Latest / The Money Puzzle / Why property bargain hunters can hang tight... this downturn is only starting

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Why property bargain hunters can hang tight... this downturn is only starting · The Money Puzzle

0:09
Speaker 1: Hello and welcome to the Australian's Money Puzzle Podcast. I'm
0:13
Speaker 1: James Kerby. Welcome aboard, everybody. I have to say that
0:16
Speaker 1: one of my favorite property guests is Cameron Cusher. I
0:19
Speaker 1: know him a long time. He was in the research
0:21
Speaker 1: team at what is now REA, as was a real estate.com.au.
0:25
Speaker 1: He was in what has now become Cautality. They keep
0:28
Speaker 1: changing their names. A permanent presence, you might say, an
0:31
Speaker 1: enduring presence as an independent commentator now, which is ideal,
0:37
Speaker 1: I think, for the show, which we're always looking for.
0:40
Speaker 1: Someone that is fully versed in the market, but stands
0:42
Speaker 1: just a little bit outside and they can give a fresh,
0:45
Speaker 1: independent view. How are you, Cameron?
0:47
Speaker 2: I'm really well, James. Thanks for having me on again.
0:49
Speaker 1: I hope I didn't wind you up too much there
0:51
Speaker 1: in my preamble.
0:53
Speaker 2: No, no, just enough.
0:55
Speaker 1: Just enough. Good, good. So I know I've just been
0:57
Speaker 1: watching and you've been all around the country, of course,
1:00
Speaker 1: and you're talking to property groups all the time. So
1:02
Speaker 1: this is the guy who really does have his finger
1:04
Speaker 1: on the pulse, folks. I thought when I sent you
1:06
Speaker 1: some notes and we tic-tac about what we might talk about,
1:09
Speaker 1: I thought we might just explain to the casual listener
1:12
Speaker 1: where we are. Because that's what everyone wants to know.
1:14
Speaker 1: Where are we on this downturn? How does it compare
1:17
Speaker 1: to previous downturns? What happens next? Everyone, of course, wondering
1:21
Speaker 1: and asking, when do prices, when do we reach the bottom?
1:24
Speaker 1: Let's see if we can give a fair answer to that.
1:26
Speaker 1: As I understand, the last two cycles, downward cycles, they
1:30
Speaker 1: were 8% kick to trough, and that was 2022 and 2017. right, Nishamite?
1:37
Speaker 2: That's correct. And I guess the two factors in both
1:40
Speaker 2: of those downturns were a little bit different. In 2022,
1:44
Speaker 2: it was largely coming out of the pandemic. Interest rates
1:47
Speaker 2: were increased very aggressively. 2017 was more about restricting access
1:52
Speaker 2: to credit because we had the Royal Commission going on
1:55
Speaker 2: and that led to that downturn in the housing market
1:57
Speaker 2: we saw at that time.
1:58
Speaker 1: So this one, it's hard to explain, isn't it, in
2:02
Speaker 1: a single sentence, what forces it? But it would seem
2:04
Speaker 1: to me that The outstanding issue is the continued elevation
2:11
Speaker 1: of interest rates, and it's not over yet. But you
2:14
Speaker 1: tell me, before we talk about the particulars of this drop,
2:18
Speaker 1: what it might mean and how it might look against
2:20
Speaker 1: other drops, what are the explanations so far of the
2:25
Speaker 1: softness in house prices?
2:28
Speaker 2: Yeah, I think there's a few. So firstly, if we
2:30
Speaker 2: look at the two big markets of Sydney and Melbourne,
2:33
Speaker 2: and they really drive the national outcomes, the Melbourne housing
2:36
Speaker 2: market has been weak for five years. It's actually seen
2:39
Speaker 2: no price growth over that period of time. That's been
2:42
Speaker 2: a function of really low consumer sentiment or buyer willingness
2:46
Speaker 2: in that market and a very high volume of stock
2:49
Speaker 2: available for sale in Melbourne. You've still had strong net
2:54
Speaker 2: overseas migration to Melbourne and Victoria over We've had a
2:57
Speaker 2: lot of people leaving Victoria and a lot of people
2:59
Speaker 2: from interstate not arriving in Victoria who would have previously. Now,
3:04
Speaker 2: Melbourne is actually really quite affordable now, but the challenge
3:07
Speaker 2: still is that there's a lot of properties on the market.
