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Australia's Biggest Property Crash in 40 Years Has Already Begun | Property Experts · The Follio Property Podcast

0:00
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0:56
a house price fall of up to 10%, potentially Australia's largest property correction in 40 years.
1:06
we're going to have the biggest property price correction in 40 years. The capital gains, negative gearing, very poorly timed. We've got a housing market that is at a cyclical peak. The RBA has just hiked rates three times, got the highest cash rate in 15 years, equal highest the peak last year, and financial markets think it's going to go higher again. We're going to get another rate hike. We're already in a downswing. Sentiment's terrible. And now the government's basically put more downward momentum on that with these changes. A lot of people view this budget as a tax grab because they increase taxes. You need to earn 1.9 times the median full time to now
1:34
pay the top rate the system is built to tax you more every single year even when you're going backwards someone who still wants to invest investor borrowing capacity has been hit because the negative gearing rule investor borrowing capacity for negative gearing has gone down by up to 30 the bottom 40 could hold up pretty well it'll be the sort of higher end that'll probably get spanked more this is bleeding money i'm getting out at any price
1:59
You're listening to the Folio Property Podcast. I'm Rhys Beddell and I'm here each week with my co-host Lachlan Delahunty, most requested guest back in the building. I thought he might be too big time for us now, Lachlan, after his tour of the big podcasters over the last couple of weeks. But Leith Van Onselen, welcome back to the Folio Property Podcast.
2:20
Thanks, Phil. Thanks for having me back. I'm always happy to come back here, mate. I had such a great time last time. We had a good chat, so let's do it again. You call it how it is, so that's what we like, and I think that's what the listeners want to hear. Listeners do want to hear that. I was just telling you off air. Feedback was they want more. They were disappointed we only had half an hour.
2:37
We will go longer today. We won't cut all the good bits out, but hopefully we can get you back for round three. Hey guys, quick thing to share. If you're serious about investing in Australian property right now, you need to see what we put together. It's called the National Investment Report and it's our brand new monthly deep dive into exactly where the market is moving, what the data is saying and what the smart investors are looking at right now. You can get the first access completely free. Just scan the QR code on the screen right now or click in the link below to fill out the form.
3:07
First things first, Leith, you know, we're a couple of weeks post-budget now. What's your thoughts from the budget, not just property related, but as a whole? The backlash, which they could end up undoing, is I actually think the capital gains, negative gearing changes to property are very poorly timed, right? So whether you agree with them or not, in principle, now's probably not the time to do it, right? So we've got a housing market that is at a cyclical peak, not everywhere, but nationally, if you just talk averages, it's at a cyclical peak.
3:36
The RBA has just hiked rates three times. We've got the highest cash rate in 15 years, equal highest to the peak last year, and financial markets think it's going to go higher again. So we're going to get another rate hike. We're already in a downswing. Sentiment's terrible. We've got the war in the Middle East. We've got rising unemployment now. We're probably already looking at a fairly decent property price correction nationally.
3:59
And now the government's basically put more downward momentum on that with these changes. So it's pretty poorly timed. If they'd done it during the start of an upswing, it probably would have landed a bit better. You would have actually taken some heat out of the market, but you don't really need to exacerbate the downside. So it's kind of been a pro-cyclical tax move at, I think, the wrong time. And what I think could happen...
4:18
is that we could end up following New Zealand. So New Zealand did a similar thing in Jacinda Ardern. They first restricted negative gear in 2019. Then they tightened those rules. I think it was in 2022. New Zealand's had basically a property price crash.
4:30
And now the national government came in, the new government, and they've totally undone all their rules. So they had an effective capital gains tax, which is called the Bright Line Test in New Zealand. So basically what it meant is you only avoid paying capital gains tax if you held the property for 10 years. So that used to be two years, then it went to five and then 10 under Jacinda Ardern. And then they did negative gearing like we have, but then they didn't even...
4:55
more tightly so you can't even claim mortgage interest against your property. So they tightened it and made it ridiculous, made no sense. They've had a property price crash. Now the new government's come in, gotten rid of negative gearing entitlement, bought back the old negative gearing rules. And then also they've put the bright line test. So it's effectively their capital gains tax down to two years. So if you hold your property for two years or more, you pay zero capital gains tax. So it's incredibly generous and there's no stamp shooting in New Zealand. So the zero capital gains. Zero if you hold it for two years.
5:25
That's pretty encouraging and it stops the flippers within the short period. Yeah. You bring on accommodation and you get rewarded handsomely for contributing to the contract. It is a property investor's dream over there. You pay no stamp duty. You've got basically no capital gains tax if you hold it for two years and you can negatively gear now. So, Justin and I made that a lot. Basically, if you had to hold it for 10 years not to pay capital gains tax under the Brighton Line test, that was absolutely...
5:50
It's been changed a lot, but at its worst, that's what it was. And then obviously made a punitive negative gearing, complete removal, more vicious than what we've done. So you see that playing out here in Australia? Potentially. How long would it take to really come into effect? Well, yeah, I mean, if the government keeps...
6:11
Keeps getting tomatoes thrown at it. Keeps sinking in the polls. If we have a much bigger property price correction, which I think we will, I think we're going to have the biggest property price correction in 40 years. Which is only 15%. Well, mate, it's not even. So that's a great headline. I said this on Carl Steffner. We're going to have the biggest property price, like this, right? And then they use that as their thing. But then I qualified it because the biggest in...
6:32
40 years, according to Cotality, is only 8.2%. Yeah, which is... Nationally, which is not that much. But I think we're going to beat that. Going off an 80% upside and you had an 8% correction, reality is... Yeah, so that's it. So it's not saying that much. Like, to beat, to get the biggest in 40 years doesn't actually mean a hell of a lot. I saw an article in Perth, in the Perth newspaper, and they said... Trent actually posted this. They said the average days has doubled in Perth. Like, the market's cooling down, but it's gone from 7 to 14, which is tight. Yeah.
