s very good data or CoreLogic’s very good data. Typically, Sydney leads the way, it’s the most expensive housing market. There’s a price premium, and then Melbourne comes in second. There’s a further price premium, and then Brisbane comes in third. You’ve got some of the smaller states like Perth or Adelaide that do come in below that with a substantial discount. Perth sometimes is the exception because it is very much boom and bust and I am always amazed when I look back over some of those years where it went through the mining booms. Perth was the most expensive housing market in Australia, which I find absolutely fascinating.
In terms of looking forward, there’s a couple of things I’m very keen to unpack with yourself. I know this is crystal ball gazing, but I’m convinced that Melbourne is significantly undervalued and I want to just unpack that a little bit more with you. I agree with you that I think there’s a lot of risk in Adelaide right now. One of the comments I’ll make, I’ve seen some of your stats. I was not astounded to see that Brisbane has a higher median house price than Melbourne, but Adelaide and Perth are going to overtake Melbourne, very soon.
What that screams out to me, and you can look at it when you look at the historical time series, is that something is very badly out of balance in Melbourne, and I’ve asked the team also to start doing their own digging to just try and explain what is it. Is it the impact of the lockdowns? Is it additional taxes or charges? Is it additional supply? One thing I’ve certainly landed on, in addition to the taxes and charges, which I know are deterring investment, if you actually look at the dwellings per person or dwellings per capita, Melbourne, maybe people would be astounded to hear this, has actually delivered more dwellings per person than any of the other states and territories and that’s part of the explanation for why Sydney and then also Brisbane is growing so strongly because those markets, whilst Melbourne is chronically starved of supply, Sydney and Brisbane are even worse in terms of being starved.
And then when you look at Adelaide and Perth, Adelaide and Perth were the beneficiaries of that interstate migration. Everyone left Melbourne during the two years of lockdowns. Brisbane benefited and will continue to benefit because we’ve got the lead up to the Olympic Games there. But when you look at Perth and the opportunities in Perth, there’s a huge amount of interstate migration going there. I credit the Perth government because they’ve put in incentives to incentivise new supplies.
So, for example, there’s off the plan incentives for apartments, and I speak with developers on the ground there. They are getting sales through those channels. The issue is retaining builders there, but there’s demand that was driven into the Perth market. There was a huge amount of demand driven into the Adelaide market. My gut says that Adelaide, I agree with you Tim, is overpriced, and typically it has suffered from reverse migration in the sense that 25-34 year olds would actually leave Adelaide, and they’d come to the eastern states because there were better job opportunities.
That reversed for a few years, and it has turbocharged Adelaide house prices. They typically should not jump by, as Tim said, 10%, 15%, 20% in a balanced housing market. The developer listeners out there would well know why on earth would you do development if you can just put your money into a house and get a 20% increase over one or two years, that’s just astronomical. And so, I suppose moving forward, and again I do like to have a forward looking view of the market, my gut says that Melbourne is tremendously undervalued, I speak with a lot of people, investors from Sydney and Brisbane, who are now seeing that those markets are more expensive than Melbourne, and I’m just wondering, do you think it’s a matter of time before investors come back to Melbourne? Do you think the government has to start encouraging more investment by changing some of those taxes and charges?
Is there going to be a tipping point or an inflection point with yields? I know it’s a hard question to ask, but I’m keen to unpack that a little bit with yourself because I’m convinced that there’s an inflection point coming, and I’d love your views given you’re so close to the data too.
Tim: Yeah. Absolutely. I agree. There is a silver lining to Melbourne’s underperformance, and that simply comes back to its becoming more affordable and yields are rising. It’s one of the few capital cities where yields aren’t compressing or holding steady. Melbourne’s clearly, I think, given a couple of months, we’ll probably see Melbourne yields above Brisbane yields, which is something that’s quite unique. Medium to long term, absolutely, I think Melbourne has some prospects. The shorter term, we generally find investment appetite follows the capital growth trends.
Investors don’t seem to have a great deal of attention on yields for whatever reason.
Richard: They don’t?