3:09
Speaker 2: Sydney has also gone into a downturn and the fall
3:13
Speaker 2: in prices in Sydney started before the federal budget. And again,
3:17
Speaker 2: similar to Melbourne, one of the big drivers of the
3:19
Speaker 2: weakness in the Sydney housing market has been there's been
3:22
Speaker 2: a very high level of stock available for sale. and
3:25
Speaker 2: affordability in that market is extremely stretched. What we were
3:29
Speaker 2: also seeing before the federal budget, obviously we got three
3:33
Speaker 2: interest rate increases early this year, and we were seeing
3:37
Speaker 2: the rate of growth in prices in those other markets
3:40
Speaker 2: starting to slow. But then the federal budget came and
3:44
Speaker 2: there were obviously some significant changes to the capital gains
3:47
Speaker 2: tax discount and negative gearing. And we've largely seen investors
3:52
Speaker 2: who were about 40% of mortgage demand pull out of
3:57
Speaker 2: the market. They're trying to figure out how they proceed
4:00
Speaker 2: from here. But those changes have really damaged sentiment and
4:04
Speaker 2: it's led to the falls broadening. Now, most capital cities
4:08
Speaker 2: have seen prices decline over the last sort of two
4:10
Speaker 2: to three months. We're seeing that the number of buyers
4:14
Speaker 2: turning up to open homes is significantly lower. And obviously
4:19
Speaker 2: now we've got the prospect that interest rates are probably
4:21
Speaker 2: likely to rise at least one more time, if not
4:25
Speaker 2: a second time. And I think that's creating a lot
4:28
Speaker 2: of trepidation for people that want to buy or want
4:31
Speaker 2: to invest in the housing market right now.
4:33
Speaker 1: And we have the issue that the interest rate rise
4:36
Speaker 1: is both local and global. So we have local factors
4:39
Speaker 1: which could push up our interest rates and they're on
4:41
Speaker 1: the table. And it looks likely that there would be,
4:43
Speaker 1: as you say, at least one more. And then globally,
4:46
Speaker 1: driven by the US, it would look like their next
4:48
Speaker 1: move will be up as well. So this is not
4:50
Speaker 1: good for a property investor. All right. So if the
4:53
Speaker 1: last two cycles then, those downturns, one was, we mentioned,
4:57
Speaker 1: 2.022 and one was 2.17. And they went peak to
5:01
Speaker 1: trough 8%. It would seem, we don't have to be
5:05
Speaker 1: an expert to know, that it would seem this time around,
5:08
Speaker 1: they were very particular factors the last time. This looks
5:12
Speaker 1: like a combination, almost like a perfect storm. of factors,
5:16
Speaker 1: and those factors are yet to play out. Do you
5:20
Speaker 1: think we'll see a drop of more than 8% peak
5:23
Speaker 1: to trough this time?
5:24
Speaker 2: I think definitely. If you look at the cotality daily index,
5:27
Speaker 2: it's already fallen 5% from its peak at a national level.
5:31
Speaker 2: And over the last couple of months, we've seen the
5:34
Speaker 2: rate of decline accelerating. The other thing we've also seen
5:37
Speaker 2: is that the previous months, the declines that were initially
5:40
Speaker 2: showed have been revised significantly lower So we're constantly seeing
5:45
Speaker 2: the actual magnitude of these drops revising. So I think
5:48
Speaker 2: we will see prices fall by more than 8%. I
5:51
Speaker 2: think ultimately prices probably pull back somewhere between 10% and 15%.
5:57
Speaker 2: And we probably don't start to see a recovery in
6:00
Speaker 2: the housing market until interest rates are reduced. And at
6:04
Speaker 2: this point, as we mentioned, it looks like interest rates
6:06
Speaker 2: will rise at least once, maybe twice. And I don't
6:10
Speaker 2: think at the absolute earliest– the Reserve Bank's going to
6:14
Speaker 2: have scope to be cutting interest rates until this time
6:17
Speaker 2: next year. And it could end up being a lot
6:19
Speaker 2: longer than that. So until it becomes clear that inflation
6:23
Speaker 2: is moderating and the Reserve Bank's going to have scope
6:26
Speaker 2: to cut interest rates, then I don't see a recovery
6:29
Speaker 2: occurring in this market. Okay.
6:32
Speaker 1: Now, for the general listener, they know that the national
6:35
Speaker 1: prices fell 8% in the last two cycles, down cycles.
6:39
Speaker 1: And they know You've just said that the national prices
6:42
Speaker 1: have fallen perhaps 5%, did you say? Picked a trough.
6:46
Speaker 2: Across the board.
6:47
Speaker 1: At what point do you think we passed that we're
6:52
Speaker 1: into fresh territory? At what point do you think we
6:54
Speaker 1: passed the 8% drop? Roughly.
6:56
Speaker 2: It's probably very late this year or early next year.
7:00
Speaker 2: So probably sometime in December or January is when we
7:03
Speaker 2: see those falls eclipse.
7:04
Speaker 1: So we could be there by the end of the year.
7:06
Speaker 1: We could be into whatever the opposite of blue sky is,
7:10
Speaker 1: but we're into this sort.
