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'Stock overhang'- Inside the property market's biggest issue · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard. These are difficult, challenging days for
• 0:18
  Speaker 1: property investors. No two ways about it. But really, outside
• 0:21
  Speaker 1: of the doom and gloom, as an investor, you want
• 0:25
  Speaker 1: to know really exactly what's happening in the market. How
• 0:29
  Speaker 1: deep is this drop? What are the specific issues for
• 0:33
  Speaker 1: property investors and property owners of all types in relation
• 0:36
  Speaker 1: to a market where you've got rates rising? and prices
• 0:40
  Speaker 1: falling at the same time. On top of that, obviously,
• 0:42
  Speaker 1: a suite of new property taxes which came in during
• 0:45
  Speaker 1: the budget. Another way to look at this market is
• 0:49
  Speaker 1: it's getting cheaper, where the bargains might emerge would be
• 0:53
  Speaker 1: interesting in the days ahead. My guest today is Angus Moore,
• 0:56
  Speaker 1: who is the senior economist at what is now called,
• 1:00
  Speaker 1: once again, realestate.com.au. Hi, Angus. How are you? Great.
• 1:04
  Speaker 2: Thanks for having me, James. Great to be here.
• 1:06
  Speaker 1: Lovely to have you. Now, Let's just cut to the chase.
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  Speaker 1: I think in terms of what people would be hearing
• 1:13
  Speaker 1: that prices are falling, and they are falling, it seems
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  Speaker 1: to me they seem to be falling something like 1%
• 1:18
  Speaker 1: a month. These are nationwide figures. But there's also talk
• 1:23
  Speaker 1: that the fall is accelerating. Could we just put it
• 1:27
  Speaker 1: on the table, allowing for the fact that the forecast,
• 1:29
  Speaker 1: even from banks now, are something like peak to trough
• 1:32
  Speaker 1: fall of anything up to 15%. But what do we
• 1:35
  Speaker 1: know so far? What has happened so far?
• 1:38
  Speaker 2: Yeah, I think a lot to unpack there. It's an
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  Speaker 2: interesting question and an interesting time in general. As you say,
• 1:44
  Speaker 2: we've seen six consecutive months of falls on our data
• 1:47
  Speaker 2: so that the PropTrack Home Price Index prices are off
• 1:49
  Speaker 2: about 3.5% from their peak nationally. That national is an
• 1:53
  Speaker 2: important caveat. There's obviously big discrepancies between what we're seeing
• 1:56
  Speaker 2: in Sydney and Melbourne, which have been leading the downturn.
• 1:59
  Speaker 2: They're more like 5.5% versus regional areas that are actually
• 2:03
  Speaker 2: holding up pretty well. Prices were actually flat last month
• 2:05
  Speaker 2: in regional areas. They didn't fall So it's not one
• 2:07
  Speaker 2: fall everywhere, though compared to what we have been seeing
• 2:11
  Speaker 2: in say 2022, 23, 24, when Perth, Adelaide, Brisbane were
• 2:15
  Speaker 2: just absolutely skyrocketing compared to Sydney and Melbourne, it is
• 2:19
  Speaker 2: much more similar in that it is pretty soft everywhere
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  Speaker 2: at the moment. Right.
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  Speaker 1: So the first thing I suppose then, it has spread
• 2:25
  Speaker 1: to all parts. There's no secret corner of the country
• 2:27
  Speaker 1: that's escaped a falling market that's decelerating, if you like.
• 2:32
  Speaker 1: And the fall... as measured week to week or month
• 2:36
  Speaker 1: to month, is it accelerating?
• 2:40
  Speaker 2: I wouldn't say it's accelerating at the moment, but we're
• 2:42
  Speaker 2: certainly not seeing signs it's slowing down. The pace of
• 2:45
  Speaker 2: falls has been pretty consistent for the past sort of
• 2:47
  Speaker 2: five months or so. It looks like it's tracking fairly consistently.
• 2:51
  Speaker 2: And we see that elsewhere too. Auction clearance rates remain
• 2:54
  Speaker 2: at roughly the same level, sort of 40-ish percent in Sydney,
• 2:58
  Speaker 2: around 50% in Melbourne. They've been there since March. We
• 3:02
  Speaker 2: kind of haven't seen that really shifting. time to sell
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  Speaker 2: a home equally has increased, though it's been a little
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  Speaker 2: bit more stable in the past sort of months or so,
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  Speaker 2: but again, at a higher level than it was, say,
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  Speaker 2: 12 months ago.
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  Speaker 1: Yeah, that's something I want to talk to you about,
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  Speaker 1: that idea of overhang and to what extent that's building.