Tim: No. Absolutely not. Probably because the highest yielding market is Darwin by a huge margin, and it gets very little investment potential because the market’s so flat.
Richard: Volatile. Okay.
Tim: And volatile. Absolutely. So, if you look at Melbourne’s yield, it’s currently, heading towards the late 3% mark now, and I think it’ll probably overtake Brisbane, maybe even Adelaide and Perth, given some time.
I think for investors who are countercyclical and take advantage of the relatively soft conditions in Melbourne at the moment where listing numbers are actually quite high, we’re seeing listings in Melbourne tracking about 16% or 17% above the five-year average now, so it’s a lot of stock to choose from. You can negotiate. You can take your time. There’s no real urgency. I think for a lot of investors who might have that more medium to long term perspective, Melbourne’s looking pretty good to me, and I agree, it is undervalued. We still have, I suppose the barriers to Melbourne being high taxes. Hopefully, once government debt starts to reduce a little bit, they start to wind back some of these tax reforms around, say, the $50,000 threshold for a land tax. The high rates of stamp duty are also quite debilitating, and the whole range of other taxes, be it vacancy taxes, short term property rental taxes, higher fees for foreign buyers. The list goes on. It seems to be really trying to dig the way out of a debt hole using property taxes, which is a real disincentive to capital flow.
Richard: Talk to me, please, about Sydney. I find this market absolutely amazing, especially the really high-end prestige market. You pick up the papers and you see house sales almost every week in the $80 Million mark, and I appreciate that’s a submarket within the submarkets, but that is such an expensive housing market. I’m interested in your views. It seems to just continuously increase in price, both houses and even units, and I’m wondering, how are people able to actually afford to live in Sydney or to rent in Sydney?
Tim: Isn’t it mind boggling. Absolutely. I mean, the prestige market runs its own race. The broader market in itself is still mind-boggling.
We’ve got a typical house value in Sydney that’s upwards of $1.5 Million, units above the $1 Million mark as a median. It’s extraordinary. But to your question, how do people actually afford this? Well, I can only speculate. I think you’ll probably find there is some intergenerational wealth transfer happening here.
People call it the bank of Mum and Dad, I suppose. It’s very hard to measure, but I’m certainly getting the same feedback from the industry and real estate groups as well that Mums and Dads are there helping out with deposits, acting as guarantors, in some cases, actually buying the homes for the younger folk. So, yeah, I think it comes partly back to that. We’re also seeing in Sydney another really interesting trend where every other capital city outside of Sydney, it’s really clear the lower quartile of the market, the most affordable 25% of the market is really leading the growth trend. In Sydney, it’s the middle of the market and the lower quartile.
The upper end’s clearly slowing down. It’s losing steam. Probably is a deflection of demand as borrowing capacity erodes and affordability pressures get in the way, but the fact that we’re still seeing the middle end of the marketplace as good as or as strong as the lower quartile, I think really reinforces that notion that there must be some intergenerational wealth transfer. We are also seeing more demand coming to the unit sector as well, and this is something that’s happening around the country also. And I think it’s just a reflection of more people want to get into the marketplace. They can’t afford to buy a house. The logical alternative is going to be to buy an apartment with a lower price point. Maybe use that as an upgrading mechanism or a steppingstone. But the other factor around unit markets, as you know, Richard, is supply levels are really tight now, and that’s probably another factor on the upwards pressure on unit markets.
Richard: Thank you for that. I do a lot of work in Sydney, and our team up in Sydney, I work with them very closely and it does seem to be a very different market, although it is definitely only submarkets within that area that seem to be going from strength to strength.
Look, I know we’re running short of time, there’s two items that I wanted to talk to you about and certainly some of the metrics that I use and I’m keen to pass on to our listeners to track the housing market. The first one is vacancy rates, and the next one is auction clearance rates. As a rule of thumb, when I’ve had the team look at vacancy rates, typically, so vacancy rates really reflect a rental market and what the vacancy rate is in the rental market. A vacancy rate across the different cities, and it is slightly city dependent, between 2%-3% suggests that the market is in equilibrium or in balance.
