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2022 Property Market Outlook

2022 Property Market Outlook
December 30, 2021 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

1. 2021 Market Wrap

Sydney, Hobart, Brisbane and Canberra all produced between 25 and 30 percent growth in 2021.

As expected, the absolute best-performed property markets in 2021 were (once again) among the 200 individual regional towns and cities. More than 30 regional towns produced greater than 30 percent capital growth in 2021. This included Bega NSW, Bendigo VIC, Geraldton WA, Kempsey NSW, Maitland NSW, Noosa QLD and Warrnambool VIC.

2. 2022 Executive Summary

During November, each of Australia’s Big-4 banks all released property market forecasts for 2022 and 2023. Their capital city predictions ranged from single digit price declines across the 2-years in the worst performing capital cities to a maximum 8 percent gain in the strongest cities.

Not for the first time, Propertyology’s analysis of underlying fundamentals gives a completely different outlook.

Australia is just 2-years into a new and exciting era which will produce the highest rates of home upgrades and relocations in human history.

Frankly, Propertyology is undeterred by whether interest rates rise or not. Borrowers are already miles ahead of mortgage payments and the huge demand for housing will remain underpinned by dirt cheap credit for many years to come.

According to data recently released by the RBA, the financial capacity within household budgets (real estate equity, redraws and offset accounts) has never been better. Add to this our expectation of the national economy cranking up another notch in 2022.

On the supply side of things, the current volume of resale supply is comparable to 2010 levels, but Australia’s population has grown by 3.9 million since then. This is a recipe for continued double-digit growth across most of Australia.

Propertyology’s growth forecasts assume no new property taxes, no great change to credit policy and no increases to home loan rates before Q4 2022.

Adelaide, Brisbane, Hobart and Canberra could easily produce between 30 and 45 percent (detached house) capital growth over the 2-years ending December 2023. A plethora of regional locations will do even better.

But the biggest and most important story in this country right now is household rents.

The question that Propertyology is keen to see answered is will 2022 be the year that the regulators who caused the current rental crisis finally have the courage to correct their past actions, or will they remain in denial?

If the latter, expect to see asking rents for standard houses to increase by as much as $10,000 in many locations in 2022 alone.

REGIONS

Whereas the population of Australia’s combined capital cities declined by 17,000 during the first year of COVID-19, the combined regional population increased by 51,000.

A new era of lifestyle movement, many regional economies are stronger than capital cities, work-from-home popularity, low housing supply and continued high rates of internal migration will (once again) drive significantly stronger property market performance than capital cities.

If you are a property investor, get your head out of the sand and appreciate the superior opportunities for (both) capital growth and cash flow in regional Australia.

 

BRISBANE

After 15 consecutive years of lean performance, Brisbane will be Australia’s best-performed capital city in 2022. Somewhere in the vicinity of 27 percent capital growth is on the cards for 2022 and 35 to 45 percent over the 2-years ending 2023.

That said, the economy of Australia’s third largest city is (still) not as strong as many other locations and commentary about internal migration and infrastructure investment is grossly exaggerated. Accordingly, there are various other locations that I personally would invest in ahead of Brisbane.

Brisbane’s current growth is coming from 15 previous years of suppressed real estate activity which was given a kick along by the 2019 H2 interest rate cuts and coinciding with very low resale supply volumes.

 

HOBART

The strongest capital city property market over the last 7-years by a long streak, Hobart has become home to the most precious real estate in all of Australia.

70 percent less resale supply now compared to 5-years ago and only 97 dwellings advertised for rent plays a leading role in our circa 20 percent capital growth forecast for 2022.

On the demand side, the Tasmanian economy has now been atop CommSec’s State of the States for 8-consecutive quarters. Household balance sheets are flush with liquidity. Propertyology is anticipating another surge in internal migration, especially by mainland lifestyle seekers and those eager to reap the benefits of the work-from-home way of life.

ADELAIDE

2021 was the first time that annual house sale volumes in Adelaide surpassed 19,000 since 2002 (a 20 percent growth year). Propertyology is anticipating a similar year in 2022.