7:11
Speaker 2: Of beyond routine drops. Exactly. And I think this is
7:17
Speaker 2: one of the things. Obviously, the housing market operates in
7:20
Speaker 2: a cycle. I recently had a look. If you go
7:22
Speaker 2: back all the way to 1980s, and look at every
7:25
Speaker 2: single month, about 75% of all months have seen prices
7:29
Speaker 2: rise and only about 25% of all months have seen
7:31
Speaker 2: prices fall. So prices do fall, but they have generally
7:37
Speaker 2: been quite moderate. And I think a lot of people
7:38
Speaker 2: forget about the price falls because most of the time
7:42
Speaker 2: prices are rising. But as you alluded to, this is
7:44
Speaker 2: a very different situation. We've got tax changes. We've got
7:48
Speaker 2: interest rates that are elevated. We've got inflation that's high.
7:51
Speaker 2: And historically, what's led to a recovery in the market
7:55
Speaker 2: when we've gone into a downturn is that the reserve
7:57
Speaker 2: bank has either started cutting interest rates or it's become
8:01
Speaker 2: very obvious that they're going to cut interest rates soon.
8:04
Speaker 2: And I think we're still a long way away from
8:06
Speaker 2: that point at the moment.
8:07
Speaker 1: There's so many things I want to ask you. I'm
8:08
Speaker 1: trying to keep them in my mind. But the first
8:11
Speaker 1: one is that at the end of the year, if
8:14
Speaker 1: we came into that period where we're beyond where we've
8:16
Speaker 1: been in the last two cycles, How far back would
8:19
Speaker 1: you have to go to see a drop of 15%
8:20
Speaker 1: peak to trough?
8:22
Speaker 2: Look, there's not really quality data before the 1980s, but
8:26
Speaker 2: you'd be looking at the oil crisis back in the 1970s,
8:29
Speaker 2: the last time we saw that sort of fall.
8:31
Speaker 1: Right. Have you any sense of what the most recent
8:35
Speaker 1: worst one being the early 90s drop was?
8:38
Speaker 2: So the worst one we've seen since the start of
8:41
Speaker 2: the 1980s was actually that 8% fall that we saw
8:44
Speaker 2: in 2017 and then again replicated in 2022. Right. Now,
8:47
Speaker 2: there's been markets, obviously, where the falls have been much larger.
8:51
Speaker 2: We've seen Melbourne in the early 1990s, prices fell about 15%
8:56
Speaker 2: and took about 15 years to recover. The more recent
8:58
Speaker 2: example is actually Perth. Before the global financial crisis, we
9:02
Speaker 2: saw prices in Perth fall by about 15% and show
9:06
Speaker 2: no growth for about 12 years. So there are individual
9:09
Speaker 2: cities where we've seen examples of that, but at a
9:11
Speaker 2: national level, we haven't seen a large fall like that
9:14
Speaker 2: for quite some time. Okay.
9:16
Speaker 1: Listeners to the show would know that both you and
9:18
Speaker 1: I were careful to get it right as opposed to
9:20
Speaker 1: exaggerating in any fashion. But I'm just trying to get
9:22
Speaker 1: perspective here in terms of what could happen. To what
9:26
Speaker 1: extent do you look overseas? Question without notice. Do you
9:29
Speaker 1: look overseas and is there any parallel? As I'm thinking
9:31
Speaker 1: of Canada, for instance, where they met a lot of
9:33
Speaker 1: efforts to cool their house prices and it worked all
9:36
Speaker 1: too well. Is there a danger of that here?
9:39
Speaker 2: Look, I think it's unlikely, but I think there's a possibility.
9:42
Speaker 2: And a big thing that Canada did was they lifted
9:44
Speaker 2: interest rates significantly. much more aggressively than we did, and
9:47
Speaker 2: New Zealand did that also. Even though I think we're
9:50
Speaker 2: going to get a couple more interest rate hikes, I
9:52
Speaker 2: don't think that the Reserve Bank's going to be overly
9:55
Speaker 2: aggressive because they do have this dual mandate that they
9:57
Speaker 2: need to try and maintain full employment. which other central
10:01
Speaker 2: banks don't necessarily have. The other big one for both
10:04
Speaker 2: Canada and for New Zealand was Canada's really aggressively cut
10:09
Speaker 2: its rate of migration to that country as well. And
10:12
Speaker 2: that's impacted on the housing market. Now, New Zealand didn't
10:15
Speaker 2: do that. But as the New Zealand economy weakened, a
10:18
Speaker 2: lot fewer people went to New Zealand. And obviously, a
10:21
Speaker 2: lot of Kiwis found their way to Australia because they
10:24
Speaker 2: can do that. The economy is stronger. Their job prospects
10:27
Speaker 2: are a lot stronger as well. Now, there's obviously been
10:29
Speaker 2: some talk about cutting migration, but I don't think anyone's
10:33
Speaker 2: proposing to cut migration anywhere near as aggressively as what
10:36
Speaker 2: we saw in Canada over the past few years.
