We've all heard the media's doom and gloom on how the property markets are going to crash 30%, 40% even up to 50% - it's the same news time and time again, year after year, and they constantly get it wrong! They're in the business of selling news and headlines like that is what gets people's attention. So, let's look at the facts on why property prices should remain steady.
Low Stock Levels
One of the driving factors behind price growth is supply vs demand. What we're currently seeing in most property markets across Australia is that demand is outweighing supply.
When you have twenty buyers out there looking to purchase a property but only five properties available for sale, this creates fierce competition amongst buyers which drives property prices up. Let's say those five properties have sold. We still have fifteen buyers who missed out and are still looking to purchase, plus new buyers entering the market.
This creates further price growth, as buyers who missed out last week are usually willing to increase their offer next time around in order not to miss out again. Plus, new buyers entering the market may have higher budgets, or vendor's price expectations are increasing as they see the results from the previous week and want to achieve a better result for their own property.
Record Low Interest Rates
Whilst we all know interest rates will be rising soon, we're still near record low levels. Many of us have heard previous generations talk about the time they had 17% interest rates on their mortgages but still managed to buy property and create wealth, so why can't we?
The current interest rates are allowing more buyers to enter the markets, as their monthly repayments are still very affordable. What many people don't realise too, is that the banks always have a buffer of around 3% above the actual rate to ensure their customers (borrowers) will be able to afford the repayments, even if the interest rates rise.
If the bank is offering you a loan at 4% interest rate, then they've actually calculated that you can service the loan at an interest rate of 7% (3% buffer). This means that you should comfortably still be able to make your mortgage repayments if interest rates rose by 3% and your income remained the same.
It's too often I hear uninformed people say 'if interest rates go up, everyone will struggle and have to sell their property' or 'if interest rates rise, the market is going to crash'. Interest rates are not going to increase by 3% overnight or even for years (in my opinion).
If we look back at the last time interest rates rose, it was from 2009 (5.80%) to 2011 (7.79%) - an increase of only 1.99% over two years. And prior to that, we saw an increase from 2002 (6.07%) to 2008 (9.62%) - an increase of 3.55% over 6 years. Plus, we saw the average wage growth exceed these rates which would've balance it all out..
At the end of the day, banks are a business and want to mitigate their risk exposure as much as possible too.. They're not going to lend money to people they think won't be able to afford their repayments should interest rates rise.
Building Material Shortages & Increased Costs
One of the biggest issues we're facing at the moment is the shortage of building materials and the enormous price increases. COVID has caused major supply chain disruptions and worker shortages.
Some builders are waiting up to 9 months just for their materials to arrive, which has delayed the completion of many new builds. This again plays in the hands of low stock levels compared to the buyer demand out there - I know some agents have waiting lists of more than 50 buyers looking to purchase land to build a new home.
The rising cost of materials has also caused major issues within the construction industry, with many reputable builders going bust. Why, you ask?
Many builders sign what's called a 'fixed price contract' with their customers, guaranteeing the price of the construction at the time of signing. The problem here is that builders priced up the construction based on their known costs at the time, however many materials have increased by 20% - 30% which has completely chewed up their profits and they're now running all of their jobs at a loss.
So let's sum that up. We've got a shortage of new dwellings coming to the market but still plenty of buyer demand. The cost to build a new dwelling is through the roof nowadays, so people are buying existing dwellings and as a result, vendors can ask more for their properties. And builders are going bust, so many projects are now sitting incomplete until the insurance companies payout the property owners, so they can find a new builder to continue the job.
The population is increasing. Immigration is picking up again. International students are returning to Australia. Overseas investors are coming back. But we don't have enough supply - this is a recipe for further price increases.
Record Low Unemployment
There's no doubt COVID disrupted the world as we all went into lockdown, which had a major impact on businesses and employment.
Whilst we saw a spike in the unemployment rate in 2020 (the start of COVID), this quickly began to fall and is now sitting at a record low 4.0% which we haven't seen since 2008.
This is a positive sign that Australia has weathered through the pandemic with strength and many businesses are thriving better than they ever have previously. With low unemployment comes more money being spent by consumers back into the economy, which includes property and investment.
We acknowledge that there are factors that contribute to a softening of the property markets (rising interest rates, housing affordability issues etc), however the above points are there to help you understand that there are also many positive signs of a strong outlook for growth in the Australian property markets.
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I hope all of this info has been helpful and wish you all the best on your property journey. Please don't hesitate to get in touch if you have any questions.
Disclosure: The information contained in this blog is our personal opinion only and is not to be taken as financial advice, as we do not know your financial situation. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances. We will not be held liable for any losses.
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