John McGraths tips for 2018 – John McGrath

John McGrath speaks to us about how he sees the Australian property market moving into 2018. What areas does he think will improve most?
Kevin:  This week, John McGrath released his annual McGrath Report, and John makes the point right at the outset that the most frequent question he’s asked year after year is “What is the market doing?” And as he points out, there is no one market in Australia.
John, thank you very much for joining us. How are you?
John:  Good, Kevin. Yes, it’s interesting, isn’t it? Because everyone you speak to, many of them are experiencing different markets, and I think the report articulates the fact that if you had to break it into a couple of markets, one is Sydney and Melbourne that has seen very strong rises over the last five or six years. In fact, some areas have doubled values, but at least 50%.
And yet in other parts of the country – in South East Queensland, too, to a lesser degree, but in other parts of the country, there’s been what I would call really minimal growth. I think that will change going forward.
Kevin:  As you indicated, you still see the Australian property market as Sydney and Melbourne and the rest of the country. Is that becoming less acute? Is the rest of the country starting to catch up, do you think? Or will it?
John:  It will. Not yet. We’ve seen Sydney and Melbourne, right up until this interview, have been performing very strongly. We haven’t seen much of a drop off. Sydney is starting to slow down a bit now, Melbourne got a little bit more strength to go. But I think it would be fair to say – certainly in my view, anyway – that both of those markets are very much towards or at their peak.
I think there are many other markets – South East Queensland – that are probably midway through. I think if you were looking at a percentage, I’d say that South East Queensland might be 55% or 60% through, and Sydney and Melbourne are 95% to 100% through their cycle. So, I still think there’s good growth up in the Queensland area, especially South East Queensland.
Perth is another area that I think has obviously been very hard hit through the mining issues, and that’s been really down, but I think it’ll catch up. All the markets will eventually catch up, but I think South East Queensland will be the stellar performer over the next three to five years.
Kevin:  Now, you’re still sure there is no bubble. Why is that?
John:  I’ve heard it so many times, Kevin. I look at it, and every time there’s a cycle rise and there’s some strong growth in areas like Sydney and Melbourne and other parts of Australia, people say, “Oh, Sydney must be 20%, 30%, 40% overvalued.” I think the reality is that Sydney and Melbourne are the New Yorks of Australia, and they’re probably never going to be caught by the other cities.
I think there is a gap there, which is in my opinion too wide today, but there will always be a gap going forward. I just think the weight of money coming into the two big east coast cities will always have them ahead of the rest. But right now, the gap is as big as I’ve ever seen in three decades of being in real estate, and I think that’s not going to last.
So, the question is are Sydney and Melbourne overvalued? I think they’re not. I think they’ve reached probably where they’re going to reach for this cycle. We might see a very small correction in those markets of a few percent going forward over the next 6 to 12 months, but I actually think the issue is that the rest of Australia is probably undervalued.
I think it’s more of a media headline, “Market overvalued.” I’m sure there are spreadsheets that say that compared with other times or other parts of the world, Sydney looks a little bit on the expensive side. But it’s a big city that people want to live and invest in.
We were just talking before we got on the interview about Asia. There are literally billions of people in that part of the world who are rapidly becoming very much the middle class and they’re earning money they’ve never earned before. They will all be looking to invest elsewhere, and they’ll also be looking to migrate to great countries like Australia. So, I think our future in terms of property values is really strong.
Kevin:  How are property prices impacting how we live and where we choose to live, John?
John:  Again, I’ll refer to Sydney and Melbourne, which for a lot of people have become in certain parts unaffordable. It’s not uncommon that in a new development in Sydney, a one-bedroom is going very close to $1 million, whereas as you would know, in South East Queensland – which is an equally beautiful part of the world – you can buy a nice house in many areas for $375,000 to $450,000. I think that from that aspect, we are finding a lot of people in Sydney and Melbourne are going to find it very hard to find a place.
At the other end of the market, you have people who are probably in their 50s, 60s, 70s who wound up finding themselves in a home that’s now very expensive, and perhaps they’ve had it for years or even a generation or two. They thought it wasn’t worth much, then they check with their local real estate agent, and they’re saying, “You’ll probably get $2.5 million” for this house. I think those people are going to be saying, “Well, for the next 10, 20, 30 years of our life, we might take that money and either look for a sea change or a tree change, or we might downscale here and invest elsewhere.”
We’ve seen the numbers. As you know, Kevin, we’ve seen strong migrationary numbers returning again, the strongest for many years. So I think it’s a very healthy time.
Kevin:  John, what sort of an impact are those moves to regulate the market with taxes and rates having on market conditions overall, do you think?
John:  I’m very anti the overseas levy that’s been placed on buyers from overseas, only because I think that, one, we’re now all living in a global city or a globalized economy, and I think that it’s very dangerous to be saying to people outside of the immediate area or inside Australia, “We don’t want your investment.”
I think we should be encouraging other people to migrate and to invest into Australia – the right people in appropriate numbers. So, I think it’s a very strange signal when state governments say, “Well, if you want to come here, we’ll let you, but you’re going to have to pay a lot more stamp duty,” for example.
We’ve already seen a big drop off in the southern states in terms of people overseas buying. I’ve never felt the growth in the southern states values was a problem around demand; it was more of a problem about supply. We’ve had an extreme housing shortage, so from that respect, I think it’s dangerous, because Canada put the stop sign up and said, “We don’t want anyone’s money any more,” and their real estate market really suffered fairly badly, and it hasn’t recovered yet.
I just think this is a big country; with the appropriate development controls in place, I think we could continue to grow our cities in the right places and invite people from other parts of the world to come and participate.
Kevin:  I’m talking to John McGrath about the McGrath Report, which has just been released.
John, let’s talk about developers for a minute. Are they being spooked by some of these restrictions and regulations that are being imposed on them?
John:  In some instances and in some cities, they’ve had a few very good years, but I think they were enjoying the fact that in addition to a strong local market, there was overseas interest. Sydney had a strong buying interest from China, which was very well documented, and a lot of that has dried up. I would say 75% or 80% of the overseas money looking to invest in Australia, if not move here, has dried up.
There’s no doubt when a developer buys a product, as long as they can get financing and as long as they have confidence there’s an end user or an end buyer for the product, they’ll go and develop. If they’re concerned about building and they’re not finding buyers at the end of the process, that’s going to be an issue. So, it will no doubt take some of the wind out of the market by putting the stop sign up to overseas investors.
Kevin:  John, before I let you go, your closing thoughts on the future of the property market? What do we need to do to make housing more affordable? Is that possible?
John:  I think there are a few things – no doubt – with the affordability. The supply issue is the main one. So, we need to have good quality, complying developments processed far more quickly. In some instances, it still takes two years for developers to get complying developments approved and through the councils, both local and state. I think if that sped up, that’ll certainly provide a lot more stock in the market.
I think with building materials, there are alternative styles of building happening, Kevin, and that should make things a little bit less costly. And the third one is infrastructure. There is good infrastructure happening throughout most parts of Australia, but I think there was a period certainly during the GFC where there was very little infrastructure, so that really put a bottleneck in many areas. Now, infrastructure, new roads, new hospitals, new employment opportunities will definitely open up some other opportunities for people to live in new areas, I think.
Kevin:  John McGrath, thanks so much for your time, mate. Thank you.
John:  Thanks, Kevin.

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