7:02
Yeah, yeah. Look, Perth's a different market, mate. It is. You all quoted, and this is the interesting part. So I woke up and got sent an article, which was house prices are going to fall by up to 15%. And there's a picture of Perth. Yep. And then I'm like, what idiot is calling this with the tightest hell market in Australia? And I'm like- I was misquoted.
7:25
And then I went in there and it's got a, you know, it's your name, it's your article, but you're referring to predominantly nationally Australia. Yeah, I don't even think I said 15%, but yeah, I think it said biggest in 40 years. And it said, oh, yeah, it could be up to, no, no. What I said, I think I quoted New Zealand and Canada saying that they've gone more than 15% and that's, that, you know, it's a risk. Australia could go down that road or something like that. Yeah.
7:47
But they've dragged Perth into that and probably Adelaide. And realistically, and that's where I get frustrated with some of these journalists, they've obviously, they'll take a little bit of what you said, and then they'll try to insert into a market where I believe has absolutely zero relevance because you've got the tightest market in the country on one extreme, and then you've got Melbourne and Sydney on another extreme, and you've got...
8:06
Adelaide and Brisbane, probably somewhere in between. Yeah. Well, that was hilarious because that article, I got sent that. This is how the media works often, right? So I've got a friend, Catherine Cashmore, do a podcast with her. She's like a buyer's agent. She's a doomsdayer talking the 20 cycles. Yeah, but she's a friend of mine and she goes, oh my God, look at this. And then she sent me the text and then she sent me another one. And I think it went to the Daily Mail or something. And then it went to WA Today or one of those ones. And then it just did this whole...
8:31
thing around the internet. And I was just laughing going, oh, this is hilarious. And they had our photos. It's just the way it works, mate. Like, you know, it's click-baity stuff. But the thing about it is if you get, if we got, say, 10% decline nationally, right? Biggest in 40 years, great headline. It's a good one if you want to get the clickbait, right? Yeah, yeah. It works beautifully. Biggest in 40 years. You know, you do that sort of thing. But, you know, say it's 10% nationally. But it's a bit like the ASX 200, right? If it takes, if it dumps 10%, you go, oh, wow.
9:01
capital cities. There'll be some sub markets within those capital cities. They're a lot worse. There'd be other ones that are better. It's an average. And let's be honest, the national aggregate is driven very heavily by city at Melbourne. So Brisbane, sorry, Perth's got a pretty small impact on it. Yeah, probably 10%. Yeah. So, you know, a 10% national doesn't mean 10% everywhere. Some markets could go down bugger all.
9:23
They might even hold the line, whatever, and other ones will go bad. So, for example, I used this in a recent interview when quoted on this. I said, look, the Mornington Peninsula of Melbourne, well, it used to be Victoria, but now it's sort of part of Melbourne. So that's sort of about an hour or so away. Yeah, it's a lost old market. Yeah, that's it. So some of the values there have tanked 50%. And part of that is because they basically doubled in value during COVID. So we had the Dan Andrews lockdowns.
9:51
We got smashed down here. Nine months of lockdown were basically, yeah, it was horrible. But a lot of people could escape to those areas was just outside the lockdown zone. And a lot of people bought up in those areas. The prices pretty much doubled. They rocketed. They got completely absurd.
10:06
And then obviously we've gone through a downswing. The Victorian government bought in, smashed property investors with huge land taxes. A lot of people there are holiday homeowners. They rent their homes out. Now the ATO's whacked them with stricter rules on how many days a year you've got to let it out. So basically they've been whacked with massive land taxes. And some of the properties there were paying tens of thousands of dollars in land tax now.
10:31
So people are just going, look, this is bleeding money. I'm getting out at any price because I just can't afford to carry it. So that is...
10:38
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11:07
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11:22
Now there's no buyer for that product because they can't get the capital, the negative giving benefits. So you've got, yeah. And I've seen it, we've seen live examples where there has been, you know, upwards of 50% declines. So, so there's always, you know, there's always markets like that, especially, so that's a specific case, right? It doubled in value and then tax changes completely wrecked the economics of it. It was a perfect storm going up because of the lockdowns and everything. And the perfect storm going down. Yeah, going down, right? So, so when you say 10% nationally,
11:50
There's examples like that at the extreme end, and there's other ones where, you know, if you're in the below the 5% deposit scheme caps, I think those markets are going to hold up pretty well, right? Because if you're an investor now who's, say someone who still wants to invest, investor borrowing capacity has been hit because of the negative gearing rules. So basically...
12:10
The reports from banks and also from some people I know who work in this space, they've said that investor borrowing capacity for negative gearing has gone down by up to 30%. So it depends where you are on the income scale, because banks now consider that you've got less after-tax cash flow because you don't get the negative gearing benefits. So that could mean that that could target investors more to the lower-end properties.
12:33
ones below the 5% deposit scheme caps because they can't borrow as much. So people who want to invest might target those homes. And then you've got the first home buyers targeting those homes because they're still below the 5%. Yeah, so the lower price properties below those caps, the sort of bottom 40%.
12:48
could hold up pretty well. It'll be the sort of higher end that'll probably get spanked more. And that's what we're seeing both in Sydney and Melbourne, the higher end really come off. They're always more volatile though. Yeah, without a doubt. But if you look back in time and we track property markets specifically, you know, more so than we do
13:04
politics or economics, but property markets around Australia, there's never been a moment in time where all markets have come off at the same time. It's always counter-sicular. So if you look at GFC, obviously Melbourne and Sydney for a small period got whacked, but then...
13:21
Perth saw up to 100% growth the years following that. And reverse that, 2017, 2018, APRA come into play, absolutely killed markets like Perth, Adelaide got hit. But then others rebounded really, really quickly. So I, again, and I know it's not your conversations that you're going out saying nationally that markets are going to fall, but it's interesting because that does hit sentiment. And your voice, Catherine, who you referred to, talks about the 18-year cycle. We spoke a little bit about that in the last podcast.