 

CANBERRA

Australia’s third smallest capital city has already outperformed most capital cities in recent years and current fundamentals suggest that 2022 will be another strong year. Around 15 percent price growth is on the cards for detached houses, but investors are cautioned to avoid apartments.

 

PERTH

2021 was Perth’s best year since 2006, although the current median house price has only just returned to values of 6-years ago.

The outlook for Perth is sound and double-digit growth is a possibility for 2022. But make no mistake, any investment in Perth real estate will always be a gamble on Chinese demand for WA commodities. The facts parcelled up in the below graphic proves that the economy (and property market) of this beautiful city has an unhealthy reliance on one customer, China.

SYDNEY

The activity of both buyers and sellers was significantly constrained by Sydney COVID restrictions throughout 2021 H2, so it is currently very difficult to have an accurate read of Sydney’s property market.

That said, there is no doubt that a few underlying fundamentals are unfavourable.

One must have concerns about Sydney‘s economy, heavily impacted by business exposures and lockdowns. According to ABS data, Greater-Sydney had 4.7 percent less jobs in October 2021 than 2-years earlier.

An estimated 50,000 people (net) had already relocated away from Sydney during the first 18-months of COVID, plus housing supply volumes are trending up.

DARWIN

The volume of detached house sales during 2021 had returned to levels last seen in 2015 and apartment sale volumes were 100 percent higher than 2019. Investor and first home buyer activity is noticeably on the up. The outlook for Darwin’s economy is improving.

 

MELBOURNE

The fact that Melbourne’s property market managed to produce any price growth at all over the last 12-months is a testament to this great global city. Rising tides do lift all ships. More than any other city in the world, Melbourne has been ravaged by 260 out of 560 days in lockdown.

2022 H2 and 2023 may be when the cracks in Melbourne’s real estate fundamentals become exposed. Thousands of businesses have already closed, Melbourne had 125,000 less jobs in October 2021 than 2-years earlier, and 10,000s of people have already left town. State government debt is now 3-times higher than pre-pandemic levels. Like water, oil and flour, this is not a good mix.

3. Rental Market In Crisis

This ‘house Down Under’ has been full since late 2017. That’s when the total volume of residential dwellings advertised for rent fell below 70,000 for the first time.

4-years later, Australia has an additional 1 million people living here yet the volume of dwellings advertised for rent has plummeted further to just 55,000. When Sydney and Melbourne are removed, the other six capital cities plus 200 regional towns only have 15,000 rental properties advertised.

The dire lack of rental supply is a national disgrace. It is the single most important issue in Australia right now. The germ did not cause it, poorly considered state and federal government regulation since 2015 did the damage.

One can’t possibly expect to increase rental supply by consistently squeezing the b’jesus out of those with the capacity to add to it.

As illustrated in the graphic below, participation rates of everyday Aussie investors have been consistently below where they need to be since 2017. It’s not rocket science.

Over the last 3-years, an increasingly bigger portion of Australia has seen thousands of good people with stable incomes and good rental histories want to move but can’t find anywhere to live.

Many are wanting to pursue a new career opportunity. Others need a bigger home because their family has grown. Some are COVID-escapees seeking a regional lifestyle or going through relationship break-ups.

During 2021, Propertyology’s buyer’s agents saw rents on standard houses already increase by $5,000 per annum. Mark my words, if you’re a tenant this is going to get an awful lot worse. For investors, it is a cash flow bonanza.

To address an enormous skilled labour shortage, Australia is about to open up overseas migration. An extra 200,000 or more people per year. Does an employer try to recruit them by offering a $300 voucher to Tent World?

4. Market Fundamentals

This time 20-months ago, human nature to lock on to a ‘perceived negative’ of a situation resulted in widespread conclusion jumping that the international border closure and no population growth would trigger a massive property market downturn. The opposite is underway – the second biggest real estate boom in Australian history.

Now, with the international border due to open up, the same people with the same default negative-bias are jumping to similar conclusions over the possibility of interest rates rises. Give me strength.