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  Speaker 1: But just laying it out for listeners, first of all,
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  Speaker 1: in terms of what has happened so far, then, of course,
• 3:26
  Speaker 1: we have interest rate increases into this market. That's hard,
• 3:31
  Speaker 1: of course, for the market because by textbook definition, when
• 3:35
  Speaker 1: you get interest rate rises, it cools the market, but
• 3:38
  Speaker 1: it's already cooling. On your own estimation, have you got
• 3:42
  Speaker 1: in your mind what we might call a terminal rate?
• 3:44
  Speaker 1: If we see that the cash rate is now up
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  Speaker 1: at 4.6, is there numbers you're working off on a
• 3:50
  Speaker 1: model or anything like that?
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  Speaker 2: Yeah, look, we'd have at least one more in our
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  Speaker 2: kind of expectations for where things go from here, whether
• 3:57
  Speaker 2: that happens November 1st Maybe looking a little bit less likely,
• 4:01
  Speaker 2: probably early next year at the moment, looks a bit
• 4:03
  Speaker 2: more likely, though we'll know a lot more once we
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  Speaker 2: get the next inflation rate on whether that's this year
• 4:08
  Speaker 2: or next. But certainly we'd expect to see at least
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  Speaker 2: one more. Whether we see a second, another one from there,
• 4:14
  Speaker 2: probably less convinced that's necessary. But again, that's really going
• 4:17
  Speaker 2: to depend on inflation. Market pricing still has a chance
• 4:20
  Speaker 2: of that second hike, but it's relatively low. It's certainly
• 4:23
  Speaker 2: not locked in by any means.
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  Speaker 1: Right. I'm sure you'll be willing to concede. Once we're
• 4:28
  Speaker 1: into modeling, we just don't know, do we? We have
• 4:30
  Speaker 1: no idea. No one has any idea of where rates
• 4:33
  Speaker 1: will go, both locally or globally. Does the continuing creeping
• 4:38
  Speaker 1: up of bond yields, being pushed by both good news
• 4:41
  Speaker 1: on CapEx for AI companies and bad news by inflation,
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  Speaker 1: I mean, you obviously watch that all the time. Does
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  Speaker 1: that ultimately bear on our market?
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  Speaker 2: Yes, it does to some extent in that it flows
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  Speaker 2: through in things like exchange rates, which affects inflation. And
• 4:57
  Speaker 2: to some extent, some financing is global. And so that
• 5:00
  Speaker 2: can flow through to domestic activity, though that's probably a
• 5:02
  Speaker 2: weaker channel than exchange rates. So it can matter. It's
• 5:05
  Speaker 2: certainly something we watch, a risk for higher mortgage rates.
• 5:09
  Speaker 2: But at the moment, under the assumption that inflation continues
• 5:13
  Speaker 2: to evolve as the RBA is broadly expecting, hopefully there's
• 5:16
  Speaker 2: only one more to go. Again, inflation will kind of
• 5:19
  Speaker 2: determine that.
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  Speaker 1: Yeah. And then what's your own view on the forecast
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  Speaker 1: of a peak trough drop of 15%? Yeah.
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  Speaker 2: I mean, 15 seems quite large. That's certainly not what
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  Speaker 2: we're expecting to see, though it's worth noting, I think
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  Speaker 2: when people talk about that 15%, they're maybe picking the
• 5:35
  Speaker 2: upper bound of a forecast range, and those ranges tend
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  Speaker 2: to be wide, and also probably focusing on the sorts
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  Speaker 2: of markets that are quite salient, like Sydney and Melbourne.
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  Speaker 2: And I think an important distinction to draw here is
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  Speaker 2: One of the characteristics of the downturn that we're seeing
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  Speaker 2: at the moment, which is it is kind of consistent
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  Speaker 2: with a rates-driven, affordability-driven downturn. And what I mean by
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  Speaker 2: that is the more expensive end of the market is
• 5:57
  Speaker 2: bearing the brunt of the falls at the moment.
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  Speaker 1: Yeah, isn't it just? Sydney houses have been cut by
• 6:04
  Speaker 1: a million. Not unusual in some salubrious Sydney suburbs. Sydney's
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  Speaker 1: getting the brunt of it, yeah.
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  Speaker 2: Yeah, that's right. Sydney and Melbourne, kind of tracking together
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  Speaker 2: at the moment, if you look at the sort of
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  Speaker 2: top quarter, it's the most expensive quarter of homes in Sydney,
• 6:18
  Speaker 2: in Melbourne, both of them are about 8% off already,
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  Speaker 2: peak to trough. So hitting 15% would still be quite
• 6:25
  Speaker 2: a substantial fall from where we are today for those,
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  Speaker 2: but it's not implausible. Whereas the low end, even in
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  Speaker 2: both those cities, only off 2.5%. Nationally, the low ends,
• 6:35
  Speaker 2: the sort of most affordable quarter, nationally is only off
• 6:38
  Speaker 2: a percent. So 15% for that is implausible in my view.