10:39
Speaker 1: Okay. And then just to finish off on this gloom segment,
10:42
Speaker 1: because it is gloomy, and I think you have to
10:44
Speaker 1: be a very confident, rational investor to know you're buying
10:48
Speaker 1: cheap now and you make a profit when you buy.
10:52
Speaker 1: So from an investment point of view, there is a
10:55
Speaker 1: lot to be desired here in that there are splendid
10:58
Speaker 1: property investment opportunities across Australia on a global basis. When
11:03
Speaker 1: you look at the wider picture of our market, what
11:07
Speaker 1: could imperil this forecast?
11:09
Speaker 2: What would make it worse? What would make it worse?
11:12
Speaker 2: I think the thing that would make it worse is
11:15
Speaker 2: if it takes longer for interest rates to be reduced.
11:18
Speaker 2: If we see an increase in forced selling, obviously at
11:21
Speaker 2: the moment, what we've seen for the start of spring
11:23
Speaker 2: is that there hasn't actually been a significant ramp up
11:26
Speaker 2: in listings, which for me actually says that potential vendors
11:30
Speaker 2: are saying, I don't need to sell right now. I'm
11:33
Speaker 2: not going to put my property on the market. Okay.
11:36
Speaker 1: So this pile on that has been predicted, it hasn't
11:40
Speaker 1: taken cheap yet?
11:41
Speaker 2: No, it hasn't. It could, especially if we do get
11:43
Speaker 2: some more interest rate hikes, the pressure might come on households.
11:47
Speaker 2: But there's little evidence of that yet. But I think
11:49
Speaker 2: interest rates is the big one. I mean, if you
11:51
Speaker 2: look at the yield curve at the moment, the next
11:53
Speaker 2: 18 months, it doesn't have any interest rate cuts in
11:55
Speaker 2: the yield curve at all. Now, there's no guarantee that's right.
11:58
Speaker 2: But I still think that we're quite a distance away
12:01
Speaker 2: from the Reserve Bank being able to cut rates. And
12:03
Speaker 2: because a lot of people taking out mortgages take on
12:06
Speaker 2: a large sum of money to do that, we are
12:09
Speaker 2: very interest rate sensitive. And I think that's going to
12:12
Speaker 2: impact on the market while we continue to have these
12:14
Speaker 2: high rates of high interest rates. Okay, we'll take a short.
12:17
Speaker 1: Break, folks, and we will be back in a moment.
12:19
Speaker 1: We're going to dig in here and tell you basically
12:21
Speaker 1: a lot more about the nature of what's going on
12:24
Speaker 1: and where it may go from here. Back in a second. Hello,
12:31
Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby
12:34
Speaker 1: here talking to Cameron Kusher of Kusher Consulting. Cameron, just
12:39
Speaker 1: to finish off on the picture of the national market,
12:44
Speaker 1: I think most people know very broadly, Sydney and Melbourne
12:47
Speaker 1: are leading the drop, Adelaide, Perth, Brisbane in the middle.
12:50
Speaker 1: And they are, what happens in the larger cities does
12:53
Speaker 1: tend to happen sooner or later in the smaller cities.
12:55
Speaker 1: And that would seem to be the case if I'm
12:57
Speaker 1: saying anything wrong here, tell me. But this one is
12:59
Speaker 1: only on one thing. So far, in a sort of
13:02
Speaker 1: perversion really of economics, the lower part of the market,
13:06
Speaker 1: the first home entry level, is actually the strongest part.
13:11
Speaker 1: So the luxury level is really getting hit. The middle
13:13
Speaker 1: level is middling and the entry level cheapest property has
13:18
Speaker 1: the strongest demand. Some of that we would imagine is backed,
13:23
Speaker 1: supported by the government's first home deposit. Could you tell
13:26
Speaker 1: us a little bit about that and will that crack
13:28
Speaker 1: like everything else? What's your view?
13:30
Speaker 2: Yeah, so that lower end of the market's been supported
13:33
Speaker 2: by first home buyers, as you said. I think the
13:35
Speaker 2: other thing that was supporting that lower end of the
13:37
Speaker 2: market was investors because investors and first-home buyers historically compete
13:42
Speaker 2: for that similar kind of stock. Now that there's fewer investors,
13:47
Speaker 2: we have started to see some prices decline at that
13:50
Speaker 2: lower end of the market. And I think we'll continue
13:52
Speaker 2: to see that because I think as the market continues
13:55
Speaker 2: to go into a downturn, the first-home buyers will start
13:59
Speaker 2: thinking to themselves, why would I jump into the market now?
14:02
Speaker 2: Because if I wait a few months, I'll be able
14:05
Speaker 2: to buy this property cheaper. equally investors are sitting on
14:08
Speaker 2: the sidelines. So you don't have as much demand from
14:10
Speaker 2: that segment of the market. The other thing is that
14:12
Speaker 2: the top end of the market has been really weak,
14:14
Speaker 2: but I wouldn't be surprised if it's actually ends up
14:19
Speaker 2: being a little bit stronger, say in 12 months time.