13:51
And it's interesting that we speak a lot that sentiment can drive markets as much as anything. And at the moment, there is low sentiment. But when you drag all markets in to that news story, it can be quite detrimental.
14:03
Yeah, 100%. 100%. So look, I'm obviously a macro guy, right? So I'm always looking at the big picture. Yep. I mean, and part of that's data-driven, right? Because, you know, if you're looking at the Cotality Daily Index or whatever, you get five markets only. And it's, so you're looking at the whole of Melbourne, the whole of Sydney, the whole of whatever. I don't look at the little sub markets within markets. Obviously, if you're looking for investment opportunities, you've got to, all real estate ultimately is local.
14:29
So if you're looking to buy something, you've got to look at the local market within that market. And they're all different.
14:36
Again, to use that ASX 200 analogy, some companies, even in bull markets, are doing terribly and some are doing great. Obviously, a bull market, more are going up than down. In a bear market, some are doing great and most are not doing well. So it's similar property. And this negative sentiment stuff, if you're looking to invest, well, it actually could be to your advantage, right? Because you can more likely get a better deal when you're buying. So if you're someone who's pretty savvy and doesn't want to go with the herd and you can
15:03
target a market that will buck the trend for whatever reason. Yeah. You know, go for it. But,
15:10
Yeah, I don't do that sort of stuff. I'm looking at the big picture, partly because that's all the data you got. So I get the... You get your weekly auction clearance rates, for example. You get the whole of Melbourne, the whole of Sydney, whatever. That's not giving you the little micro, you know, inner east is doing this versus the outer western suburbs. And you don't get that nuance when you're looking at the big picture level. I was going to go back to your earlier point, actually, when you were talking, you were supportive of the changes, but then you also said you don't think they're going to go through. So...
15:38
Oh, sorry. No, I think they'll go through, but I think they'll ultimately get... I think there's a good chance. I'm not saying that will, but there's a good chance that we could go a couple of years down the track and they get reversed. A bit like what happened in the mid to late 80s. Yep. Okay. Interesting then. So let's go on the previous four then. Why do you think this is potentially a good move for the property market with the CGT and the negative gearing changes? So I take the...
16:02
I don't want to call it selfish, but I guess it sort of is selfish. So I've got two teenage kids, and I want them to be able to afford to get, you know, have a home that's affordable. So for me personally, I'm actually pretty happy that Melbourne, for example, has had pretty much no house price growth since 2017. Now, because I'm not an investor in Melbourne, I own my house, I own it outright now. But...
16:26
I'm living there regardless, right? So I don't really care if it goes up or down in value personally, but I do care about my children's ability to be able to get into a home and not have to mortgage themselves to the hilt. And also selfishly, so the selfish bit comes in, I know I'm going to have to help them in. For example, you could get a good freestanding house with a good block of land, whatever, for one and a half million in Melbourne in a good area, like one of the nice areas, versus three million. Well, that's better for me. I don't have to help them as much.
16:54
So I'm personally, for me, if you want to make housing more affordable, the price has to come down. It's as simple as that, right? You don't make petrol more affordable by the price going up. And then allowing people to have easier access to credit to then buy that petrol. Ultimately, if you want the systemic cost of housing to come down, the price has to come down.
17:12
So reading between the lines there, like these hand breaks that we've pulled, you think that is going to have a drastic impact on property prices from a macro level? Yeah, yeah. Well, I mean, certainly, I mean, it'll have a short-term decent impact and then long-term it'll stop having, you won't have this bigger up cycles now because you won't have that invested demand as hot as it was before.
17:35
So yeah, I think if you fast forward, say 20 years, the prices will be a decent amount lower than they were before. But at the same time, there's a whole bunch of other factors that are feeding. Do you think this could be a decade of negative house prices? Is that what you're saying? Maybe not negative, but we could have a, I think the super cycle's over. So we've had pretty much a 25 year super cycle in values where they've just continued to rise relative incomes and stuff.
18:00
I think we could have a flattish patch for years nationally. I'm talking about- Even with the migration forecast that's predicted? Yeah. Yeah. Letting 500,000 people in the country a year. That's more a rental story. So when you talk about property prices, if I had to rank the inputs, like migrations impact to house prices, I'd say it's probably-
18:22
might be you know 20 percent maybe 15 percent if you have to say are all the different factors that drive up house prices uh i'd probably give migration uh waiting of 15 or 20 percent or something and more and and credit 50 credit availability um you know government policies you know five percent deposit schemes and stuff um you know tax policies and all this other stuff that goes into it let's let's work through that let's wait it out so you'd say 10 on migration what would you say for for credit availability
18:49
Oh shit, that'd at least be 50%. Yeah. And then- Tax policy? Yeah, tax policy. And then I've never even thought about that'd probably be at least 20%. I'm probably going to end up saying, I'll have 20 and then it won't end up adding to 100. I haven't actually thought about it. I thought you put on a spreadsheet. So I'm already at 90%. Hang on. And then you've got government policies like the 5% deposit schemes. You've got bank and mum and dad, you've got all this other stuff. But yeah, there's a whole bunch of factors that feed into prices.
19:17
But you're saying credit availability is far more important than money. Oh yeah, 100%. 100%. Yeah, credit availability and cost of credit and stuff like that is way more important. And we basically have constricted credit availability now and cost of credit. Because obviously we've had rate hikes, and with rate hikes you get lower borrowing capacity. And then now we've had borrowing capacity directly get cut because of the negative gear and capital gains tax changes, like on the investor side. So up to 30% less borrowing capacity there.
19:45
This stuff all weighs down on house prices. And there's a fantastic chart Shane Oliver's done where he basically has done the median house price in Australia and he's done capacity to pay based on all these sorts of factors. And traditionally, they've kind of gone up, although prices have decoupled a bit, but they've kind of gone up together, right? So prices rise at borrowing capacity. In the last five years, it's gotten a massive divergence. So prices have kept going up, but capacity has actually fallen as we've had these rate hikes, et cetera.