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  Speaker 1: As an investor looking at the market, I remember someone
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  Speaker 1: who never went into property before, always wanted to go in,
• 6:48
  Speaker 1: said they were waiting for prices to fall. Everyone laughed
• 6:50
  Speaker 1: at them and said, keep waiting, they're never going to fall. Well,
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  Speaker 1: here it is. So if someone was in that position, what,
• 6:58
  Speaker 1: if anything, is distinct about this downturn compared to previous ones?
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  Speaker 1: I mean, you would have thought that the big distinction
• 7:05
  Speaker 1: is that our absolute prices are higher. But what will
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  Speaker 1: mark this downturn compared to previous downturns?
• 7:13
  Speaker 2: Yeah, I think there's two things. And I think it's
• 7:15
  Speaker 2: probably early on one of them at this stage. So
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  Speaker 2: the two things are one, as you say, we're kind
• 7:20
  Speaker 2: of starting from a position of extraordinarily strained housing affordability.
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  Speaker 2: On our measures, affordability has never been worse. Or put
• 7:28
  Speaker 2: another way, the cost of servicing your mortgage relative to incomes,
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  Speaker 2: kind of no matter your income, no matter the house,
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  Speaker 2: is as bad as we've seen. So we're starting from
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  Speaker 2: a fairly challenging position already. The second is the budget,
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  Speaker 2: which is obviously a big unknown. And I'm sure when
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  Speaker 2: we're going to discuss that link over the- You mean
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  Speaker 2: the implications of the tax changes in the budget.
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  Speaker 1: Correct.
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  Speaker 2: Implications of the tax changes in the budget. Those are
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  Speaker 2: not unprecedented. We've changed capital gains tax before. We've changed
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  Speaker 2: negative gearing before. But the last time we did it
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  Speaker 2: was more than two decades ago. Fair to say Australia
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  Speaker 2: and Australia's housing markets changed a lot in that time.
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  Speaker 2: And so that's a really big unknown. Now, to date,
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  Speaker 2: I don't think we've seen massive effects on home prices
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  Speaker 2: from those budget changes for the reasons that we kind
• 8:14
  Speaker 2: of just spoke about. The low end, which is where
• 8:17
  Speaker 2: investors concentrate, is actually holding up better than the top end.
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  Speaker 2: So to date, it looks like a rates-driven downturn, but
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  Speaker 2: how that plays out is going to be the kind
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  Speaker 2: of big question for the next 12 months.
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  Speaker 1: Okay. I think we'll take a short break and we're
• 8:30
  Speaker 1: going to come back and we're going to look at
• 8:31
  Speaker 1: this market as from an investor lens, folks. So we're
• 8:34
  Speaker 1: going to just look at the units versus houses, for instance. What,
• 8:38
  Speaker 1: if any, evidence of investors going into new homes? What's
• 8:41
  Speaker 1: the situation with vacancies? I mean, if vacancies remain as
• 8:44
  Speaker 1: tight as they are, but it's still a very viable,
• 8:47
  Speaker 1: investable market. We'll be back in a moment. Hello, welcome
• 9:06
  Speaker 1: back to the Australian's Money Puzzle podcast. James Kirby here
• 9:09
  Speaker 1: with Angus Moore, who is the senior economist at realestate.com.au.
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  Speaker 1: So this is his whole business, the housing market and
• 9:20
  Speaker 1: the housing market for both buyers and investors. Let's just
• 9:24
  Speaker 1: take a look at it, Angus, from an investor's point
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  Speaker 1: of view. Units versus houses. Are the units falling? Which
• 9:32
  Speaker 1: are falling faster? Do we know?
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  Speaker 2: Houses at the moment.
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  Speaker 1: Interesting, right? Because houses were always the one that did better. Yeah.
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  Speaker 2: So that's kind of consistent with the sort of rates-driven
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  Speaker 2: affordability story that we were talking about. Detached houses tend
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  Speaker 2: to be more expensive. If you're looking at the top
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  Speaker 2: quarter of homes, most of those are going to be
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  Speaker 2: detached houses. So they have seen a bit larger a
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  Speaker 2: fall than units. That's not uncommon in downturns to see
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  Speaker 2: detached fall faster than higher density and then the converse
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  Speaker 2: in upswings.
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  Speaker 1: Right. Okay. So that's not unexpected, even though houses always did.
