Opposing Economic Metrics Create a Big Question Mark

How has the year started?

As we begin the new year, fresh figures are showing Australian home values still falling albeit at a slightly slower rate than December 2022. Values dropped 8.4% between May of last year and January 2023, according to CoreLogic. The fall is similar to the housing downturn between 2017 and 2019, when home values fell 8.38%.

Confusing matters, this downturn is happening at the same time new residential listing numbers are lower than usual. Normally, after the workforce returns from holiday mode in mid-late January, we see a significant seasonal upswing. In the month to January 8, the volume of new listings was almost 25% less than this time last year, while total advertised supply was 2.9% lower than at the same time last year.

Why? Sellers are taking the wait and see approach.

Coming into 2023, we expected the first half of the year to be ripe with buyer opportunity. So what happened?

These are the economic metrics that need to be considered:

• Annual inflation is at 7.8%, the highest annual CPI increase since 1990, ABS December figures show. It has come in under the anticipated 8% though

• The RBA is predicted to begin making cash rate cuts later this year, says Morningstar CIO

• Rates are expected to rise again before they come back, as seen on February 7th

• Despite record price falls, CoreLogic's national Home Value Index (HVI) fell -1.0% in January, the smallest month-on-month decline since June 2022

• Rents are still rising in most capital cities and regional areas with vacancy rates low

• Consumer earnings dropped in the September quarter by 12.4%

• The unemployment rate remains low at 3.5%

Micro Market View

Low stock persists

Early indicators are pointing to a continuation in the relatively mild flow of new listings to the market, at least over the coming weeks. Pre-listing activity by real estate agents across CoreLogic's RP Data platform is -15.3% lower over the first 22 days of the month compared with the same period a year ago. This suggests homeowners considering a sale of their property are still reluctant to take action during the current downturn, hoping for an improvement in selling conditions in the months to follow.

Current housing supply includes surplus stock from December, along with passed in properties. As the share of old listings increases nationwide, quality or A-grade housing stock, in particular, remain in short supply.

SQM Research recorded 6,210 dwellings as having sold under distressed conditions in 2022. This remained well down on pre-Covid levels of approximately 13,000 dwellings. In Melbourne, old listings (on the market for over 180 days) increased by 27% throughout 2022.

The good news for investors, though, is that the tighter supply of new listings could put a floor under property price falls. According to SQM Research Director Louis Christopher, the "calamitous predictions" of a housing crash this year are unlikely to play out until we see a major surge on distressed listings activity.

The hard data and broader economic and geopolitical factors tell one story, but how things are playing out at a grassroots level may be another.

Agents attending open for inspections over the last three Saturdays are seeing how quickly A-grade properties are being snapped up and are getting a feel for market sentiment.

Properties that had little buyer engagement in December are suddenly selling - and selling quickly. Last Saturday alone, two inspected properties sold in 24 hours. Numbers at open for inspections are unusually high. One property had 40 groups at an inspection, despite a similar property severely struggling in the December quarter.

And last weekend a Malvern East property had 36 groups through, while one in South Yarra drew 40 groups, yet a similar property struggled last November.

There is roughly a two-week lag in the release of data to get a firm picture of how the market is performing. On top of that, January is really only half a month to report on, given the market is still getting into gear on the back of holiday season.

But currently, we are seeing good properties sell well and buyers are using time as their number one negotiating tool. They are making quick, clear decisions and expediting their due diligence when it comes to their purchase.

Macro Outlook

Significant events in 2022 such as the war in Ukraine, continued pandemic challenges and, of course, the election of a new federal government in Australia, all have repercussions for consumer confidence and the national economy, and the consequences have played out in real estate values.

Annual inflation is at 7.8%, the highest annual CPI increase since 1990, ABS December figures show. It came in just under the RBA's forecast that it would peak at 8% over 2022 before dropping this year.

Crucially, underlying core inflation (a measure preferred by the RBA to headline inflation) rose to 6.9%, still some way from the Reserve Bank's 2-3% target range.

Australia's dollar has also fallen significantly against the US dollar over the year.

Corporate earnings are down, the jobs market is tight, and many companies are having difficulty finding workers. Unemployment is low and costs and interest rates are going up. This all affects consumer confidence.

Households are being hit by cost of living pressures as homeowners and industries adjust to a higher interest rate environment.

Not all doom and gloom

On the flipside, China's reopening after relaxing its Covid measures and Canada's banning of foreign buyers from buying homes for two years, starting this month, could work in Australia's favour.

As travel returns to pre-pandemic conditions and the borders open up in China, the Australian property market as a whole is set to benefit from increased net overseas migration and the return of international students.

China's recent policy announcement that academic degrees and diplomas awarded from online studies will no longer be recognised, will add an influx in overseas student numbers. We have already seen international student enrolment levels back to 2019 levels, and with China now loosening their Covid policy, the opening of borders will only be a matter of time.

While price pressures are mounting, RBA head of economic analysis Marion Kohler announced on the first day of February that inflation may have already reached its peak in Q4 of 2022 and will start to ease this year.

Backed by this forecast, the RBA is tipped to begin making cash rate cuts later this year, and it will be the first major central bank to do so, according to Matt Wacher, CIO at Morningstar.  

The investor market

2023 will be a challenging year for those coming off fixed-rate mortgages this year. With further rate rises tipped, many homeowners who took advantage of record-low interest loans will be in for a shock, with their rate expected to more than double to around 5 or 6%.

Rents are still rising in most capital cities and regional areas with vacancy rates low, CoreLogic data shows. Rental prices for units in Melbourne went up 20% in the 12 months to December and 5.9 % quarter-on-quarter, says the latest Domain Rent Report.

 

Rents are rising at the fastest annual pace ever seen across the combined capitals. It is the longest stretch of continuous rental price growth on record as house rents rose for the seventh consecutive quarter and unit rents for the sixth.

 

Legislative changes during Covid that led to landlords selling up, deciding it was all too hard, has contributed to the investor exodus. Burned out property managers have followed, in turn pushing up wages for their jobs. These increased costs will flow onto investors.

 

However, tenants can breathe a sigh of relief as rents are set to stabilise later this year. As rents reach a peak, some renters will naturally begin grouping together for housing. Another portion of the renting cohort may turn themselves into first home buyers, buoyed by first home buyer incentives, decreasing property prices, and greater certainty surrounding interest rates. All of this will ease the demand-side pressure on rental stock.

 

Data shows rental unit affordability has already improved in Melbourne suburbs such as Macleod and Beaumaris, where rents plunged 32.8% and 14.3% year-on-year, respectively.

The importance of due diligence

Due diligence before buying a house is integral to ensure the property is right for you. Buyers should have their approach down pat. If you don’t, your time - your biggest advantage in a negotiation - evaporates. You could be forced into a conditional offer if you don’t have your ducks in a row.

Ask yourself:

• Do you have a building inspector you really trust?
  
  
• Will they provide the high level information needed to move forward? 
  
  
• Can they do a pest inspection as well?  
  
  
• Are they readily contactable and work weekends at short notice?  
  
  
• Do you have a trusted solicitor?  
  
  
• Are they contactable on weekends and after hours?  
  
  
• Will they check the contract? Is there a fee?  
  
  
• Do you have the skillset and data access to price the property?  
  
  
• Can you assess any approved surrounding developments that may affect value?  
  
  
• Do you have a responsive architect to give clear insights? 
  
  
• Do you have access to the right data to value the property? 
  
  
• Are you across the grass roots metrics that can assist you in pricing the home?