14:21
Speaker 2: And that's mainly because high end housing or high priced
14:25
Speaker 2: housing is tax free. You buy it. Yes, you pay
14:28
Speaker 2: stamp duty when you purchase a property. But if you
14:31
Speaker 2: hold that property, if you make a renovation to that property,
14:34
Speaker 2: if you hold it and see prices grow. You sell
14:37
Speaker 2: that and there's no capital gains tax. So I wonder
14:40
Speaker 2: if the changes to the capital gains tax and the
14:42
Speaker 2: negative gearing benefits actually see more people pouring money into
14:47
Speaker 2: their principal place of residence rather than an investment property.
14:50
Speaker 1: Because it's CGT exempt.
14:52
Speaker 2: Exactly.
14:52
Speaker 1: Are they less interest rate sensitive too at the top end?
14:55
Speaker 2: They certainly are. I mean, the top end is probably
14:58
Speaker 2: cheaper than a lot of your listeners would think. So
15:00
Speaker 2: the top end of the market is sort of one
15:02
Speaker 2: and a half million and above. anecdotally talking to a
15:05
Speaker 2: lot of people, you know, the really top end of
15:07
Speaker 2: the market is largely unaffected. I mean, there's still been
15:10
Speaker 2: some record sales. I know last week, there was a
15:12
Speaker 2: record sale in Cottesloe in WA. There's been some really
15:16
Speaker 2: strong sales in those premium markets of Sydney and Melbourne.
15:19
Speaker 2: But that sort of $ 1. 5 to $ 3 million market, that's
15:23
Speaker 2: certainly where more of the weakness is at the moment.
15:26
Speaker 2: The ultra top end People aren't interest rate sensitive at
15:30
Speaker 2: that level. I wish I was at that level, but
15:31
Speaker 2: the reality is I'm not. That's right.
15:33
Speaker 1: Their home is just an asset of money. Okay, this
15:36
Speaker 1: is worth persevering with. Just to complete this, and we'll
15:38
Speaker 1: come back to the first home buyer segment in a second, folks.
15:41
Speaker 1: I saw, Cameron, you said something along the lines of
15:44
Speaker 1: what you were really surprised by was not that house
15:47
Speaker 1: prices were falling, but that they weren't falling more in
15:52
Speaker 1: what we might call mediocre property investment markets. assets. By that,
15:59
Speaker 1: you were referring to, they have prime property, obviously, in commercial,
16:02
Speaker 1: and then they have divisions after that. And obviously, middle-ranking, mediocre, middle-level.
16:06
Speaker 1: I'm talking strictly from an investment perspective. They might be
16:09
Speaker 1: cut in those places today. But mediocre property assets, such
16:13
Speaker 1: as residential property in the middle suburb that has nothing
16:16
Speaker 1: in particular wrong with it, but nothing particularly good about it.
16:18
Speaker 1: It's not by the sea. It doesn't have views. It's
16:21
Speaker 1: not by a forest or whatever. That seemed to me
16:23
Speaker 1: as though you were particularly puzzled by Yeah, well, I
16:27
Speaker 1: think what the.
16:28
Speaker 2: And of course, the tax changes haven't actually started yet,
16:31
Speaker 2: but they are going to start from middle of next year,
16:33
Speaker 2: although your negative gearing's adjusted a little bit and things
16:37
Speaker 2: have been grandfathered on the side of negative gearing. But
16:40
Speaker 2: for me, I think what these tax changes do is
16:42
Speaker 2: make income more important now for an investment necessarily than
16:46
Speaker 2: capital growth, because... Oh, yes, the rent rather than the
16:49
Speaker 2: price appreciation.
16:50
Speaker 1: Is that what you mean?
16:51
Speaker 2: Exactly right. From an investment perspective... things like inner city
16:55
Speaker 2: apartments that are low priced but have strong rental yields
16:59
Speaker 2: actually become a little bit more attractive under this market.
17:03
Speaker 2: Outer suburban housing, although it's not really that cheap anymore,
17:06
Speaker 2: but you can get better yields in those outer suburban housing.
17:10
Speaker 2: Those middle ring houses where prices have appreciated so much
17:14
Speaker 2: over the last few years, rental demand possibly isn't quite
17:18
Speaker 2: as strong. Your gross rental yields are probably in most
17:22
Speaker 2: of the major cities sitting at a sort of 3%, 3.5%,
17:24
Speaker 2: which is a net rental yield of probably 2% or
17:27
Speaker 2: even lower than that, I'm surprised that demand for that
17:31
Speaker 2: hasn't reduced by a greater amount. And purely because the
17:36
Speaker 2: people that would buy that as an owner-occupied property are
17:39
Speaker 2: struggling with higher interest rates and are probably thinking, if
17:41
Speaker 2: I wait this out, the price of that will come down.