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  Speaker 1: I think we had almost a decade, hadn't we, where
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  Speaker 1: the house prices improved better than unit prices, units being higher.
• 10:13
  Speaker 1: apartments basically, but also kind of townhouses between the two.
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  Speaker 1: So you expected that, did you, that the units would
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  Speaker 1: hold up? I would have told the units were even
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  Speaker 1: weaker in a downturn. Could you explain the rationale there? Yeah.
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  Speaker 2: So I think the story here is an affordability one,
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  Speaker 2: but it's also probably a biosegmentation one. And we'll talk
• 10:33
  Speaker 2: about that in a second. So the affordability one is
• 10:35
  Speaker 2: relatively straightforward, which is when your borrowing capacity falls, as
• 10:38
  Speaker 2: it has fairly significantly under the weight of four rate
• 10:41
  Speaker 2: hikes or going back five years under the weight of
• 10:44
  Speaker 2: substantially more than four rate hikes, people look for more
• 10:47
  Speaker 2: affordable options. And so that can be looking further out
• 10:50
  Speaker 2: from the city, or it can be looking for a
• 10:52
  Speaker 2: townhouse instead of a detached house or an apartment instead
• 10:54
  Speaker 2: of a townhouse. So that's not an uncommon feature in
• 10:58
  Speaker 2: price downturns and affordability-driven downturns. The other factor is the
• 11:02
  Speaker 2: first-time buyer market. At the moment, we are seeing a
• 11:05
  Speaker 2: bit of support for first-time buyers coming through from the
• 11:07
  Speaker 2: Australian government 5% deposit scheme. That's now really quite widely used.
• 11:11
  Speaker 2: About half of first-time buyer loans are now using that scheme.
• 11:15
  Speaker 2: So it's pretty widely used. That's going to concentrate on
• 11:18
  Speaker 2: more affordable homes and sort of disproportionately, particularly in Sydney
• 11:21
  Speaker 2: and Melbourne, on units and higher density.
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  Speaker 1: I see. So they have something of an artificial support
• 11:28
  Speaker 1: in that this universal deposit scheme arrived just in time
• 11:32
  Speaker 1: to perhaps support that layer of the market inside this
• 11:35
  Speaker 1: falling market. Okay. Interesting. Now, from an investor point of view,
• 11:41
  Speaker 1: I mean, the big issue was this notion that there
• 11:44
  Speaker 1: will be overhang, that the volumes, I'd love to hear
• 11:48
  Speaker 1: more about volumes on the market in terms of the
• 11:52
  Speaker 1: amount of stock for sale. And then spring, traditionally, there
• 11:57
  Speaker 1: was always about 30% or so increase in volume. So
• 12:02
  Speaker 1: is there an overhang building? And could you articulate what
• 12:08
  Speaker 1: it might look like?
• 12:09
  Speaker 2: I think it's a really interesting divergence in that sense
• 12:14
  Speaker 2: between Sydney and Melbourne, where conditions have been quite a
• 12:17
  Speaker 2: lot quieter this year. The number of new properties getting
• 12:19
  Speaker 2: listed for sale on realestate.com.au is down 17%, 18% across winter.
• 12:25
  Speaker 2: That said, the total stock on market, so that's new
• 12:28
  Speaker 2: listings plus anything that remains unsold, is actually up a
• 12:31
  Speaker 2: little bit. It's not huge, but it is up a
• 12:33
  Speaker 2: bit compared to where it was a year ago. And
• 12:35
  Speaker 2: that's simply a factor of homes taking longer to sell,
• 12:37
  Speaker 2: sticking around longer. Brisbane, Adelaide and Perth, completely different story.
• 12:42
  Speaker 2: Those markets have been really quiet in recent years, very
• 12:45
  Speaker 2: limited stock for buyers. That's starting to change. We've seen
• 12:48
  Speaker 2: a number of new properties being listed for sale up 20%
• 12:53
  Speaker 2: across those cities in recent months. And that means that
• 12:56
  Speaker 2: the kind of total stock on market, so both because
• 12:59
  Speaker 2: there's more new flow and it's taking longer to sell homes,
• 13:02
  Speaker 2: has jumped 50% or more compared to where we were
• 13:04
  Speaker 2: at the start of the year.
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  Speaker 1: So that's the big change. Beyond Sydney and Melbourne, those
• 13:10
  Speaker 1: cities where basically people were, it had topped, I suppose,
• 13:16
  Speaker 1: but it hadn't turned. And suddenly there is this 20%
• 13:19
  Speaker 1: lift in stock for sale in those cities. What would
• 13:23
  Speaker 1: naturally happen, do you think, in spring? What would we
• 13:26
  Speaker 1: have reasonably expected to happen? What would the natural increase be?
