Issue 18 | Thursday 9 September 2021 | What is driving the prices?
Hi, Andrew Bell here and we are really experiencing a glorious start to spring, but our thoughts continue to be with our fellow Australian’s who are in difficult lockdown situations, and we hope they are managing as best as possible through these difficult times. There does appear to be some growing optimism that things will be vastly different by the end of November and we are hoping that all families can be reunited for Christmas and everyone around the country will be able to enjoy a wonderful summer holiday season.
Today I want to talk a little bit about real estate prices. There is a strong correlation between real estate prices driven by consumer demand, as we see so evident at present, and the very foundation of pricing which is the balance of supply and demand. These are the key ingredients that support pricing. On the demand side, population growth is essential to feed demand for housing construction which is an important part of our economy and so there is a loop that exists. It is no surprise that through the COVID period there has been negligible immigration, and this ultimately has a big impact on our population growth which at some stage then flows through to buyer demand. With borders closed it is just a simple fact that no immigration exists and by the time borders do open it will be two odd years of zero immigration, and as such the only population growth will be through greater births over deaths and that is always a very small part of our population growth.
What will also have a big effect on immigration when borders open is the state of the economy. It will be unemployment that will be watched by Government before recommencing immigration. Whilst unemployment was in decline before the damaging effects of the long-extended Sydney lockdown, and now with Melbourne heading towards the longest lockdown of any city in the world, we just don’t know what unemployment will look like as we move into 2022. The normal population growth that has driven real estate for over a generation is unlikely to be anywhere near as strong. We have depended on that population growth not only for demand for existing properties, but, more importantly, to create demand for new properties. One of the great drivers of our economy over the past 40+ years has been construction and white goods sales. Population growth has necessitated the building of homes and apartments right throughout the country and this has created employment and demand for all sorts of materials that has driven our economy.
Without the traditional population growth, we are now in a completely different situation. Understandably, many people are asking what is driving the current real estate market where we are hearing of huge demand and significant rises in prices. The plain and simple answer is a re-assessment of people’s lives because of the pandemic. With the belief that this pandemic will continue for a long time to come with constant new strains of COVID evolving, much of the international travel will not only be risky but may even be blocked, and so where do people want to live? There is a lot of upgrading of homes right throughout the country, there is a lot of movement within cities that people call home, and there is an unprecedented amount of interstate migration. Much of that migration is out of the big cities into regional areas.
Throughout the country we are already seeing, and will increasingly see, completely different scenarios of supply and demand and that will have profound effects on real estate pricing.
Add to that what happens with new housing construction where currently in areas where people are migrating to in great numbers we have already seen developers move swiftly to secure sites, get development applications in, and, as we see in many pockets throughout the country, ever growing numbers of cranes of the horizon and new developments well under construction. This means that at some point a little further down the line supply will also come on strong.
So here we are with an interesting mix of factors – negligible population growth that hasn’t really bitten into the market yet and 14 or so months of significant re-positioning of people either in the cities they currently live or moving to new areas. This has changed demand factors and that will play out even more so in 2022. We have huge volumes of new developments well under construction with many of those selling off-the-plan now and others that will come online in 2022, 2023 and 2024. That basis of pricing, being supply and demand, will require careful watching moving forward.
Beyond question the market that is receiving so much of the benefit is the Gold Coast property market. When official figures come out, I think we will find that we topped the country for the greatest amount of inbound migration and so the huge amount of development work we see occurring here on the Gold Coast is definitely justified. As that new supply comes online it will play a settling factor in price growth, but the demand equation will also play a significant role in underpinning our marketplace.
I have no doubt that 2021 will go down in the Gold Coast record books as the most defining year in its history. The year the city made a quantum leap from being Australia’s favourite holiday destination to the city that is the most preferred location to live in. Undoubtedly the balance of supply and demand will play a significant role in our real estate pricing, where we saw in 2021 a massive imbalance with huge demand and little supply. Moving forward, it will be interesting to see how the demand continues, but most definitely there is a significant amount of supply coming online. No one can forecast how that will play out for real estate prices, but I think we can be pretty safe in saying they won’t retreat from their current levels.
I have some exciting news which I will share with you in the next market update, but until then let’s all prepare for a stronger and happier end to 2021. I just wish all the squabbling between politicians, health officials, and all interest groups could subside, and we get back to being a united country proud of who we are as a nation and our ability to come together in times of challenge. I look forward to being with you in a fortnights time.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group