20:15
ultimately that gap's got to narrow and it's either got to narrow by interest rates tanking and then that increases your borrowing capacity up towards the prices or prices falling. I think we're going to get the latter because obviously rates aren't coming down yet. I think there's a good chance they might next year. Agreed. And at the same time, we're having this tightening in credit availability because of the negative gearing in capital gains tax changes, which is reducing, which banks have already cut investors' borrowing capacity. So,
20:44
We've got that. And also we've got the other dark horse out there rising unemployment. So unemployment's now drifting higher. It's still not 4.5%. If that goes up, the RBA hand would be potentially to reduce interest rates. 100%. So I actually think next year we'll probably get rate cuts. That's a huge call because the futures wouldn't put that in. And if we see a rate-cutting environment, that would then argue a price uplift.
21:14
100%. But that, yeah, sometime next year, we'd be surprised if we get rate cuts because I think the RBA is kind of, and their hand's been forced, they're kind of mirroring what happened during the GFC. So if you remember that, we had the US subprime crisis in 2007. So that was kind of late 2007. And then the RBA hiked rates by 1% after that over the following year.
21:38
And then the full-blown GFC, when Bear Stearns and Lehman Brothers collapsed in September 2008, we had the full-blown global financial crisis. So it started off in America. That was about a year ahead.
21:50
And the RBA hiked by 1%. We had pretty high interest rates then. And then they were forced to cut by 4% after when the GFC hit. Now, I don't think they'll cut by 4%. They're obviously not going to cut by 4%. We're not starting from as high a base. We saw that recently play out with COVID. Yeah. You know, it could be catastrophic for the markets. Well, for the economy in general, I think there's a good chance Australia will have some sort of recession. So we're already sort of, you know, the latest, the March quarter national accounts,
22:16
We had 0.3% growth for the economy, which is bad growth, but it's growth. But per capita, we're back to, you know, we've now got another negative quarter of per capita growth, only down 0.1%. But we've had 10 out of the last 15 quarters have been negative.
22:32
in per capita. I think we're just going to, so we're going to have a likely another per capita recession. I think the next quarter is going to be negative as well. And then I wouldn't be surprised to have a full blown recession because the RBA is tightening the energy shock from the Middle East, which, you know, at some point we're going to get, we're probably likely to get some sort of fuel rationing. It hasn't hit us yet because I think we've been burning through our storages and we've managed to, you know, sort of muddle our way through, but
22:59
A lot of farmers haven't planted their crops for this year because they're worried about availability of diesel. We're going to get some sort of impact on the economy there, which will hurt growth, obviously. And I think we're going to get a rise in unemployment as well. So in addition to the weakened economy, we've also got the government now is trying to cut back expenditure on the NDIS and that sort of thing. That's been one of the biggest job drivers we've had in the last five years. So most of Australia's job growth, at least since the start of 2023, has been one of the biggest jobs.
23:29
has been in this non-market sector. So that's the government funded sector, whether it's bureaucrats or it's, you know, the healthcare sector, et cetera. So the jobs that are affected, they're not necessarily public servants, but they're funded by government. And a lot of that has been in the NDIS.
23:42
That's been the main job driver. Now the government's trying to reduce expenditure on the NDIS from double-digit growth annually to 2%, which means that you're going to get less growth in jobs in the NDIS if they do cut expenditure, which means that tailwind is going to disappear.
24:00
Unemployment rises. Yep. And at the same time, you know, we've got this AI issue that's rolling out globally now where a lot of HR managers, et cetera. So it might have been Mercer. I might have misquoted that. But there was a major HR survey that was done about a month or so ago. And basically 100% of the HR managers who were interviewed expected job losses because of AI. CBA's boss, Matt Coman, has come out recently and said there's going to be job losses because of AI. So that's going to be another headwind for employment.
24:30
So I think, you know, going into next year, we'll have rising unemployment. It already is rising, but rising more than the RBA expects. A weaker economy than they thought. A bigger housing downturn than they thought. And I think the RBA is going to be forced to cut next year.
24:46
And then run that out because there's sort of conflicting information in the sense that if, you know, the government has got it wrong and they were to reverse policy around negative gearing and capital gains in the next couple of years or the new government comes in 2028 and reverses it, which, you know, seems to be the theme of how they're going to run up to the next election.
25:06
then you may have falling interest rates, calling that as early as next year. We know migration is going to be extremely strong for the next couple of years while the Labor government's still in, which I know it's a passion of yours. But those three factors, if all would come into fruition...
25:22
That's a perfect storm for a rising property market. Yeah, yeah. Well, I mean, that's it. That would call for a boom in housing prices. Yeah, yeah. Or certainly a rebound. Yeah, yeah. I mean, if all those things happen, that could certainly happen. But I think before that, we'll probably get a decent downturn. But I mean, that's the thing, right? You guys are property investors, so you've always got to be...
25:44
Cognizant of where the opportunities are, right? So I've got a few contacts, for example, in the Brisbane housing market, and I speak to them, like real estate agents, et cetera. I know that market well. And the change there has been quite astronomical in the last month or so, especially those properties that are priced above a million, which is above their 5% cap. So those markets are being getting hit pretty hard, and there's been a massive change in sentiment there, according to the real estate agents and everyone I speak to. Yeah, well, they're on the ground, boots on the ground, right? Yeah, yeah, that's it. But obviously...
26:14
The people I speak to, they don't work in the outer areas that have got those properties below a million, which get the 5% deposit scheme. And those markets, at least going by the data, are going a lot stronger. But certainly there has been a change in sentiment up there. And if you look at the Cotality Daily Index, Brisbane's still growing, but it's coming off really hard. I get their weekly market indicators report, which basically shows you their number of listings.