• 13:30
  Speaker 2: Yeah, we normally expect to see a fairly substantial increase
• 13:33
  Speaker 2: in new stock hitting market in spring. October, November, depending
• 13:36
  Speaker 2: on the city, is usually the busiest month of the year.
• 13:38
  Speaker 2: We'd still expect some of that to happen this year,
• 13:40
  Speaker 2: of course. Spring is still when activity is concentrated.
• 13:43
  Speaker 1: But what I mean is, if it's 20%, what would
• 13:46
  Speaker 1: it have been any other year? Would it be 10%, 5%?
• 13:50
  Speaker 1: So that's 20% relative to a year ago. So that's 20%
• 13:54
  Speaker 1: over and above what we would normally say, or what
• 13:56
  Speaker 1: we saw last year at least. 20% over and above
• 13:59
  Speaker 1: what would have naturally been expected. I see. So that
• 14:03
  Speaker 1: would seem to be the outstanding difference then. In terms
• 14:07
  Speaker 1: of where we are in the down cycle of the
• 14:11
  Speaker 1: property market, this is where we are. And it's the
• 14:14
  Speaker 1: cities beyond the big two. Which had a later run,
• 14:19
  Speaker 1: of course. Their price came later. Yes. They are now
• 14:25
  Speaker 1: joining us in the gloom. Okay. Okay. Right. So that's
• 14:28
  Speaker 1: for an investor's point of view would probably mean that
• 14:31
  Speaker 1: for the first time in some years, I imagine quite
• 14:33
  Speaker 1: a few years, Brisbane and Perth especially, they've been catching
• 14:38
  Speaker 1: up basically, hadn't they?
• 14:39
  Speaker 2: Yeah. Perth particularly was coming into the pandemic after a
• 14:43
  Speaker 2: pretty soft decade post mining boom. was really quite affordable
• 14:47
  Speaker 2: in sort of 2019, 2020. So some of it's been
• 14:49
  Speaker 2: catch up. It's probably more than caught up now. I mean,
• 14:52
  Speaker 2: Melbourne's now the most affordable city in Australia. Brisbane, Perth,
• 14:55
  Speaker 2: Adelaide are more expensive. They've had remarkable runs, those three cities.
• 14:59
  Speaker 2: If you look relative to the start of 2020, so
• 15:02
  Speaker 2: kind of pre-pandemic, those three cities have more than doubled
• 15:05
  Speaker 2: home prices across that period. It's been an extraordinary run
• 15:08
  Speaker 2: of growth.
• 15:10
  Speaker 1: Yes, it has. It really did. Particularly, and I think
• 15:13
  Speaker 1: maybe the question I ask just about every economist that
• 15:16
  Speaker 1: comes on the show, do you think the old order
• 15:21
  Speaker 1: where the prices were in line with the population, so
• 15:27
  Speaker 1: Sydney was the most expensive, Melbourne was the second most expensive,
• 15:30
  Speaker 1: Brisbane was the third, do you think we'll ever go
• 15:32
  Speaker 1: back to that?
• 15:34
  Speaker 2: It's a good question. And I think there are reasons
• 15:35
  Speaker 2: to think that some of that has faded in that
• 15:39
  Speaker 2: with working from home, with remote work, which of course
• 15:42
  Speaker 2: doesn't apply to everyone. Plenty of jobs can't work remotely.
• 15:45
  Speaker 2: But for a reasonable swathe of often quite high paid jobs,
• 15:49
  Speaker 2: it is possible to live somewhere very disparate from where
• 15:52
  Speaker 2: you work. And so that geographic relationship may be a
• 15:55
  Speaker 2: little bit weaker than perhaps it was historically. That said,
• 15:58
  Speaker 2: ask an economist a question, get two answers. I would
• 16:01
  Speaker 2: say Melbourne probably still looks... It seems unsustainable for Melbourne
• 16:06
  Speaker 2: to be Australia's most affordable city, given it is large,
• 16:09
  Speaker 2: high income, high productivity. So it's... There's been a whole
• 16:12
  Speaker 2: swathe of factors driving that underperformance in recent years, but
• 16:17
  Speaker 2: over 10, 15 years, I'd expect some of that to reverse.
• 16:20
  Speaker 1: Right. It didn't quite make the call about whether it
• 16:24
  Speaker 1: would return to its... But it's more from an investor perspective,
• 16:28
  Speaker 1: I suppose, where people are looking. And we know that
• 16:31
  Speaker 1: interstate buying, can you just tell us, I know it's
• 16:33
  Speaker 1: an aside here, but interstate buying, that was virtually marginal
• 16:37
  Speaker 1: once upon a time because it was so hard. I know.