17:44
Speaker 2: And an investor, it's not stacking up as strongly for
17:47
Speaker 2: an investor anymore.
17:48
Speaker 1: Yeah, yeah. So kind of an area of concern being
17:50
Speaker 1: that middle ring, as you say, not the totally outer
17:53
Speaker 1: suburb because there's good yields there, not the inner because
17:56
Speaker 1: they have separate dynamics, but the middle ring suburb, which
18:00
Speaker 1: has gone up a lot in price and it's showing
18:03
Speaker 1: rental yields that are terribly low. And someone's searching those
18:06
Speaker 1: for again rental yield, they're not going to get it
18:08
Speaker 1: in that ring.
18:09
Speaker 2: Just quickly, one other thing. The only thing with that
18:10
Speaker 2: is if it's a really large block and it's got
18:13
Speaker 2: the potential to be a knockdown rebuild where you build
18:16
Speaker 2: two properties or a duplex, then they actually become quite
18:19
Speaker 2: attractive because one of the ways to get negative gearing
18:21
Speaker 2: or the capital gains tax discount is to create additional supply. Now,
18:26
Speaker 2: you can't do that through a granny flat, but if
18:28
Speaker 2: you can knock down a large block on, say, an
18:30
Speaker 2: 800 square metre block and build two or three properties...
18:34
Speaker 2: then that's the type of investment people will be looking for.
18:36
Speaker 1: Yeah, yeah, because they're new and then they can be
18:38
Speaker 1: negatively geared for the first donor at least. Yeah, only
18:42
Speaker 1: the first donor to be precise. Keep that in mind, folks. Okay,
18:45
Speaker 1: just to finish off then, what about the first home
18:47
Speaker 1: buyer level? I didn't really let you take up on that. Basically,
18:50
Speaker 1: will it? crack like everything else or are there factors
18:53
Speaker 1: that will hold it up?
18:54
Speaker 2: Look, I think it's probably hold up a little bit better.
18:56
Speaker 2: We saw the latest lending data. There was a big
18:58
Speaker 2: pullback in investors. There was actually a bit of a
19:00
Speaker 2: pullback in first home buyer volumes as well, but not
19:03
Speaker 2: to the same magnitude. Look, I think a lot of
19:05
Speaker 2: people want to buy a home and some first home
19:07
Speaker 2: buyers will see this as their opportunity to enter the market.
19:11
Speaker 2: But I think increasingly they're going to be a bit
19:14
Speaker 2: more hesitant to jump in because as we said, prices
19:18
Speaker 2: are falling. So they will feel like, okay, I like
19:21
Speaker 2: this property, but if I wait six months, something better
19:24
Speaker 2: might come on the market and it's probably going to
19:26
Speaker 2: be cheaper. Or this property might still be on the
19:28
Speaker 2: market in six months' time and I'll be able to
19:30
Speaker 2: negotiate a better price on that. So I think some
19:33
Speaker 2: first-home buyers will jump in. They'll say, look, I'm going
19:35
Speaker 2: to own this property for 10 years. It's a good property.
19:37
Speaker 2: It's the price I'm comfortable with. But I think others
19:40
Speaker 2: will wait and try and get that best deal they
19:42
Speaker 2: can possibly find.
19:43
Speaker 1: I suppose the first home buyer does have that great
19:45
Speaker 1: advantage that they don't have to sell them so they
19:50
Speaker 1: really can't pick their timing unlike the person who's trading
19:53
Speaker 1: a search where they have to get everything has to
19:55
Speaker 1: fall into place okay i have some questions i've kept
19:59
Speaker 1: for camera and stay with us back in a moment Hello,
20:11
Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby
20:14
Speaker 1: talking to Cameron Cusher. Cameron, I meant to ask you
20:16
Speaker 1: in the second segment, one of the things that has occurred,
20:19
Speaker 1: of course, is the collapse of this BATHLA, B-A-T-H-L-A, housing
20:24
Speaker 1: group in Sydney, leaving thousands and thousands of homes unbuilt.
20:28
Speaker 1: It's in administration at the moment, struggling not to go
20:30
Speaker 1: into liquidation. And it's also sent shockwaves for the first time,
20:36
Speaker 1: really in a serious way, from the private credit sector,
20:38
Speaker 1: such as it is This private credit sector that's exposed
20:41
Speaker 1: to housing, which is a lot more here than it
20:43
Speaker 1: is in other markets. So I want to talk to
20:45
Speaker 1: you just about that. Basically, your impression of that housing collapse,
20:51
Speaker 1: a housing developer collapse, and names like Latrobe, etc., who
20:57
Speaker 1: are in the ring there on the private credit side
20:59
Speaker 1: in this saga, what What does it mean, do you think,
21:04
Speaker 1: for investors in residential property in Australia? Is it significant?
21:09
Speaker 1: Would it be a landmark? Do we learn something from it?