26:40
And three months ago, Brisbane's new listings were well below last year and its total listings were well below last year. And then over a period of three months, maybe four months, every single week, it started to shift. And then now it's gone the other way. And now there's far more new listings than there were at the same time last year and far more total listings. So I think Brisbane's turned. Perth's still got a shortage.
27:03
But the shortage has narrowed versus what it was four months ago. So it's definitely cooling, but it's still dropped. It's significantly underapplied. Mate, Perth's a unicorn. And part of that's because I live over here in Melbourne. And when you live in Melbourne and you live in, let's be honest, what's becoming a bit of a failed state, right? Victoria. Victoria.
27:23
Your perceptions, no matter how you look at the data, you are going to be clouded by your environment. And Melbourne's been, especially with regards to property, it has been a dead market for years. And quick example, three weeks ago, I went to an auction in my street. I don't usually go to auctions because I'm not looking to buy, right? I can't be bothered. I'm too busy. There was one about 10 doors up. And so it's one of these 1940s double-story brick houses
27:50
Really nice. Big block. One of these houses that I always thought, I'd love to go and see what that looks like inside. Because it was one of those sort of character houses. It's got one of those houses that has a name on it. You know, the people put the names. So, yeah. Went in there. Mate, this auction had, there was one guy who gave a bid for 1.6 mil. Which, to give you 2017, that house would have sold for 2 million. No doubt about it.
28:15
Had one guy gave a low ball bid. So 20% discount. Oh, mate, huge. And there was a zero interest with crickets. The guy goes, no, no. And then a vendor bid for 1.7. And the person who was selling it was an investor who had owned it for 20 years, right? So they would have still made decent money.
28:33
And the auctioneer was basically begging to sell it. It was ridiculous. Oh, you know, the vendor will accept any reasonable offer. The vendor just wants it gone. Basically, that's what he was saying. And there was like five neighbours and this one guy just shrugged his shoulders and walked off. And I was actually shocked because this house, you know, pre-COVID would have gone for minimum $2 million and possibly a fair bit more than that.
28:59
And that's the sentiment I'm living in because that's what's happening around me. It's a scary thought that that probably traded for 1.5 on your predictions. Could be trading for 1.3 in the next 12 months if it was to come off 15%. Yeah, yeah. Well, I mean, that's the thing. So I think last time I was on with you guys, I thought, I said, oh, Melbourne's probably a safe haven, right? I think I said something like that because you thought, you'd think logically, right? Melbourne has had basically bugger or growth for- Well, every other market's done 80% to 100%. It's done nothing. Yeah.
29:28
So if you go by, you know, PropTrack's data, since the start of the pandemic, it says Melbourne's gone up, I think, 19%. But before that, it was higher than that. So whereas Sydney's gone up about 40-something percent, Brisbane, Perth, Adelaide, more than doubled. And so Melbourne's just lagged everywhere else. So you think, based on that, you think, well, Melbourne hasn't had the upswing, and it's by far the cheapest market out of the major capitals now. So therefore, it'd be protected on the downside, right? So I'm sort of a believer in some kind of mean reversion somehow. Yeah.
29:56
It doesn't mean the prices can't be trending up, but I just think if a market overshoots too much, it usually comes back. And that's been the story of Perth and Brisbane and all these other places.
30:05
But Melbourne, I've got a series I run going back to the early 1970s that are relative house price valuations. So I do each major capital versus the weighted average of the other capitals. And Brisbane's right at the top. So it's almost at its most overvalued in 50 years. So there was one time, I think 2004 was about the same. And if you actually look at it, it's like a wave. So it kind of gives you a buy, a perfect time to buy was
30:31
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31:32
Can we share that on the podcast as listeners are watching this? They can look at it. Yeah, El Centi. So basically, it's kind of crude. So I've just got basically house price data from this series called Abelson and Chunk, which is like some guy did his PhD, did median house prices for all the majors going back to 1970. And then I interspliced it from about 2005-ish with Domain's house price data. So it's just detached houses. And I've just been updating it for 10 years.
31:58
And Melbourne is basically at the opposite of that. So it's almost the cheapest it's been relative to the other capitals in 50 years. So you think based on that, well, it'd be fairly well protected on the downside because it's based on fundamentals. No, it's getting smacked again.
32:13
So it just goes to show, you know, like... So with that in mind and that graph, so you think Brisbane currently is the most overvalued market in Australia? Based on that chart. So Perth's a little bit above its average over the past. So it's got like, I've done a line with the average and it swings up and down. Yep. But Perth started off from such a low base because you had that sort of six-year property correction. Nine years. Oh, nine years. Yeah, sorry. Yeah, where Perth just became so cheap after falling by, you know, nearly 20% nominal.
32:42
So you were starting off in a really low base. Brisbane now is at the top of that cycle. Adelaide's over-ish valued, but nothing like Perth. Brisbane just looks like it's an absolute overvalued bubble. If you go off these charts. And you think it's, by the sound of it, it's about to burst.
32:59
Yeah, or at least, I mean, bursting in Brisbane could mean, you know, has, I don't know, single digit price declines, but then has no growth for a long time, which is basically what happened last time. So Brisbane, after its last upswing, I'm trying to remember what was, might have been early 2010s, it did nothing for, or did nothing for at least a decade leading up to COVID. And then it became incredibly cheap and then it upswung. Yeah.
33:22
I think, yeah, based on this chart, and I actually did look to buy in Perth during COVID. I wish I had. Yeah, I didn't want to extend myself at the time, just because of the work situation. But at that time, these charts were saying Perth's never been this cheap. Yep.
33:40
And it still looks like it's still got more upside though. Where does Sydney sit? No, Sydney's sort of weird because Sydney's so expensive. It can't, like Sydney, you don't get as good of reads. I think- Yeah, I think like I've been calling the top of the Sydney market for the last three or four years. So Sydney, according to this, is just moderately overvalued compared to what it's been in the last 50 years. So it's just because, but it's, yeah, if you saw it, it hasn't given a great signal. Yep.
