Is the momentum finally slowing on property prices?

Sascha: [00:00:02] Welcome to the day of the podcast that asks Who said business news needs to be all business? Yesterday, Core Logic released their monthly home value index report and it showed that property prices are still on the rise yet. That's despite interest rates being their highest since 2012. In fact, it's the fifth consecutive month we've seen an increase in national figures. And for the macro economic nerds amongst us, I'm putting up my hand as one of them and maybe just those people with mortgages. Yesterday was also an important day in the diary. It was the first Tuesday of the month which signals the day the RBA meets to decide on the cash rate. Basically, interest rates are going to go up and they decided to keep them the same. It's Wednesday, the 2nd of August, and today I want to know is there an end in sight to the ever rising price of property? And what does this tell us about the wider Australian economic story? To talk about this today, I'm joined by Eliza Owen from Core Logic. Eliza, welcome to the Dive.

Eliza: [00:01:11] Thanks for having me. Great to be here.

Sascha: [00:01:13] So you've just released the latest Home Value Index report, its national updates. What are the key takeaways we love to hear about property? So give me the headlines. 

Eliza: [00:01:24] So the Home value index, which is measuring the value of the Australian property market, rose 0.7 per cent in July. So that takes this kind of recovery trend in housing values into a fifth consecutive month. We've just been through this peak to trough decline of 9.1% that bottomed out in February this year. So that July takes us to five months of lift. What's notable about it, though, is that the point 7% is much weaker than what we saw over June, which was 1.1% lift. We had a 1.2% lift in May. So it's fair to say that even though there's been a recovery trend in recent months, a little bit of momentum has been knocked out of that recovery trend. And we're seeing that in things like the auction clearance rate as well, which was sort of trending above 70%. It's now dipped back into the high sixties and that's probably to do with the June rate rise, which I think surprised markets a little bit and obviously further constrains borrowing capacity. 

Sascha: [00:02:30] Can I just ask really quickly, for those of us who aren't at auctions every Saturday morning, what do we see is the average or the regular auction clearance rate? 

Eliza: [00:02:40] That's a great question. So historically, the average clearance rate across the combined capital cities markets, though it's mainly Sydney and Melbourne has been about 65% and when you're trending above that, it does indicate a bit of a seller's market. But even within that it's variation right in the same way that we can say, okay, the market's growing, but it's growing at a slower rate. Okay, The auction clearance rate is trending about the historic average, but we can see it slowed down a little from the strong results in May. And I guess that's sort of how I would characterise the market right now. It is resilient. It's kind of been a bounce back, but that bounce back is still very uncertain and I think we've really seen the results of that in the July figures. 

Sascha: [00:03:28] So going back to the July figures, which we're talking about today, 0.7% interest rates have obviously just been the headlines every time you open a paper. Can you talk a little bit more about the cause and effect relationship there? 

Eliza: [00:03:42] Yeah, absolutely. So historically, the underlying cash rate and the property market has what we would call an inverse relationship or a negatively correlated kind of relationship. If interest rates go up, that means that the price of money is essentially going up. So when the price of money goes up, less money is demanded or less credit is demanded. Banks are assessing your ability to repay home loans based on mortgage rates, which are influenced by that underlying cash rate. So higher interest rates usually signal less demand for housing and less credit availability for housing, which is what brings prices down. So it's really unusual that we've got into this. What is potentially the peak in the cash rate. And property values have continued to rise, even though the interest rate is relatively high and it's risen very quickly. That's not unprecedented. There have been periods of times where property values have gone up, even though interest rates have gone up. But it's usually around very exceptional circumstances like we're seeing at the moment, strong levels of migration, a real mismatch of supply and demand that's also reflected in the. National housing market at the moment. In the past three months, we've seen about 105,000 new listings added to the market. So in other words, 140,000 selling decisions. But more people are buying. So we've actually seen a 123,000 sales in that same period. And so that, I think, is part of what's pushing property prices that that little bit higher.

Sascha: [00:05:30] So yesterday the RBA met and made the decision to keep the cash rate or keep interest rates the same. What do you predict the impact of that decision will be?

Eliza: [00:05:40] It's hard to say. I think you're watching from May to June, and May was when the cash rate was a 3.85, and I think a lot of people expected that that was the peak. And that's why we saw this kind of exuberance around the property market. June took some heat out because it was a bit of a surprise increase. So I wonder if Australian consumers are a little bit more wary now or a little bit more cautious that just because the interest rates held for August doesn't mean that there's not another rate hike lift. On the one hand, you've got rapidly unwinding inflation. We're seeing that in our own housing data in terms of construction costs and rents, but we're also seeing it in the official CPI numbers to have that core inflation figure dropped by nearly a whole percent in the June quarter. That's a really positive sign that would speak to asset holding rates. But on the other hand, you have this persistently tight labour market, which is held at around 3.5% unemployment for the past 12 months, really. And that's not budgeted a lot. So that will be one thing as well as the recent recovery in home values that the RBA will be considering in future monetary policy decisions.

Sascha: [00:06:59] There's reports that more than a million Australian households with home loans are ending fixed rate periods When interest rates were set previously at record lows. 

Speaker 3: [00:07:10] More than 880,000 fixed rate mortgages will expire this year, another 450,000 next year. The majority of new loans being written are variable at much higher interest rates for families with big mortgages. There aren't many things left to cut back. 

Sascha: [00:07:29] It's estimated it's about 880,000 that are going to expire this year and another 450,000 in 2024. How are you, ecologic, thinking about this and what effect do you anticipate it's going to have on property prices? 

