Where and why the market appears to be slowing? – John McGrath

Where and why the market appears to be slowing? – John McGrath

Our population growth is slowing. John McGrath joins us to discuss that and also comments on where and why the market appears to be slowing.


Kevin:  The McGrath report has just been released. This is an annual report, and John McGrath actually analyzes the Australian residential property market. It’s a great read. The author of that joins me, John McGrath.
Hi, John.
John:  Good day, Kevin. Thank you very much. We try and do our best. It’s an interesting market, isn’t it?
Kevin:  Well, that’s what I wanted to ask you about. In your opening message, you say it’s the most fascinating period you’ve seen in Australian residential real estate in the last 50 years. What makes it so fascinating from your point of view?
John:  Good question. Look. I think it’s a few things, Kevin. Sydney has been almost in an unprecedented growth spurt in the last three years. As we came out of the GFC and the markets stabilize, we’ve seen about a 50% growth in the last few years, which is very, very strong – as anyone who’s been in the market for a while would know. Melbourne hasn’t been too far behind either. Sydney and Melbourne have been incredibly strong markets.
Interestingly, normally when the Australian market is in recovery mode, you see basically every capital city and a lot of the regionals growing at a similar time – maybe not an identical pace, but at a similar time. What we’ve seen now is Sydney and Melbourne are almost decoupling from the rest of the Australian market, and they’ve shot off. The rest of the Australian market is somewhere between flat to beginning its recovery cycle. Certainly, Southeast Queensland, we think, is in the early stages of what will be a three- or four-year recovery cycle.
Kevin:  In your report, you talk about the Manhattan effect. What do you mean by that?
John:  When you think of Manhattan, you see that basically it’s no longer an area where first-home buyers or young couples can really afford. They need to move out to the boroughs and out to Brooklyn and get out of Manhattan because it’s really become a very exclusive and very highly priced enclave.
I think that if you look at inner Sydney, for example – let’s say that’s within seven to ten kilometers of the city – it’s somewhat become like Manhattan. We’re really looking at a $1 million to $1.25 million as an average price for almost anything in those areas. For young couples, even those who are doing quite well, it’s very difficult to afford property in inner Sydney.
I think what’s going to happen is either young people are going to stay home a bit longer with their folks and buy a property and rent it out until they can afford to live in it, or indeed, they’re going to be pushed a little bit further out into the suburbs.
That’s not all over a bad thing because they do get creative, and we start to unlock pockets of real estate. Sydney’s been a great example of some suburbs that a lot of people never would have dreamed of living in, and they’ve become very, very exciting and edgy little precincts nowadays because people are moving in and they’re renovating and retail is following them in.
I think this is just what we’ve seen elsewhere in the world where prime cities and the inner part of prime cities becomes a very expensive product when it comes to real estate.
Kevin:  Some of the things that you talk about in your report – getting back to the Manhattan effect – these create great challenges for local planners. I noticed in there you talk about the global vertical villages that are going to be created. It creates a lot of problems or challenges for town planners, doesn’t it?
John:  It does. But I think an important part of the solution is these infill developments where there is opportunity in a city. While a lot of people inherently are against development and high-rises, I think when you’re talking about an inner urban environment, it is the natural and logical way to go, rather than just continued urban sprawl further and further and further out into the suburbs, which requires a lot more infrastructure.
I think that if you can just take advantage of the opportunities that are sitting under our nose in inner Sydney, Brisbane, or Melbourne, in the big cities, there is going to be great opportunity. But the problem is, of course, you need to be able to cope with the influx of population in and around. You have car parking issues. You have all sorts of other activities. You have pollution issues. Those things need to be dealt with, but I do think that there is really a need in the big cities to be doing more development of medium and high density closer to the CBDs.
Kevin:  John, APRA’s moves to make it tougher for investors to get finance is seeing a lot of investors retreat. We’re hearing a lot of reports about that, even in this last week. Properties in some of the classic Sydney investor suburbs are just not selling. Do you think they’ve actually moved too far?
John:  Well, yes. It’s interesting, Kevin. Let’s look at interest rates, which have been a key driver of this property boom in certainly Sydney and Melbourne. The Reserve Bank has wanted to reduce rates to help prop up the other ailing sectors of the economy, for example, retail. If you pull the lever on interest rates, well, then it does buoy the retail, but it also buoys the real estate market, which they’re trying to cool down.
I think APRA has seen an opportunity to calm down the investor demand, which was becoming prolific. It was over 50% of the approved loans in the last 12 months were going to investors, which is normally about 25%, so we’d seen a doubling effect of the investor demand.
While I’m a free-trade guy, I kind of like to have as few manufactured imposts on the market and let free trade find its right level. I do see that there are opportunities to pull on the lever like this and maybe just calm down the investor market a little bit.
Kevin:  John McGrath, thank you so much for your time.
John:  Thanks, Kevin. Goodbye.

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