Paradox or Paranoia: What the Bloody Hell Is Going On in Residential Property?

There is simply no disputing that the last six months has been a wild ride for anyone involved in residential property.

Since October 2018, residential prices — both houses and units — in our two largest cities, Sydney and Melbourne have experienced one of the sharpest declines in modern memory.

Across the rest of the country, the contagion effect is being felt with buyer confidence, access to finance and valuation concerns sending shock waves through our major metropolitan markets.

Now, I'm not a property researcher nor a forecaster. That's not my jam. I'll leave that to the experts to measure the past and predict the future.

(Note: You can click on the Markets section in our navigation to read the wealth of coverage our fantastic team of journalists publish every day.)

But I am in the business of property and I do my human best to try to understand what is happening, why it is happening and what is likely to happen in the future.

Back to basics: The fundamentals

When we look at residential property markets, we are always drawn to the three fundamental drivers of growth:

1. Population growth;

2. Infrastructure investment; and

3. Employment growth.

As they say, property is as simple as P.I.E., so let's take a look at each of these factors.

Population growth in Australia is at all-time record highs, albeit slowing slightly. Melbourne and Sydney are both growing at in excess of 100,000 new entrants per annum, whilst Brisbane is experiencing an upswing in interstate migration, the traditional bellwether of growth.

With some of the highest population growth rates in the developed world, it's safe to say that population growth isn't the issue.

Infrastructure investment is also at historic highs with a generational building boom now under way. The Feds are committing close to $100 billion over the next decade whilst the States aren't far behind. Again, safe to say there's a bit going on in infrastructure!

Employment growth is the wild card here. While unemployment rates are historically low and there's a positive participation level, new job creation is a mixed bag. The numbers look good on the whole, but the pendulum is skewed very heavily in favour of New South Wales where almost 50,000 new jobs were created in January 2019 and the unemployment rate tumbled to less than 4.0 per cent as compared to the national average of 5.0 per cent.

So, if P + I + E = pretty good...what's going on?

White noise, the herd and instant gratification

Unfortunately, the world we live in today is unlike anything we've ever experienced before in human history.

With the world's information at our fingertips, the white noise of social media distorting our perceptions of what's real and fake, and a propensity to want instant gratification (read: boom or bust!), the reality of what's going on has never stood a chance.

The volatility of the modern world is making our booms quicker and our busts just as snappy.

So, what has happened?

Ever since the GFC, Australia's residential sector was fed a combination of cheap and easy credit for a housing sector that had been severely undersupplied.

We had pent-up demand from both owner occupiers and investors for real estate.

An environment of low interest rates, easy credit, rising property prices, a tidal wave of superannuation money, a swarm of Chinese-led offshore buyers, sophisticated wholesale selling networks, bullish developers and human nature (not the band!) led to the perfect conditions for a supply-led residential boom. Game on!

Enter the perfect storm, but in reverse.

As the market ramped up, the banking regulator (APRA) got a little nervous about Australia's exposure to residential property.

A couple of tweaks here and there sent the banks running for the hills for both residential purchasers as well as developers.

Throw in a royal commission that exposed gross misconduct and you've just added diesel to the fire.

State governments joined the party by raising stamp duty and taxes for offshore purchasers and removing most of the first home owner concessions that were available.

China, which accounted for an overwhelming amount of foreign investment in Australian residential real estate, suddenly imposed credit controls on funds leaving the country which compounded with growing concerns about the funding environment, valuations and everything else in between.

Throw in over-eager developers propping up site values, an increase in construction costs and the inevitable impact of slowing demand and, as they say, the rest is history.

So, what is going to happen in the future?

I think the correction we have been through is a necessary part of our well-balanced residential sector recalibrating.

The outcome, while painful for some, seems like it may be over as quickly as it started. What goes up must come down!

With the fundamentals strong, I cannot see a good reason why the major capital markets — namely Sydney, Melbourne and Brisbane — will experience anything other than reasonable growth over the medium term.

And that's all that matters, right? Who plays the property game with an investment horizon of less than 3 years?

We have population growth (check), economic growth (check), infrastructure investment (check) and new job creation (check).

The money's on for an interest rate cut next week when the RBA meet for the first time this quarter which will give the housing market a much needed boost in confidence.

New supply (commencements) has fallen off a cliff so the outlook is actually pretty reasonable.

And finally, the lifeblood of real estate — access to capital — is historically cheap and will become more available as banks turn from mitigating risk to delivering profits to shareholders!

Curious to know more? We are proud to be hosting our first Residential Development Summit in Sydney, Melbourne and Brisbane throughout May 2019.

Click here on your city below to find out more.

Brisbane - Friday 10 May

Sydney - Friday 17 May

Melbourne - Friday 24 May