• 16:40
  Speaker 1: Can you give us any glimpse of economically what's going
• 16:44
  Speaker 1: on there?
• 16:45
  Speaker 2: Yeah. We don't get great data on it, is the
• 16:48
  Speaker 2: short answer, which is perhaps why we don't talk about
• 16:50
  Speaker 2: it as much as we could. We can see on
• 16:52
  Speaker 2: realestate.com.au where people are searching from and to. It's fair
• 16:56
  Speaker 2: to say it's still a minority by quite a long way.
• 16:58
  Speaker 2: Most people still look within their own states, which makes
• 17:01
  Speaker 2: sense because you're very familiar with your own housing markets
• 17:04
  Speaker 2: and areas and less so But we do still see it.
• 17:07
  Speaker 2: It's certainly a meaningful share of people look interstate. Places
• 17:11
  Speaker 2: like Perth and Adelaide have been quite popular in the
• 17:13
  Speaker 2: last sort of three or four years, which may be
• 17:16
  Speaker 2: not a surprise when you see how they've performed.
• 17:18
  Speaker 1: Yes, it was so, well, from a historical point of view,
• 17:23
  Speaker 1: if you believed in reversion to the mean in any order,
• 17:25
  Speaker 1: then it would seem that Perth was a very obvious
• 17:29
  Speaker 1: hotspot for buyers. And we covered that on the show
• 17:32
  Speaker 1: during that time. No longer, obviously. The question is whether
• 17:35
  Speaker 1: Melbourne is one now. Big question. OK, I want to
• 17:38
  Speaker 1: talk also to you about the rental market and whether
• 17:41
  Speaker 1: if the market is that soft, if the prices are falling,
• 17:45
  Speaker 1: can we reasonably expect rentals to stay as strong as
• 17:50
  Speaker 1: they are, rental yields to stay as strong as they are?
• 17:52
  Speaker 1: We'll be back in a moment. Hello, welcome back to
• 18:09
  Speaker 1: the Australian's Money Puzzle podcast. James Kirby with Angus Moore
• 18:12
  Speaker 1: from realestate.com.au. So Angus, looking at the broader market as
• 18:17
  Speaker 1: an investor, you have this curious situation where, in some ways,
• 18:22
  Speaker 1: it's the worst nightmare really. Rates rising and prices falling
• 18:25
  Speaker 1: at the same time. And that's at the sort of
• 18:28
  Speaker 1: capital part. However, and taxation changes too. But and negative
• 18:34
  Speaker 1: gearing being removed as well. And you've alluded to that
• 18:36
  Speaker 1: in relation talking about the budget in the first part
• 18:39
  Speaker 1: of the show. But then again, as an income market,
• 18:44
  Speaker 1: the rental vacancy rate is stuck at 1%. It's not
• 18:48
  Speaker 1: there for years. And I don't know, you tell me,
• 18:52
  Speaker 1: have you any projections on that vacancy rate? Because if
• 18:57
  Speaker 1: it stays at 1%, it does mean for an investor,
• 19:00
  Speaker 1: if you own a property, you can rent anything really.
• 19:03
  Speaker 1: You can rent anything because the demand is extraordinary. But
• 19:06
  Speaker 1: what's your view? Yeah.
• 19:07
  Speaker 2: So, I mean, I think maybe it's worth putting some
• 19:09
  Speaker 2: numbers around it just to kind of highlight just how
• 19:11
  Speaker 2: bad it is, right? So Perth, 0.9 at the moment. Adelaide, 1.0. Brisbane, 1.1.
• 19:17
  Speaker 2: That's incredibly low. The maybe good lining, silver lining here
• 19:22
  Speaker 2: is that for a renter, it was even lower three
• 19:25
  Speaker 2: years ago. So it's very slightly better, but you'd have
• 19:28
  Speaker 2: to say only very slightly better. The one area where
• 19:31
  Speaker 2: it is meaningfully better is Melbourne. It's 1.9 now. Now,
• 19:34
  Speaker 2: it bounces around month to month. That's a little bit
• 19:36
  Speaker 2: higher than probably we'd expect it to be over the
• 19:39
  Speaker 2: next six months or so, but it is a bit
• 19:41
  Speaker 2: higher in Melbourne. To actually answer your question, though, that's
• 19:44
  Speaker 2: going to continue to put pressure on rents. It's hard
• 19:46
  Speaker 2: to see a big improvement in vacancy rates on the horizon.