21:11
Speaker 1: Or is it the first of many?
21:12
Speaker 2: Look, I think, obviously, the development side of housing is
21:16
Speaker 2: really challenging at the moment. Bathlow were doing quite affordable
21:20
Speaker 2: housing in Western Sydney.
21:21
Speaker 1: Yeah, that's the irony of it. Yeah.
21:23
Speaker 2: But some of the reporting has been that other developers
21:25
Speaker 2: have said they have no idea how they delivered housing
21:28
Speaker 2: as cheaply as they were. So maybe that's actually the
21:31
Speaker 2: crux of their problem. They cut their margins so much.
21:34
Speaker 2: I wouldn't be surprised if in this cycle we see
21:37
Speaker 2: other property developers get in trouble because construction costs are
21:41
Speaker 2: up about 40% over the past five years. They're starting
21:44
Speaker 2: to climb again. Higher interest rates mean that their borrowing
21:48
Speaker 2: costs go up again. And the other big thing is
21:51
Speaker 2: it's going to get harder to sell brand new properties
21:53
Speaker 2: because the premium for a brand new property over an
21:56
Speaker 2: existing property is that gap's going to widen as established
22:00
Speaker 2: prices fall. I think it's probably a landmark in that
22:03
Speaker 2: it's the first big one we've had in a while.
22:06
Speaker 2: And I think the other big one is private credit.
22:09
Speaker 2: It's something that used to be really non-mainstream, but it's
22:12
Speaker 2: become much more widely used over recent years because the
22:16
Speaker 2: commercial banks have basically shut the door on a lot
22:18
Speaker 2: of developers and said, we're not going to finance this.
22:21
Speaker 2: So I think it's certainly something to keep a very
22:23
Speaker 2: close eye on. look, I don't want any developer or
22:27
Speaker 2: any business to collapse, but the combination of higher construction costs,
22:31
Speaker 2: higher interest rates, I'm sure there's other developers out there
22:34
Speaker 2: under pressure at the moment.
22:35
Speaker 1: Did we see that much in the last two cycles,
22:37
Speaker 1: that those 8% drops, 217, 222?
22:40
Speaker 2: Not anywhere near. If you have a look at the
22:42
Speaker 2: insolvency data over the last few years, the construction sector
22:46
Speaker 2: has seen very high rates of insolvency. And that's subcontractors
22:50
Speaker 2: all the way up to property developers. But no, we
22:52
Speaker 2: haven't had a large collapse like this. There was Porter
22:55
Speaker 2: Davis Homes during the pandemic that we saw go under
22:59
Speaker 2: in Victoria. They were a builder rather than a developer.
23:02
Speaker 2: And we've seen some others get into a little bit
23:04
Speaker 2: of trouble. But no, I think this is probably the
23:05
Speaker 2: biggest one we've seen in a while.
23:07
Speaker 1: It's interesting, isn't it? Okay, some list of questions while
23:10
Speaker 1: you're with us. Sally says, I'm joining the podcast as always.
23:13
Speaker 1: I heard someone say on bank reduction of their rates
23:17
Speaker 1: that maybe a reflection of the decrease in the loan
23:21
Speaker 1: applications is In other words, she's saying that the banks
23:26
Speaker 1: are putting their deposit rates lower because they have less
23:30
Speaker 1: funding to do on the other side of the book. Hence,
23:33
Speaker 1: they reduced the rate, she asked. Does that sound convincing?
23:37
Speaker 1: I imagine it's not a complete explanation, but you tell us.
23:41
Speaker 2: No, look, I think possibly, I think it's more that
23:43
Speaker 2: the banks just think they can cut their term deposits
23:45
Speaker 2: and people aren't going to kick up too much of
23:47
Speaker 2: a stink of it. I think that's probably the more
23:49
Speaker 2: likely thing, but it will be interesting. They've all said
23:51
Speaker 2: in their quarterly updates recently that mortgage applications are down 15%
23:55
Speaker 2: to 20%. That's obviously not good for the bank overall,
23:58
Speaker 2: but it does mean that they have to raise less
24:00
Speaker 2: money if there is a reduction in demand for mortgages.
24:03
Speaker 1: Yeah, yeah. So there's a couple of things going on.
24:05
Speaker 1: But as you say, maybe the fact that they can
24:07
Speaker 1: do it, This is actually a key thing. They can
24:10
Speaker 1: do it and get away with it. They get much
24:11
Speaker 1: less trouble for cutting deposit rates than they do for
24:13
Speaker 1: raising mortgage rates, as most people would know by now. Okay,
24:17
Speaker 1: Tom has a broad-ranging piece of correspondence, but he wanted
24:22
Speaker 1: to ask a couple of things. He was saying that
24:25
Speaker 1: negative gain for residential housing has locked down many people.