Eliza: [00:07:45] Yeah, So this is a piece that we've investigated a little bit. I would say the biggest takeaway for me is that although there was a real pickup in fixed borrowing through the pandemic, most of our mortgage market is still on variable terms and we've seen variable rate holding still pretty well with rising mortgage costs. So assuming that borrowers on fixed rates are similar to that population of variable mortgage holders, we can assume that we'll probably get through this period with still relatively contained levels of mortgage risk force sales, things like that. And again, RBA research suggests that the two pools of borrowers are very similar. So it's going to be a bit of a sticker shock for people transitioning from interest rates of sub 2% to what is now around 6% on average. Since rates started to rise. We estimate the monthly mortgage costs on a $500,000 loan have gone up about $960 a month for $1,000,000 loan. It's up around $2,000 a month. So this is a serious adjustment in household budgets that we're talking about. Some people are going to fall into a bit of trouble. Some people might feel they can't continue servicing their mortgages at these highs and decide to sell. Incidentally, we have seen a bit of an uptick in new listings added to the market through July, which is very unusual. Usually they would be trending down because seasonally fewer people sell during winter. So that could be partly a reflection of this period where we've got a lot of people transitioning from fixed to variable mortgages. Some people are saying, look, the cost is too high, we need to sell. Anecdotally, that remains a very small portion of sellers. And the official data also points to very contained numbers of people falling behind on their payments. But you can only assume it's going to increase a little bit through this period, even off the very low levels. 

Sascha: [00:10:00] Let's take a quick break. But when I get back, I take the opportunity to talk to allies about some of the broader research that Core Logic undertakes, including what their data says about where the best place in Australia is to invest east or west. Welcome back to the Dive. I have the privilege of being joined today by Eliza Owen, who's from Core Logic, and she is head of Research Core Logic, published some really interesting and fascinating data, and I could be talking to the head of research without taking that opportunity to talk to you about it. Recently, you published the third edition of Core Logic's Women and Property Report, and it found that there's at least partial ownership of 70.1% of homes by women in Australia, and the corresponding number with men is 73.2%. In other words, the difference of about 3.1% of stock analysed. Why is it important to consider the breakdown of property ownership in this way in Australia? I'd love you to talk to that. 

Eliza: [00:11:11] Yeah, great question. So we started looking at this. Well, it was initially just sort of a thought of what we could do around International Women's Day, but it is a really important consideration. So wealth disparity between men and women in Australia and in Australia as well. Property ownership is very central to wealth accumulation and retirement. I don't think a lot of young people really think about home ownership in this way, but it's become an implicit pillar of ensuring that you don't have housing costs by the time you retire, because if you get to retirement, your income goes right down and if you're still trying to pay rent, you're going to be in a lot of trouble. And indeed, that is the one of the biggest factors that contributes to your chance of having an impoverished retirement if you're still a rental. So there's also the fact that property values have outpaced income growth so rapidly for the past decade. That's not to say that that's a guaranteed thing for the future, but to miss out on that wealth accumulation only kind of adds to the disparity. So a lot of the disparity that we find between male and female property ownership in Australia is actually in that investment segment. So for whatever reason, it seems that men do have a kind of higher concentration in the property investment space and could be benefiting from wealth gains as a result.

Sascha: [00:12:49] Yeah, I found it such an interesting report to read, but I'm going to pick up on that investing thread, of course, for our business show and we're part of an investing network. You recently found the proportion of property investors active in the marketplace is back to its long term average, so it comprises 34% of mortgaged bonds based on the value of new mortgage commitments. And as a result, you published an article saying East or West, when considering the best place to invest, what did you find? What did your findings tell us? 

Eliza: [00:13:21] Yeah, so I do want to pick up on the investor listings piece, because it's important to remember that it is a proportional pace, right? And new listings, while they've been rising, they're still pretty low. So investor selling is relatively high, but it's not at the highest level it's ever been. The highest level was in 2021, actually, where you had really strong capital gains in the property market. And we actually produced that data to understand if investors were cashing in on those capital gains and therefore contributing to a bit of volatility in the rental market. So our guess is that we're out. I guess our educated guess is that we've gone from a period of selling in investors, selling to cash in on strong capital gains to a point now where investors are selling because they might be having issues of serviceability. 

Sascha: [00:14:22] Okay. 

Eliza: [00:14:23] The capital gains on is robust now was what they were in the sort of market peak 2021 early 2022. In terms of the east or west, we find that a really interesting case because your biggest investment markets are generally Sydney and Melbourne where the rental return is actually very low. So potentially the strategy is more kind of capital growth where Sydney and Melbourne have generally outperformed other cities over time. What we're seeing now, however, is that not only is W.A. presenting relatively affordable price points for entry, but the rental yields are relatively high. It's proving a very popular first time buyer market. The migration trends are really strong. So although we went through this sort of very volatile mining boom and bust in the 20 tens, we're looking at the market now. We're saying, hey, actually there's probably some really good opportunities here depending on your strategy. 

Sascha: [00:15:24] I love ending on a positive note. Opportunities. I see, said Eliza, of course you have to do your own research, but it is so fun and really interesting diving into your research today and I hope it's not the last time that we have you on the dive. 

Eliza: [00:15:37] Amazing. Me too. 

Sascha: [00:15:41] Thank you so much to Eliza from Core Logic. She's the head of research for joining us on The Dive today. I'm going to be back on Friday with news about tech talk and how they're trying to get into the music space. In the meantime, can I ask you for a quick favour? I know I ask you something every single episode, but this one, it's different. Can you jump into your podcast player? Open it up. Give us a five star review and write some lovely comments. Here's why, it's literally the best way to get those secret algorithms of all these different podcast players to recommend us to other listeners. Other podcasts might have marketing budgets or big radio teams behind them. We are small independent media and it really does make all the difference. There are some of you who've already done that. To you, I say thank you. I do read them all and I take your feedback on board. But with that said, I'll talk to you on Friday. Take care.