• 19:49
  Speaker 2: We'd hope they continue to drift up as they have been,
• 19:51
  Speaker 2: as population growth isn't as strong as what we were
• 19:53
  Speaker 2: seeing kind of post-pandemic. We continue building more homes, though
• 19:56
  Speaker 2: there are some concerns there as well. And that's to
• 19:59
  Speaker 2: build the rental stock.
• 20:01
  Speaker 1: But the government's idea, obviously, was that it would boost home,
• 20:05
  Speaker 1: new home buying by banning negative gearing for existing homes.
• 20:11
  Speaker 1: We know, and anyone listening to the show who reads
• 20:13
  Speaker 1: any news at all will know that obviously the housing
• 20:15
  Speaker 1: targets were never met, never will be met because they
• 20:17
  Speaker 1: were not realistic. However, what I'm driving at is whether
• 20:23
  Speaker 1: you have seen any evidence that investors, knowing that the
• 20:28
  Speaker 1: negative gearing was banned for existing homes, have turned to
• 20:31
  Speaker 1: new homes. Have you seen anything to back that up
• 20:34
  Speaker 1: or show that it's happening?
• 20:35
  Speaker 2: Short answer is yes, though with a bit of a
• 20:38
  Speaker 2: caveat on it. If you look at the loans that
• 20:41
  Speaker 2: investors take out, we get data on what they've taken
• 20:44
  Speaker 2: the loan out for. Now, the vast majority is to
• 20:46
  Speaker 2: buy established property, but there is a chunk that's there
• 20:49
  Speaker 2: to buy newly built homes. The past sort of two
• 20:52
  Speaker 2: or three years, that's been bouncing around sort of 14%
• 20:53
  Speaker 2: to 15% of loans were for new homes. Between March
• 20:58
  Speaker 2: and June quarter, that jumps from 14.5% to 17.2%.
• 21:00
  Speaker 1: Right. Okay.
• 21:01
  Speaker 2: Okay. And the budget's in May, right? So that splits
• 21:07
  Speaker 2: the June quarter in half. So that looks like we
• 21:10
  Speaker 2: did see an increase in new homes purchases by investors. Now,
• 21:14
  Speaker 2: the caveat, the reason why I'm putting it there is,
• 21:16
  Speaker 2: I mean, that's one quarter of data. It's middle of
• 21:18
  Speaker 2: the budget too. I wouldn't hang my hat on that
• 21:21
  Speaker 2: by any means, but there is some evidence that's maybe happening.
• 21:26
  Speaker 1: I wonder how they define that. Is a new home,
• 21:28
  Speaker 1: what does it mean? Is it like, was it finished
• 21:31
  Speaker 1: last week and someone's ready to move in? Or is
• 21:34
  Speaker 1: it a plan or an after plan? Do you know
• 21:37
  Speaker 1: what the definition is? Devil's in the details with all
• 21:40
  Speaker 1: of these things. So it covers both loans taken out
• 21:42
  Speaker 1: to purchase a new home. So that would be one
• 21:45
  Speaker 1: that has been built, but is as unyet been lived in,
• 21:48
  Speaker 1: or taken out for the purpose of building one. So
• 21:50
  Speaker 1: that can be a knockdown rebuild, but it can also
• 21:53
  Speaker 1: be a greenfield development off the plan. What I really
• 21:57
  Speaker 1: love to see, of course, is whether these new homes
• 21:59
  Speaker 1: were in the fringes of the cities, or whether they
• 22:03
  Speaker 1: were new homes in existing postcodes, which, of course, from
• 22:09
  Speaker 1: a negative gearing perspective these days would be the best
• 22:12
  Speaker 1: thing of all, I imagine. I suppose there's no doubt
• 22:15
  Speaker 1: on that, is there?
• 22:16
  Speaker 2: We'd love to get that data. There is not, as
• 22:18
  Speaker 2: is often the case, sadly. Yes, I'd love to get
• 22:20
  Speaker 2: it too.
• 22:21
  Speaker 1: Okay. Yeah. All right. Reviewing what you've been saying then.
• 22:25
  Speaker 1: The market has some way to go on its softening.
• 22:28
  Speaker 1: We're assuming that rates only go, maybe mortgage rates go
• 22:31
  Speaker 1: seven point something, but not much higher than that. And
• 22:36
  Speaker 1: through it all, vacancy rates remain more or less where
• 22:40
  Speaker 1: they are, which is 1%.
• 22:42
  Speaker 2: Yeah, maybe a little bit better than that in Sydney
• 22:44
  Speaker 2: and Melbourne, where rental markets aren't quite as tight. But yes,
• 22:47
  Speaker 2: it's hard to see a really big improvement in vacancies
• 22:49
  Speaker 2: on the horizon.
• 22:49
  Speaker 1: Have you any idea what vacancy rate was naturally 20
• 22:52
  Speaker 1: years ago, 10 years ago?