Anything higher than that, or lower than that is out of balance. So please keep that in mind, you can get a lot of the data off CoreLogic’s website and you can see where vacancy rates are, and they’re extremely low. The rental market’s extremely tight now. Let’s talk about vacancy rates before we get into auction clearance rates. What are you seeing? What are the tightest markets, across Australia?
Tim: Well, absolutely still Perth. Perth has got a vacancy rate sub 1%, Adelaide’s still quite tight as well, but even markets that have softer housing conditions like Melbourne would be a good example, we’re seeing vacancy rates in Melbourne that are still sort of 1.1-1.2%, very, very tight. The interesting thing is even though vacancy rates remain extraordinarily tight, we are seeing evidence of a slowdown in rental growth. And I think a big part of that well, there’s two things there. I think one of them would be simply rental affordability. Most cities are now seeing renters having to dedicate more than 30% of their incomes towards paying rent. It’s really hard to go higher than that. Renters can’t approach a bank and get credit to pay more rent, so they look for more cheaper options or they try to maximise their tenancies. And you can see there is some data now showing group households are reforming. Households are once again becoming bigger, which is taking some demand away from rental markets. The other factor is simply that net overseas migration is now slowing. In fact, it peaked back at Q1 of ‘23, and that slowdown coincides with a slowdown in rental markets, particularly the unit sectors of the largest cities as well.
Richard: Thank you for that, Tim. Just to jump off the back of that, I am interested when I read in the media about vacancy rates in Melbourne, for example, slightly increasing or rents slowing, I’d encourage our listeners to keep in mind the longer term trends, the longer term context, and as I said 2% to 3% is when a market is in balance. If Melbourne for example goes from 1% to 1.1%, I don’t think people should be getting too excited about that in the sense that it’s extremely chronically starved of rental supply. I don’t think that’s going to change to be perfectly honest really until more supply gets mobilised. I think an explanation for that too and I’ve asked the team to look into this is before the pandemic, the household size, that’s the type of people or the number of people per household, was much higher and then when rents dropped, especially in Melbourne, by about 30%, that household size shrank a lot because there were opportunistic renters that, for example, rather than grouping up, wanted to live by themselves. That trend now is very much reversing because as Tim said, typically, rule of thumb is people would pay 30% of their income to service or to pay rents. They’re really struggling to do that with the rapid rent increases. They’re starting to group up, couple up again, and that certainly is part of the explanation for vacancy rates marginally increasing and perhaps rents either slowing or just not increasing as fast as possible.
In terms of auction clearance rates, another metric that I have asked the team to look into, typically, a market seems to be in balance when the auction clearance rates are around about 50-60%. If it’s above that, it’s a seller’s market in terms of the stock moving quite quickly, and below that it’s a buyer’s market. Again, I know that’s a little bit submarket specific there, but again just keep that in mind, much like vacancy rates 2-3%, auction clearance rates seem to be 50-60%. Again, you do have to overlay that, and I’ve read a lot of Tim’s work with the actual quantum of stock on the market and I think you’ve made very good points about that. You need to read them hand in hand. Otherwise, it can be quite misleading. In terms of the auction clearance rates, I know Melbourne is the auction capital of Australia. What are you seeing in the rates? Are there any trends that have jumped out to you that have surprised you?
Tim: We’re definitely seeing clearance rates in Melbourne losing a little bit of steam. They’re tracking around the low 60s at the moment, so about 61, 62% on the finalised numbers. The long run average, the 10-year average in Melbourne is about 65%. So, a little bit below average, which makes sense given the higher stock levels and, some now downward pressure on prices. But we’re definitely not seeing the bottom falling out of clearance rates in Melbourne.
Homes are still selling. Outside of clearance rates, you can see private treaty metrics are showing the same thing. Homes taking a little bit longer to sell, about 38 days on average in Melbourne. Discounting rates are now picking up a little bit as well, but these are nowhere near the levels we’re seeing through, for example, the beginning of the rate hiking cycle around the middle of 2022. Clearance rates fell quite sharply through that time, or if you come into, say, the late period of 2018, 2019, we were seeing clearance rates getting down the low 50% range.
