Myths: Property prices always go up in value – Andrew Wilson

In today’s show Dr Andrew Wilson,  the senior economist at the Domain Group, takes a look at the suggestion that property prices always go up. Well we know from recent times that is not always the case, so how can you pick the cycle?


Kevin:  I’ve been accused over the years of pumping up real estate prices – if that’s even possible. One of the things that I have said in the past is that property prices go up and down. Do they always increase in value? That’s one of the myths we’re going to have a look at now. My good friend Andrew Wilson, the senior economist at the Domain Group joins me.
Andrew, good morning.
Andrew:  Good morning, Kevin, my good friend.
Kevin:  Andrew, do property prices always go up in value?
Andrew:  It’s all about the timeframe, Kevin, isn’t it? We do see property prices wax and wane, and it also depends on the nature of the market. Capital city markets, of course, have significant demand and supply drivers that keep them ticking been taking over through the cycles and over the longer term.
However, smaller regional markets can be exposed to significant changes in those supply and demand dynamics, particularly in relation to the performance of local economies. I think regional markets that are exposed to perhaps a single economic driver are those that are most vulnerable for prices to shift and for actual downward pressure on prices over time.
Look, the whole genesis or the basis of property price growth is supply; there’s demand in terms of construction. I think that we’re always a country that never has enough houses really in terms of the big picture going forward.
Even though we’ve seen a spurt in apartment development recently – and that’s a positive for employment generation and economic growth – I think even over time those shorter term oversupply scenarios are soaked up. I think it’s because we are basically a country that has a small number of large urban centers that we crowd into. I think that always means demand is pushing ahead of supply over the longer term, which keeps prices ticking upwards.
Kevin:  You mentioned there about supply and demand. I’m just interested to know about the tipping point. When does a market move from being undersupplied to being over-supplied? What are the indicators there?
Andrew:  Certainly, it’s a continuum. It depends what point of time you take your snapshot in terms of is it over-supplied or under-supplied or balanced? Developers always look for opportunities whereby supply can match the perception of where there are high levels of demand. Particularly with high-rise development, developers have to take a longer term view because of the very nature of high-rise development and significant numbers of new product coming into the marketplace, which will move ahead of demand.
We do see and we’ve seen markets where over time these short-term over-supply scenarios are soaked up and you see prices growth resuming. But they are the key indicators of an over-supply – and that’s falling prices and falling rents.
Kevin:  Is there a point in time in terms of stock levels where a market goes into over-supply? It all relates to supply and demand and that leads onto the number of sales. In a particular marketplace, is there a certain volume of stock that would indicate that a market is going to get some downward pressure on prices?
Andrew:  Again, these are short-term dynamics. We only have to look at the Perth and the Darwin markets to see the impact of, firstly, the surge in fly-in, fly-out workforce through the mining burns, where there was a significant demand from a mobile workforce for housing, which pushed up prices, pushed up rents. Now, when the mining boom ended that fly-in, fly-out workforce also ended, and then we did see much higher vacancy rates and falling prices. Again, over time with population growth and economic revival, those things do tend to balance out.
We’ve seen that particularly in the Perth market where that’s starting to stabilize now after a period where rents and house prices have fallen because of a significant reduction in demand, which was, as mentioned earlier, a reflection of the exposure of the Perth market to one particular strong economic driver, and that was the mining industry.
But other capital city markets – Brisbane, Melbourne, Sydney, and even Adelaide and the smaller markets, Canberra and Hobart – don’t have that same exposure to a single economic driver. That means that they tend to adjust or don’t tend to have the extremes of outcomes that markets have when they are just a one-trick pony in terms of what’s driving economic activity.
Kevin:  You talk about extremes in marketplaces. Sydney would have to be the classic example of extremes. Not just in recent times, but we’ve seen it over the last few decades where prices in Sydney will escalate phenomenally and then they’ll go into a massive downturn. What has actually caused the increase in the Sydney market in recent times, Andrew?
Andrew:  There were a confluence of factors. It was almost a perfect storm. It started in 2012 when the state government changed the stamp duty concession for first-home buyers. We saw a rush of first-home buyers into the market. They purchased established properties because established properties at that point were still eligible for the stamp duty concession. Then that activated change-over buyers that first-home buyers had purchased from. It was like a ripple effect in a pond.
Then along came lower interest rates and it just escalated, and prices growth was a product of those who owned their own homes trading up through the various price levels and regions and pushing prices up because they could, because interest rates fell to the lowest level since the 1960s. So that gave them the capacity to keep pushing prices up.
The other part of that perfect storm was investors. Investors got in on the action and they created their own energy. Prices growth attracted more investors, which pushed up prices, attracted more investors.
The thing that kept that investor market taking over in Sydney was a shortage of rental stock, a shortage of housing, which kept pushing up rents in line with prices growth, kept yields quite reasonably stable, even though they did start to fall when prices boomed. But it was still an attractive proposition, particularly that strong prices growth, and the low vacancy rates that kept investors interested.
A perfect storm in Sydney, but as we’ve seen recently, Sydney prices growth has certainly come back to the pack and, in fact, has fallen.
Kevin:  Will it continue to fall in your view?
Andrew:  This is the big question, isn’t it? We saw the sharpest fall over the December quarter in Sydney’s history, down by 3.1%. Now, confidence is certainly impacted in that Sydney market. Buyers and sellers will sit on the sidelines until there’s perhaps a clear indication of when the market has bottomed out.
But yields are now rising in Sydney. I think that the underlying fundamentals in Sydney are very strong – a strong economy, shortage of housing, strong migration. I think that will get the market up and running sooner rather than later. But there’s no doubt that double-figure prices growth of the past three years is now certainly an ancient and historical factor that is unlikely to be repeated any time soon.
So a much more moderate price outcome for Sydney this year. In fact, we may just see something like 2% or 3% prices growth following a near-15% result last year.
Kevin:  Always good talking to you. Dr. Andrew Wilson, senior economist at the Domain Group.
Andrew, thanks for your time.
Andrew:  Thank you, Kevin.

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