• 22:55
  Speaker 2: We'd consider something in the order of 2% to 2.5%,
• 22:57
  Speaker 2: kind of broadly stable, broadly neutral. There's no right number exactly,
• 23:02
  Speaker 2: but that's sort of where we were pre-pandemic in Sydney, Melbourne.
• 23:05
  Speaker 2: Perth was much higher than that, though, as we've discussed,
• 23:07
  Speaker 2: Perth was a very weak housing market in the 2010s.
• 23:10
  Speaker 2: So that sort of order is where we'd consider consistent
• 23:13
  Speaker 2: with sort of low and stable rent growth as opposed
• 23:15
  Speaker 2: to the much brisker rent growth we're seeing at the moment.
• 23:19
  Speaker 1: Okay. One last thing for you. And it's been terrific
• 23:22
  Speaker 1: so far, Angus. Thank you. Often when markets, in the
• 23:26
  Speaker 1: Australian housing cycle, when we get a soft cycle and
• 23:29
  Speaker 1: house prices are flat or softening, and our last two
• 23:33
  Speaker 1: cycles were pretty tame, weren't they? I think, was it 8%
• 23:36
  Speaker 1: we had a peak to trough on the last two?
• 23:39
  Speaker 2: So the 2022-23 rate height cycle was, I think, 3.5%
• 23:45
  Speaker 2: off the top of my head. The 2018-19 was actually
• 23:48
  Speaker 2: the largest downturn we've had in three decades. People kind
• 23:50
  Speaker 2: of forget That pre-pandemic one, it was larger than that,
• 23:54
  Speaker 2: but still, I think in the order of 5% or 6% nationally.
• 23:57
  Speaker 2: Larger again in Sydney and Melbourne. So nothing as bad
• 23:59
  Speaker 2: as I just portrayed.
• 24:02
  Speaker 1: Okay. Keep that in mind, folks, that the last downturns,
• 24:06
  Speaker 1: even the more severe one, 2017.
• 24:08
  Speaker 2: Three and a half and five and a half.
• 24:11
  Speaker 1: Three and a half and five and a half were
• 24:12
  Speaker 1: the last two downturns. So there you are. We're going
• 24:15
  Speaker 1: to have a much more severe downturn than that. Now,
• 24:17
  Speaker 1: the point I wanted to make, Angus, was in previous downturns,
• 24:20
  Speaker 1: way back in relative terms, last century, there was always
• 24:24
  Speaker 1: a home building renovation boom, basically, where people said, okay, well,
• 24:29
  Speaker 1: my home is a CGT-free asset. The best thing I
• 24:32
  Speaker 1: could possibly do is upgrade my house. And then when
• 24:36
  Speaker 1: things come right, I can get the lift in the
• 24:38
  Speaker 1: fullness of time. I wonder, will that happen this time?
• 24:41
  Speaker 1: Or I wonder, will it be restrained due to the
• 24:44
  Speaker 1: particularly high inflation in building materials? and the kind of
• 24:48
  Speaker 1: episodic trade shortages we tend to get. Yeah, I think
• 24:52
  Speaker 1: exactly where it balances out is hard to say, but
• 24:54
  Speaker 1: I think yes. I'd be surprised if we see a
• 24:57
  Speaker 1: big boom in it because of the pressures we're seeing
• 25:00
  Speaker 1: on construction and on labour shortages in the construction sector.
• 25:03
  Speaker 1: We are seeing very substantial building inflation after a period
• 25:06
  Speaker 1: where it had been starting to improve after really bad
• 25:09
  Speaker 1: inflation during the pandemic. So in that environment, it's hard
• 25:13
  Speaker 1: to see that being a huge swing variable here. Right.
• 25:18
  Speaker 1: All the tradies are off building data centers.
• 25:21
  Speaker 2: Certainly some of them, yes. The electricians are very busy.
• 25:24
  Speaker 1: The electricians are very busy. That's why you can't get
• 25:26
  Speaker 1: them to come to your house to do your extension.
• 25:29
  Speaker 1: That's life. Thank you very much, Angus. That was great.
• 25:32
  Speaker 1: Lovely to talk to you. A pleasure.
• 25:33
  Speaker 2: Thanks for having me, James.
• 25:34
  Speaker 1: That was Angus Moore, Senior Economist at realestate.com.au. Keep the
• 25:39
  Speaker 1: emails rolling, themoneypuzzle at theaustralian.com.au. Love to have some more
• 25:44
  Speaker 1: questions or comments from you. Today's show was produced by
• 25:47
  Speaker 1: Leah Samaglou. Talk to you soon.