While, in every single year, there are always cities and towns whose property markets function with a different pulse to the general national theme, at a macro level Australia has been through some periods of very strong property market growth and some leaner periods.
Macro factors can have a positive or negative impact on property markets.
There are some macro factors that an investor can get their research teeth in to in attempt to make good location decisions. Other factors macro are applicable across the board to everyone in an ‘it is what is’ kind of way.
In this report, I’ve outlined the ten (10) biggest influences on property markets.
Before I outline what they are, one might be surprised to learn that several factors which didn’t make the cut include interest rates, population growth, infrastructure projects, population size, negative gearing, beaches, natural disasters, views and train stations.
Yes, these factors, and others, certainly do have some influence on property markets, but they don’t have the biggest influence.
Those who choose locations to invest in primarily because of, say, an infrastructure project or population growth are missing much more important parts of the property puzzle.
The process that I followed in coming up with the list of Top 10 influences on property markets involved analysing Australian real estate history, isolating major property market booms and downturns, recalling the specific conditions within those years, and identifying the dominant forces.
It’s appropriate to recognise that, at a national level, the single most prosperous era in Australian real estate history was 2001 to 2005. The rates of growth in median house prices from back then may never be seen again.
Within those five super-boom years, Hobart (127 per cent), Brisbane (113 per cent) and Canberra (112 per cent) led the charge. Prices also doubled in those five years in Adelaide (102 per cent) and Perth (96 per cent), while Melbourne (70 per cent), Darwin (63 per cent) and Sydney (57 per cent) were also strong.
For a variety of individual locations, that incredibly prosperous era continued through to 2007.
A small sample of non-capital city property markets which were outstanding performers over the six years ending 2007 include Albany WA (199 per cent), Bundaberg QLD (170 per cent), Cairns QLD (147 per cent), Armidale NSW (126 per cent), Port Lincoln (109 per cent), Wagga Wagga NSW (104 per cent), Wangaratta VIC (101 per cent), Bendigo VIC (82 per cent), and Alice Springs NT (83 per cent).
Conversely, our biggest capital city downturn on record occurred just recently (the 2-years ending mid-2019).
Other very lean periods for capital cities included 1995-6, 2008 and 2011-12. And various regional locations have also had lean years at different times.
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So, given the real estate results of yesteryear, here are the ten (10) biggest influences on property market.
10: EXCHANGE RATES
This metric is out of mind for most property enthusiasts, but it is important because it has a significant impact on Australia’s export market (think international tourism, mining, agriculture, and international education). When the exchange rate is supportive of these industries, the economy of various locations across Australia perform well. Job creation is a precursor for property price growth.
9: LIFESTYLE
What constitutes a good lifestyle is a very subjective thing – we all have different priorities and taste palettes. But there is growing interest in a lifestyle change away from big city congestion, towards safer communities, and tree / sea change locations offering lifestyles that include culinary and wine experiences. Also, the 65+ year demographic now represents 3.6 million people (or 15 per cent of total population) and 8 out of 10 of this cohort have insufficient retirement investments – again increasing the demand for a lifestyle change away from big expensive cities.
8: HOUSING AFFORDABILITY
History shows us that, when property prices in our two biggest capital cities have a significant growth surge, many residents flee to more affordable locations. As illustrated in the above chart, internal migration figures support that. We also know that during periods of rising interest rates, potential for real estate price growth in Australia’s most expensive locations is curtailed.
On the whole though, the so-called “housing affordability crisis” is primarily a Sydney-centric thing. As this next graph proves, nearly 60 per cent of all Australian suburbs are priced under $600,000.
Housing affordability also has a significant influence on policy responses from federal and (particularly) state governments in respect to first home buyer grants, stamp duties and other tax policies.
The other thing that history has taught us is that locations with high median house prices are more volatile than affordable locations. The higher prices go the further they can fall, plus the impact on household budgets becomes more significant.
7: CONSUMER CONFIDENCE
Confidence has a significant influence on property markets. Before one buys the property asset, they must first buy the debt. So, for the masses to be prepared to buy more assets, they need to be feeling optimistic. Community mood is portrayed in lunchroom and weekend BBQ discussions, which then translates through to consumer attitudes towards transacting in property.
Some examples of matters which can significantly impact consumer confidence levels include government elections, interest rate shifts (ups and downs), major projects and events that generate strong community engagement, global events such as war and economic threats, and proposed tax changes.
High levels of confidence over a sustained period of time is renowned for creating a fear-of-missing-out mentality among real estate buyers, thereby generating a wave of momentum and a property boom.