34:05
But what's your personal view outside of that on Sydney at the moment? Do you think it's going to get, will it be the hardest hit market in Australia? It could be because it's the most expensive market. And it's also has been, you know, it'll be more heavily impacted by these borrowing limits and stuff. Just because you have to borrow so much money to buy in Sydney.
34:22
So therefore when- And the incomes haven't gone up the same level as South Park. No, no. And so the price to income ratio is massive. So what it means is when you get rising interest rates or falling interest rates, Sydney is disproportionately impacted. And if you have changes in borrowing capacity, Sydney will be disproportionately impacted. Yeah.
34:38
I'm pretty bearish on Sydney. I'm pretty, I'm bearish on Brisbane as well, just cause it's just, it just screams over valuation. Uh, like some of the, some of the properties there, if you do the analysis on it and I looked at one, uh, in a sort of, if you look at that inner South area, which is the area I know pretty well, if you bought a house, for example, 1.5 million, you'd be lucky to rent that out for 750 bucks a week. If you're lucky.
35:07
So an investor now, post-budget, can't buy that? Oh, mate, no way. And even to buy that with the negative gearing, you're looking at a net yield probably once you pay all your stuff. Because if you buy an older house, it always needs work. You've got to pay your agent's fees and all that sort of stuff. You'd be lucky to get in under 2% yield. And to me, that doesn't make sense.
35:28
It puts a lot of pressure on capital growth. Yeah, it does. It does. And when you've just had prices double in just over five years, it's like, well, based on the charts I've got, you go, well, why would you buy then? Hoping that it's already the most overvalued relative to the other capitals in 50 years, pretty much. Like I think it was the second most. Why would you then buy with a less than 2% net yield thinking that it's going to suddenly go up even more? Like to me, that just doesn't make sense. Like you better off just looking at other markets.
35:56
What do you think is different this time in terms of a correction? So, I mean, you were on a podcast a couple of months ago and said, you know, you've got it wrong. Oh, Melbourne. Yeah. A hundred percent. You've got it wrong at times. I think in 2018. No, I've got it wrong heaps of times. There's no crystal ball in this stuff, right? So, you can, yeah. So, anyone listening to this, don't go, I'm going to buy this guy's advice. I'm going to sell this guy. Like, seriously, do your own due diligence. I can only look at, I can give you the macro story of what I'm seeing, the data, but.
36:26
But yeah, I'm that guy, right? I can look at Brisbane and go, oh, this just, based on the data, it just looks insanely overvalued. And it might buck the trend for another, because the vibe, I've got to say the vibe up there is different though. So I go to the Gold Coast. I know I'm always on holiday, right? So you can't always take a holiday mood. You know, you got to take the grain of salt. But every time I go there, I went there late last year. I was there a few weeks ago, about a month ago. It is a different vibe up there. Just in general, there's a lot of building going on. It's a lot more positive. It's a lot more positive.
36:55
That's late cycle. Anything that's going through a boom period typically and hasn't corrected yet, the sentiment's going to be high because everyone's got equity. Everyone's got job security. There's a lot of work. Yep. And no one typically sees that correction coming. No, no, that's right. But for me to sit here in crappy, depressed Melbourne, right?
37:14
and then going, oh, that's overvalued, therefore it's going to correct based on the data, which is what the data tells you. It doesn't account for the fact that I'm not living there and I'm not seeing how the economy is tracking and all the opportunities and all that sort of stuff because you're not there. So there's only so much you can- You're looking at the numbers, right? Yeah, yeah, that's it. Yeah, I'm looking at the numbers. So anyone listening to me, don't go, oh, I'm going to take Lee's advice on, you've got to do your own.
37:39
Diligence, right? I'd say that for anything. I never take anybody's advice as gospel. But all I'm saying is- You're looking at the macro, essentially. That's it. Yeah, yeah, that's it. And I'm not in the market to buy either, right? So I'm not going in looking at individual areas and opportunities and all that sort of stuff. I'm just looking at the total picture. And just based on the macro that we've got now, we've got rising interest rates,
38:03
Is this different? The point I was probably trying to get across was when 2018, when you probably last thought was a correction, is this the same environment right now as what was 2018? Or have things changed to- Because that was pretty significant. APRA come in, for those that are listening, what Reece is referring to in 2017. APRA come out and pretty much removed investors from getting interest- And Banking Royal Commission. Yeah, and Banking Royal Commission. Yeah.
38:28
The handbrakes, that's when we got these buffers in terms of credit buffers. They put the handbrake on investing. So property investing, even with capital gains, changes, and the negative gearing, there's still going to be property investment. 2017, they said, we don't want any more residential property investment to really curb the Sydney market.
38:48
it didn't play out as bad as probably what we predicted, but you think the current environment's different? Yeah, I think it's worse. So that was kind of a single event driven. So yeah, actually, no, it was probably not being fair. So we had the Banking Royal Commission. So it was all that. We didn't know, you know, that was in the news every day and whatever. Nothing ended up really coming from it. We had APRA tightening the screws on investors, but we also had, so back in that time, Bill Shorten was expected to win the election, right? So that was leading to the 2019 election.
39:18
And he was going to do what they've done. Right? So people expected that. When they lost the election, mate, the market just went like that. Totally reversed. And I know that because one of my mates, he's a prominent guy. I'm not going to call him that because I haven't got his permission. But he actually purchased a house in Sydney during that period and got a great price on it for where he bought it. And then it just rocketed. Because he literally, it was about a week before the election.
39:45
And it was during that period where sentiment was incredibly low. Buyers were thin on the ground. Yeah, yeah, that's it. But then the election didn't. It's obviously ScoMo won. The property tax changes didn't happen. The Bank and Royal Commission just went into the background. Market boomed.
40:02
Right. And during that period, that was when we had the biggest correction in 40 years. That was the 8.2% according to Cotality nationally. In the lead up to that election. Yeah, that's it. It was 2017, 2019 is when we had that correction. This time, I think it's worse because obviously we do have the tax changes. We've got RBA hiking aggressively and much higher. We're starting off from a worse point of affordability. So I'm talking nationally here. Certain markets, like Perth's not as bad, obviously, you know.