So, yeah, the market’s, probably favouring buyers now to some extent, but it definitely wouldn’t be too far out of balance given the fact that clearance rates are holding that low 60% range.
Richard: Great. Well, thank you for that, Tim. Look, we are out of time, so, I’d like to conclude the session, and I typically conclude it by taking away three key learnings or three things that I’d like the audience to actually walk away from. And I begin our discussions each month with you asking about mortgage rates, the different markets, and the long-term averages.
And those are really the three things that I’d like everyone to take away today. The first one is the cash rates. The RBA have done some fantastic work on showing how responsive the housing market is to a change in the cash rate. And then also you overlay that with, as Tim was talking about, either the APRA serviceability buffer or the broader macro credential policies. I genuinely feel in the next couple of months, or leading up to at least February, there’s going to be movement in the space, and I’d encourage our listeners to just think through what that means for them and their projects, especially with buyer demand, and then price and price changing.
A number of the unit markets are undervalued. I’m convinced they’re going to start repricing upwards when it starts to really come when there’s more stability with rates and then when rates do get cut. So that’s the first point to keep in mind, and I’m sure the financiers out there can start doing some economic modeling over the next six months in terms of having a higher or lower growth scenario over that period of time and then the developers also positioning their projects to start getting faster sales philosophies.
Tim’s point about the diverse markets is very well made. It’s very interesting to hear that he feels Adelaide is a very risky market and I certainly agree. My view, and I’ve said it for a while now, is Melbourne is tremendously undervalued. How quickly that corrects again comes down to the huge deficit that we have, but also the government acknowledging that we need to remove some of the taxes and charges to stimulate market activity there.
And then the final one that I’d leave everyone with is, please stop, and I’m not saying everyone’s doing this, but there’s a risk when you open up various media publications and they talk about building approvals on a month to month basis or price changes on a month to month basis that’s all well and good but that’s one data point, you really need to be comparing it with the long term averages and there’s a number of metrics that you can use to analyse the housing market, please reach out to myself or to Tim if you’d like to know more, and when you look at the long term averages or the gaps between certain metrics, a lot of them, whilst they still are out of balance and they are still recalibrating, the market will reach a new equilibrium. It’s a matter of time and that’ll be led by when interest rates start to stabilise.
Finally, just to conclude, I do have another point, and it applies to interest rates. I know there’s a lot of conjecture about interest rates when they’re going to get cut. I’d encourage everyone to look further into the market cycle and go, well, if they do get cut or even if they do increase a little bit, I don’t believe they’re going to go back to emergency levels. By the very nature, emergency levels are that, emergency levels. I do genuinely feel they’re going to most likely hover around where they are for now.
When there’s stability, there’ll be improvement in sentiment, but why I say that is because there’s a number of investors or developers out there that are incredibly worried and I understand why about things like their weighted average cost of capital requirements. I genuinely feel you could start doing a lot of your modeling on a band within this range. I don’t necessarily think it’s going to increase materially or decrease materially. I suppose, Tim, I’ll just ask you about that. What do you think in terms of that?
And feel free to disagree. I don’t really mind. It’s just sharing everyone’s views.
Tim: Absolutely. I do agree. I think, when we do finally see rates coming down, it will be a very gradual cycle. The RBA has done a lot of heavy lifting in terms of getting inflation back to where they want it. Well, hopefully, by the time that they drop rates. But they’re pretty clear, inflation won’t get back to the target range, but its core inflation by the end of next year is their view.
Given that they’re not going to try to overstimulate the economy or maybe that’s the wrong phrase, they’re not going to try to significantly stimulate the economy. They’ll be quite wary of both a rebound in inflation, but also potentially a rebound in housing prices once interest rates come down. I think it’s going to be quite a cautious trajectory.
Richard: Well, those are fascinating and fantastic chat as always, Tim. Thank you so much for making the time to come on the podcast. I know how busy you are, and I really appreciate and very much value our friendship and our relationship.
Tim: Always a pleasure, mate. Thank you.
Richard: Thank you very much.
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