6: WAGE GROWTH
It’s no coincidence that Australia’s most prosperous real estate years at the beginning of this century also produced year after year wage growth of more than 3 per cent. Even though home loan interest rates were between 7 and 9 per cent back then, as mentioned earlier, property prices in several capital cities and dozens of regional locations more than doubled within just 5 or 6 years.
Clearly, the ability to service debt is more important than the price (or size) of the debt.
5: KEY INDUSTRIES
No matter how big or small a town or city is, every location has one or two industry sectors which are most critical to its own local economy – it’s akin to the backbone of a chosen city. The performance of the key industry/s has a major influence on the performance of its local property market.
For example, a very strong tourism sector was the driving force behind the 105 per cent median house price increase in Gold Coast over the 4-years ending 2004. A gas boom was behind Darwin producing double-digit price growth in 9 out of 11 years to 2013. An when conditions are good for agriculture, property markets in regions such as the Riverina, Murray, Launceston and several others perform strongly.
It works in reverse as well. Property markets throughout Queensland and Western Australia typically follow the peaks and troughs of natural resources, while Sydney’s property market lost 20 per cent on the back of a global stock market and financial sector collapse in the late 1980’s.
4: STATE GOVERNMENTS
From the quality of their economic management, to investment in new infrastructure projects, and property taxes such as stamp duty, land tax and first home buyer incentives, state governments have an enormous impact on property markets.
Almost as important as the policies they make is the tone of their daily dialogue and what influence that has on the electorate’s level of confidence (positive or negative).
Visionary governments with the communication skills to engage with their community generally produce a strong economic track record – a precursor for healthy property market performances. Conversely, minority governments have less ability to propel the state forward (refer ‘Brisbane needs to put on its Big-Boy pants’)
3: JOB CREATION
Aforementioned property market influences such as key Industries, wage growth, state governments and consumer confidence can all be bundled up as part of job creation. On the demand side of the supply-demand property equation, job creation is the ONE thing which Propertyology focuses our research on more than anything else.
Contrary to public perceptions, job creation (a leading indicator for property markets) is a gazillion times more important than population growth (a lagging indicator and grossly exaggerated influence on property markets).
A town or city with consistent job creation is a town or city that is generating more local confidence, more revenue for local business, and more demand for housing.
It is the uncovering of lots of community stakeholder decisions which, in time, led to an uptick in job creation that helped Propertyology anticipate the upswing in property markets such as Hobart, Ballarat, Orange, Launceston, Mildura, Newcastle, Coffs Harbour, Burnie and Cairns.
2: CONSTRUCTION INDUSTRY
The construction industry is directly responsible for 1 out of every 10 jobs in Australia. From important new infrastructure projects like hospitals, education facilities, aged care, commercial buildings and retail complexes, the work of Australia’s construction industry shapes the future of our cities.
The projects which they build are also laced with critical tax revenues for all three levels of government. In a nutshell, when the construction is strong, the economy is generally strong and property markets tend to follow in behind.
But, as with most things, there’s a downside as well. When a local economy performs particularly well for several years, there can be a tendency for the local construction industry to get over stimulated, thereby increasing the risk of more new housing stock than demand requires.
In 2012 to 2014, record building approval volumes in Mackay and Gladstone directly caused a significant property market downturn. A few years later, the same thing happened in Sydney and Melbourne along with the inner-city apartment market of Brisbane. Housing over-supply can happen anywhere.
In addition to determining the volume of housing supply, the construction industry ultimately determine the type of dwellings built (refer ‘Apartment Boom’) and whether the construction quality meets expectations so that they are still standing for centuries to come (refer ‘Australian real estate Bubonic Plague’).
1: CREDIT POLICY
Numero Uno of major influences on property markets is CREDIT POLICY. If one can’t gain access to finance, one can’t buy real estate – it’s as simple as that! Without any shadow of doubt, nothing has a bigger influence on the performance of property markets than credit policy.
Readily available credit for responsible borrowers is an essential ingredient of any country that has an aspiration for growth in jobs, wages, infrastructure investment, community confidence, and financial independence.
Australia’s most prosperous property market era (2001 to 2005) and Australia’s leanest era (2018 to 2019) were bookended by the extremes of credit policy.
To put things in to perspective, in the several years at the start of this century, a first home buyer could borrow 100 per cent of the purchase price plus add acquisition costs such as stamp duty to the loan, while others could short-circuit conventional bank income tests using a Low Doc loan. Boom!
Fast forward a bit more than a decade, though, and APRA’s restrictive policy settings saw the loan applications of tens of thousands of responsible borrowers flatly rejected. The dreams of Australians were prevented from being realised and a downturn followed – property markets and the general economy!
If you found this news article interesting, you’ll definitely enjoy this related podcast interview with Propertyology’s Head of Research, Simon Pressley, on the ‘Smart Property Investment Show’
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