40:28
But, and Melbourne's actually not as bad for affordability, but nationally we're starting from a much higher base. And then we've got all the, you know, we've got the, the unemployment situation starting to play out. The overall economic gloom, the sentiment's the lowest, the consumer sentiment. If you, if you listen to the ANZ Roy Morgan, it's tracking at close to 50 year lows. Low on COVID. Yeah. Oh, it's worse. Yeah. It's worse now.
40:53
Which is fascinating because we said this off air. We track a sentiment index through the podcast, actually. It's a newsletter you can sign up for. So quick little plug, sign up for the newsletter. We have over 2,000 people that complete that survey or the index. So it's a good sample size, right? Most are investors. So 65% at least got one investment property.
41:17
But the confidence is actually strong and has increased. And in areas which are probably not a surprise to what you're saying there with the sub-markets, areas like Queensland and Perth have actually increased in confidence post-budget. They're probably sitting on a pile of equity. They're seeing maybe an opportunity there. But we're actually seeing – and from a Melbourne perspective, it's neutral. I'll have the graph come up for those that are listening. Yeah.
41:40
Sydney is the only one that's confidence level has dropped slightly off the back of the budget. So it's interesting, you know, because I've read that same article. We actually said it on a podcast recently about the 50-year low from a consumer confidence. But it'd be interesting to get your take on, you know, from an investor standpoint, why we actually seen some positivity there.
41:57
First of all, you'd be dealing with a sort of, I don't want to say educated, because I don't want to make it sound like everyone else isn't educated, but like someone who's, what's the term I'm trying to use? Sophisticated is probably the better term. Sophisticated people who actually track the market. And I think in some ways, and this is going to sound counterintuitive, the run up to the budget in some ways could have been worse than the actual outcome because
42:22
Uncertainty stops buyers and stops sellers. When you don't know what's going to happen, you don't know what's coming up. It basically just puts a handbrake on the whole market, whether you're a buyer or a seller. Now that the budget's gone, at least we know what you're dealing with. So now they know what the rules of the game are. And that could have actually boosted sentiment in a weird way. So it's a bit like in the stock market when
42:43
When the market's falling in the fear of an event, then the event happens and markets boom straight after. Because even if the event happened as they thought, it could have been worse. You must have listened to the podcast we recorded in the studio yesterday because exactly what I said. I said the fear or the uncertainty of the event is worse than the event itself. Oh, it is, 100%. And you spoke to that in that app, for example, that in the previous election, the lead-up, markets fell by the worst in 40 years, 8% in the lead-up to Bill Shorten's election. Yep. The fact that he didn't get in...
43:12
They responded after that in such significant upswing. Also, the Banking World Commission got handed down and it wasn't that bad. And it's like, oh. So all that uncertainty was lifted off, right? And we kind of got that now. Although, you know, the changes aren't positive for prices, but at least if you're playing the game. You know what it is. You know the rules of the game are. Whereas before, you were like, well, I'm not going to make a decision because I don't know what the rules of the game are going to be. And they could end up being worse than they ended up being.
43:39
So I think just the fact that the rules of the game are now being laid out, that might have boosted sentiment because everyone goes, okay, I know what I'm working with. And the only uncertainty that still remains in the market, which I'm interested in your thoughts as the year plays out, is interest rates because the fear of interest rates going up does more damage than actually rates going up, in my opinion.
43:56
And the fact when they throw out, there could be two or three. And that's the RBA's job is to change consumer behavior. They come out tomorrow and said, or in two weeks when they meet and say, no more rate likes for the rest of the year. Markets are going to respond really, really positive. And they're not going to do that. They're not going to say that. Even if in their mind they were going to keep it that way, they have to...
44:13
put in, you know, they want to keep inflation down. So they're going to say... Yeah, jaw boning. That's what they call it. They'll pause it. In my opinion, I can't see them... I agree with that, actually. I can't see them increasing them in June. No. And on the basis of that pause, they'll come out with some commentary around that expect more rate rises because they don't want people to then go out and start spending, right? Yeah, yeah, 100%. So, yeah, yeah. So it's about managing expectations. Yeah. And to your point, I think there's close to 0% chance we get a rate hike in June. I hope that doesn't come back to buy me.
44:41
But I mean, for the simple reason, right? So you've got – the RBA's got two key performance indicators. They're trying to maintain full employment and they're trying to do price stability, right? Keep the inflation between 2% to 3%. The unemployment rate, the latest rating, 4.5%, was a lot worse than what the May Statement of Monetary Policy expected, which only came out like a week before the ABS did that. So they've already gone, oh, okay, the labour market's worse.
45:06
And then the latest inflation read was actually basically what they expected, but marginally better. Like we're talking by a fraction of a decimal point, right? I'm not going to... So inflation wasn't worse than they were expected. Unemployment was a lot worse based on that. And in fact, in their minutes to the last meeting, the main meeting, which get released...
45:24
couple of weeks afterwards, they actually suggested that they were going to wait and see how it all plays out and hold in June. So they're already looking to do that. Yep. This reinforces that. Yeah, 100%. So I mean- How's the rest of the year play out? I've made a call yesterday. I don't think there will be any more hikes. Yeah, I agree. Okay. Which is against what the markets are predicting. They've actually softened though. Yep. So the markets were a couple, only a couple of weeks ago, were tipping two more rate hikes. Yep.
45:50
Now they're less than 100% chance of one more. So it's like a 90% chance they expect one more this year. I wouldn't be surprised if we don't get any more at all. But yeah, to your point, I think you're right. Arbe's not going to come out and say, suggest that we're done. What they'll say, they'll say something like, we want to see the impact of the rate hikes to date. We've got a moderately restrictive monetary policy.