24:29
Speaker 1: And this time, this strategy is unavailable now. And borrowing
24:33
Speaker 1: or using equity builder to borrow shares also seems high.
24:36
Speaker 1: much too hard at 8% and higher. He says a
24:40
Speaker 1: lot of younger Australians are feeling the squeeze and we
24:43
Speaker 1: should pay more attention to that. Yes, we should pay
24:46
Speaker 1: more attention to it. It's something we try and do
24:48
Speaker 1: on the show, Tom. And for instance, with Cameron this morning,
24:51
Speaker 1: I tried to cover all aspects of housing from the
24:54
Speaker 1: top end to the entry level end, but it is
24:56
Speaker 1: something I'm very acutely aware of with our listeners in
24:59
Speaker 1: that demographic. There's many of them and we will do better,
25:02
Speaker 1: let me tell you. Okay, that's a promise from me.
25:04
Speaker 1: All right, Pete. We are all familiar with the statement
25:08
Speaker 1: about investment products that past performance is no guarantee of
25:11
Speaker 1: future performance. So how then can property forecasters get away
25:16
Speaker 1: with saying that a 4.7% fall in house prices over
25:20
Speaker 1: a quarter will translate into 80% over the next year?
25:24
Speaker 1: It sounds like premature extrapolation to me. Thank you, Pete.
25:29
Speaker 1: Premature extrapolation. I haven't heard that before. Extrapolation for sure.
25:33
Speaker 1: But all forecasters don't do. Is there anything innately wrong?
25:37
Speaker 2: Not necessarily. I mean, getting a forecast right is extremely
25:40
Speaker 2: difficult and most forecasts ultimately end up being wrong. I'm
25:43
Speaker 2: not naive enough to think that I'm going to nail
25:45
Speaker 2: this forecast. I'd like to think that I will, but
25:48
Speaker 2: there's a very good chance that I won't. I think
25:50
Speaker 2: the reason that it's getting extrapolated at the moment is
25:53
Speaker 2: that the rate of decline is actually accelerating. And so
25:56
Speaker 2: that's why people are extrapolating what's happened over the last, say,
26:00
Speaker 2: quarter or last couple of months. and then pushing that
26:03
Speaker 2: out to forecast. Now, as you know, markets don't move
26:06
Speaker 2: in a straight line. And say we get to December,
26:10
Speaker 2: we know December is a much quieter period for the
26:12
Speaker 2: housing market. You may not see prices fall as much
26:15
Speaker 2: then as we're seeing at the moment. But the way
26:18
Speaker 2: a lot of the models work is that they look
26:20
Speaker 2: at the recent performance and then extrapolate that out to
26:23
Speaker 2: give you a decline. But an 18% decline in the
26:25
Speaker 2: market's Certainly much more than I'm expecting. That's not to
26:30
Speaker 2: say it won't happen, but that would be quite a
26:32
Speaker 2: large fall. And obviously that would happen.
26:33
Speaker 1: But it has actually shunted out, hasn't it? Like literally,
26:36
Speaker 1: you can literally see it. The foreign banks came out first.
26:39
Speaker 1: No one was saying 10. The local banks certainly weren't
26:41
Speaker 1: saying 10. Then finally, the local banks say 10, and
26:43
Speaker 1: then the foreign banks push it a little bit further.
26:45
Speaker 1: They have less to lose, right? They don't. They can
26:47
Speaker 1: just be academic about this sort of thing. And they'll
26:50
Speaker 1: always have outliers. But It seems to me that it
26:52
Speaker 1: has shifted and it has become more negative, the consensus,
26:55
Speaker 1: if you like.
26:56
Speaker 2: It definitely has. I think there's a lot of optimism
26:58
Speaker 2: generally around the Australian housing market, that things think, okay,
27:01
Speaker 2: we'll go into a downturn and the market will recover
27:03
Speaker 2: pretty quickly. But obviously, that's not happening this time. And
27:06
Speaker 2: also just the broader economy, the way it's performing. I
27:09
Speaker 2: think you go back probably three or four months ago,
27:12
Speaker 2: people thought maybe there weren't going to be any more
27:14
Speaker 2: interest rate hikes. Fast forward to today and it looks
27:17
Speaker 2: like there's going to be at least one more, if
27:19
Speaker 2: not two more. So conditions can evolve pretty quickly.
27:22
Speaker 1: Keep that in mind, folks. Always good to talk to you, Cameron.
27:25
Speaker 1: Particularly good at this point in the cycle. Particularly useful.
27:29
Speaker 1: Thank you very much.
27:30
Speaker 2: Thanks for having me.
27:32
Speaker 1: That was Cameron Crusher of Crusher Consulting. Any more questions,
27:35
Speaker 1: keep them rolling. The Money Puzzle at theaustralian.com.au on any
27:40
Speaker 1: issue you like. Today's show was produced by Tiffany DeMack.
27:44
Speaker 1: Talk to you soon.