 

INTEREST RATES

Recent commentary suggesting that a possible interest rate rise will bring property markets to a grinding halt are utterly laughable.

Property market performance has never been a simple formula like ‘1 + 1 = 2’.

Most mortgage holders are currently being charged 2.5 percent interest on their loan. History shows that numerous locations have experienced double-digit house price growth at times when home loan interest rates were 10 percent or more.

An overwhelming majority of existing Australian mortgage holders already have well-established household budgets with significant loan repayment buffers. So no budgetary adjustment will be required whenever loan rates move up.

Also, CBA estimated just this month that households have an almighty $240 billion liquidity (mostly tucked away in mortgage redraws and offset accounts).

 

GENERAL ECONOMY

The national economic forecast released by the RBA in November included strong GDP growth of 5.5 percent in 2022 and a further 2.5 percent in 2023. For the first time in decades, Australia is approaching full employment (the RBA forecast is 4 percent unemployment by the end of 2023), wage growth is expected to accelerate, and 2022 business investment is forecast to be $200 billion (a record high).

Lemon-suckers, get stuffed.

A federal election is due to be held at some stage in H1 2022. At the time of publishing this report, neither political party is proposing anything that is likely to have a material impact on property markets in the near-term.

 

INFRASTRUCTURE INVESTMENT

More good news. A total of 634 committed public sector projects forms Australia’s biggest ever infrastructure boom. 430 projects worth $218 billion are due be completed by 2025 with a $52 billion peak in 2023. Current commitments will require an increase in 105,000 new jobs in the sector by 2023 (skills that currently are not in Australia).

 

RESALE SUPPLY

With so much financial capacity underpinning housing demand, housing supply is currently as scarce as it has ever been.

The 233,716 total dwellings listed for sale in Australia as at end of November 2021 is the lowest in the 11-years, yet our population is 3.9 million bigger than 11 years ago. ‘Under-supply’ is a massive understatement.

For as long as there are so few properties listed for sale, upward pressure on asset values is likely to remain intense.

RENTAL SUPPLY

All indications from those in a position to influence a sustainable solution to the current shameful rental crisis suggest that things will get a lot worse.

Rents in large parts of Australia have already increased significantly, more so in medium and small population centres. Propertyology anticipates annual rents on standard houses could increase by as much as $10,000 in 2022.

FINANCIAL CAPACITY

Recent commentary about risks associated with household debts is complete baloney.

These are the same lemon-suckers who preached fear about the so-called ‘Job Keeper crash’ and ‘loan deferral cliff’.

Fact: household equity, a combined $240 billion in cash reserves, and cash flow capacity in household budgets has never been better. Boom times, folks.

Here is an evidence-based report about Household Finance & Debt, illustrating why Propertyology is not the slightest bit concerned by interest rate rises, whenever that occurs.

LIFESTYLE MOVEMENT

Propertyology believes that Australia is currently only 2-years into a very long and immensely exciting new era which will be renowned for lifestyle enhancement.

Whether for a regional relocation, motivated by the work-from-home phenomenon, bringing forward a transition to early retirement, or expats re-settling, we anticipate the highest rates of home upgrades and relocations in human history.

 

LABOUR SHORTAGE

Already, Australia’s economic recovery from COVID-19 is outstanding. And the volume of new jobs currently available is inspiring.

Unfortunately, there is insufficient skills currently available to fill many of these jobs, particularly in regional Australia. Sectors with large skill shortages include construction, manufacturing, agriculture, hospitality and medical.

 

MIGRATION

Pre-COVID, Australia typically added 200,000 (net) population per year from overseas migration. The federal government has recently announced re-opening the international border for the first time in 2-years.

Among the new migrants, international students will be important to inner cities.

Given that migration policy includes distributing new arrivals to locations where demand for their skills is needed most, logic suggests that Sydney and Melbourne (with a much softer economy now compared to other parts of Australia) will not get the same big distribution of overseas migration as past years.

Internal migration away from capital cities will continue to gain pace.