46:14
I want to see what happens over... Yeah, basically going to rely on the data. Yeah, which is, to be fair, that's a smart move, right? That's what they should do. They should always follow the data. But I don't think we will get another rate hike. Well, there's a good chance we won't. I don't really know. But... No, no, no, no. To be fair, I don't know. None of us know, right? I can say, I don't think this, whatever. But if I... I agree. Yeah, okay. Say, Leith, you've got to put $100 down on...
46:44
We got to get another hike or we're not. I'd go, okay, I'm putting on no. But knowing that I could lose that, but there's a better chance I'd win, you know, double or nothing, right?
46:55
So if I had to choose one, I'd go, I put on the pile of no more rate hikes versus more, but I don't know. So anyone listening to me, I'm not an insider. I can't read the future. But if that was to play out- Anything could happen. If that plays out, there's no more rate hikes. That's going to have a positive impact on the market in terms of sentiment. Yep. It may reduce the price falling that we're seeing in some markets, right? Because they're driven by sentiment more than they're driven by anything else.
47:21
So that could be the cushion that these markets need to stop them from continuing to bottom out, particularly Sydney and Brisbane, you've called it. Do you agree with that? Yeah, so I think we could get a pretty short and sharp downturn and then next year once, if the Arbe starts cutting, who knows what the government's going to do with the rules. I mean, I think they'll keep them in for at least a year.
47:45
But, you know, if they start seeking the polls... They don't come in effect until July next one. Yeah. Oh, good point. Yeah, yeah, yeah. Good point. Yeah. Oh, no, no. But if you're negatively gearing now, I know you can do it for a year. Yeah. But anyone who purchases now is going to be expecting that they can't, right? So, yeah. It changes their behavior. Yeah, 100%. 100%. And also, look, it's already changing the bank's behavior and how they lend. But...
48:09
You know, I wouldn't be surprised if, again, we end up following New Zealand at some point. It could take a couple of years and they end up reversing just because we end up having a decent sized correction. People get annoyed about it. And then the negative gearing changes get blamed for it, even though they're not fully responsible because I think we'd be able to blame.
48:30
Yeah, that's it. That's it. So it's very easy to point the blame at that. Look, you crashed the market. And here's the other thing. So the government seems to... So obviously, we're running a huge immigration program at the moment, like too high. Got a rental crisis, which to me is the bigger issue than the purchase affordability crisis. One of the most vulnerable, right? Yeah, 100%. 100%. And look, the rental data sucks. Like it's... Vacancy rates, if you go by totality, but SQM research is similar.
48:53
They're back down to pretty much the lowest level in recorded history again. So they're going back to where the lows of a couple of years ago. Rents are now accelerating. So they're going up by the latest reads 5.9% over the year, which is almost double wage growth now. So more than the $2 a week that they forecast. Oh yeah, mate, 100%. And that's irrespective of the tax changes. This is a migration versus supply story.
49:17
But the, you know, Treasury seems to think and the government seems to think that we're going to magically get this rebound in supply. I don't think it's going to come because it is, if you look at the macro headwinds facing the construction sector, we've obviously had a roughly 40% increase in costs since the pandemic. So it costs way more to build. Whole bunch of builders have gone bust. We've got much higher interest rates than we had at the end of last decade when we had that apartment boom. The cash rate then was 1.5%.
49:44
versus now. So we've got high interest rates. And then now, because of the Middle East oil shock, that's now driving up input prices again. So we get a second round cost inflation. And already a whole bunch of builders come out. So active in Perth, Nigel Satterley, he came out. I think he's the second biggest house and land developer in Australia. He reckons because of the global fuel shock, it's added $50,000 to the cost of building a new house and land package.
50:14
So 20 grand of that alone is the site preparation because of the cost in rising diesel and that sort of thing. You know, your cement, your masonry, timber, all the inputs, the PVC pipes, everything's gone up in cost. So if you've got cost inflation there...
50:30
On top of the cost inflation we already had, we've got very strong labour shortages in the construction trades, partly because the government's doing the big build infrastructure, we've got all the renewable crap going up. That's sucking labour out of that area.
50:45
So the macroeconomic headwinds for construction is massive. And here's the other thing nobody thinks about. There's actually a very strong correlation between construction rates and home prices. So when prices are falling, it makes it less profitable for developers to build. Because why would you put up an apartment block or a house that, say, a house takes a year to build, apartment block takes several years to build, and you think you can sell at that, but the market's falling?
51:10
and it's going to cost you this to build, why would you take the punt if you think there's a chance because the prices are falling, you're only going to be able to sell it for that and make a loss. So that's going to style for construction as well. So CBA has been pretty good. They put out some forecasts where they actually downgraded their construction forecast for the next three or four years.
51:30
because of the Middle East shock. So they think the government's going to miss their housing target, the 1.2 million over five years, by 26%. So they reckon they're going to miss it by 315,000. And eventually that's worse than what they were predicting before the Middle East. They reckon it's knocked out tens of thousands of homes. And so the government continues to funnel in huge numbers of migrants into the country when the supply side is getting even tighter.
51:57
but they seem to think that they're going to magically get this uptick into rising prices and rising input prices, I should say, at the same time as we have falling established home prices. So that to me is just a recipe for worsening rental crisis. And that should, you know...
52:15
on a fundamental basis over the long term, should put some sort of floor under property values, you'd think. Yeah, because of the yield. Yeah. Well, I mean, just the replacement cost, right, the housing. Oh, yeah. Yeah, yeah. So if you're going to, you know, increase the replacement cost of housing, well, it's going to at least put some sort of floor under the market.
52:32
Lachlan, probably one of the most enjoyable podcasts there. It went a lot longer and we actually thought we didn't want to cut it out. So we're going to go part two with Leif next week. So this has been part one. Part two gets more fired up. It certainly does. It calls it how it is. It doesn't hold back. I like your property stance, your political stance. So you're right. Stay tuned for episode two. You've been listening to the Folio Property Podcasts.
53:07
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