Over the 5-years directly prior to COVID-19, 108,000 people (net) left capital cities to pursue a regional lifestyle. That pace accelerated to 45,000 people over the first 12-months of COVID. The popularity of work-from-home and connection with natural environments will see the trend of the green line in the above chart continue indefinitely.

 

NEW CONSTRUCTION SUPPLY

Approximately 410,000 extra residential dwellings approved for construction throughout Australia over the last 2-calendar years is consistent with housing supply volumes in previous 2-year periods. The difference though is Australia’s population only increased by circa 150,000 over the last 2-years, whereas it was 780,000 over the previous 2-years.

There is no question that today’s new dwelling construction pipeline will result in oversupply in some locations by (say) 2023. Closer analysis of data suggests that Perth, Melbourne and Sydney are the most likely capital city candidates for future market softness from new supply.

Conversely, the supply of construction materials and skilled labour is globally constrained. This is likely to place extra upward pressure on the cost to buy a new dwelling and an increase in construction business closures.

 

CREDIT POLICY

During Q4 2021, APRA announced two separate policy changes.

One is to increase the interest rate buffer for loan assessments from 2.5 percent to 3 percent (essentially 12x 0.25 percent RBA rate rises – seriously, we may all be dead before rates ever rise that much).

The other change requires banks to set aside more capital reserves that may result in higher interest rates for interest only and / or higher LVR loans (it is noted that a paper from the RBA in November supported Propertyology’s claims that investor credit is generally of significantly higher quality than non-investors).

Once again, APRA’s ultra-cautious policy settings will prevent many responsible first home buyers and investors from realising important financial goals.

From a property market perspective, APRA’s policies will reduce the number of otherwise willing buyers active in the market however, resale supply in most locations is so tight that there will still be many more buyers than sellers.

5. Top 5 tips for investing

  1. Be a borderless investor (it’s the only way)
  2. Follow the employment trends, not your heart
  3. Don’t place all of your capital into one basket
  4. Avoid apartments
  5. Your future is too important to not engage expertise (here’s what sustained success looks like)

 

Here’s how we combine our thought-leading research with
Propertyology’s award-winning buyer’s agency services.

Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

 

6. About The Author

Simon Pressley is founder and managing director of Propertyology and Hall of Fame Inductee of Real Estate Institute of Australia. Simon is a graduate of Australian Institute Company of Directors and other tertiary qualifications including property investment advisory, financial planning and housing finance.

Having studied Australian real estate history to the nth degree, Simon has an intimate understanding of the complexities of property markets, the machinations of the numerous inputs, and the knock-on effect that human actions have on property markets. There is no university degree or training course which teaches these things.

During the onset of COVID-19 in March 2020, every single bank and a big bunch of economists were predicting the biggest downturn in Australian real estate history, yet Simon was the only person in Australia to correctly predict that property markets would actually boom and that it would only take a few months for that to occur. The below graphic contains a visual summary of some of Simon’s other thought-leading forecasts.

Immediately prior to analysing national property markets full time, Simon gained invaluable experience at the real estate transaction level as a buyer’s agent. With the skills and appropriate licences to operate in five (5) different states, Simon was recognised as Australia’s Buyer’s Agent of the Year in three (3) consecutive years and subsequently inducted into the Real Estate Institute of Australia Hall of Fame.

Simon has recruited, trained and developed a team of buyer’s agents that have helped everyday Aussies to invest in real estate in nineteen (19) individual cities and towns across Australia.

Prior to pursuing a career in real estate, Simon gained valuable knowledge about banking, finance and credit. A 10-year career with Commonwealth Bank of Australia included roles in assessing credit applications, a broad appreciation for commerce, and understanding the consequences of borrowers defaulting on credit.

Subsequent to CBA, Simon owned and operated a mortgage broking business. In 2004, Simon was awarded Australian Mortgage Broker of the Year Award.

Called upon most days by different segments of the media, Simon’s objective and often very direct commentary on property market matters are featured in print, radio and television. He is also happy to consider requests for being a keynote speaker at events.

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