Navigating the Confusion: Understanding the Complexities of the Real Estate Market

Issue 14 | Thursday 13 July 2023 | Navigating the Confusion: Understanding the Complexities of the Real Estate Market

Hello, I’m Andrew Bell, and today I want to discuss the confusion surrounding the real estate market in Australia, which makes it challenging for forecasters and citizens like us to understand what’s happening. The accuracy of forecasts has consistently been off the mark, and we find ourselves in uncharted territory.

I’d like to share some insights from Nerida Conisbee, Ray White’s Chief Economist, who is a highly quoted expert on real estate in Australia. Nerida highlighted that capital city house prices only dropped by 6.4% last year, which is significantly different from the predicted 20%-30% decline. Historically, rising interest rates have been known to cause significant drops in property values. Despite global inflation, increasing interest rates, and some regions experiencing a recession, real estate prices worldwide are once again on the rise. This begs the question: what factors are causing this confusion?

One major factor is the assumption that house price movements are consistently driven by the same factors. As I’ve mentioned before, there are five factors that influence the real estate market, and different factors come into play at different stages. Currently, there is an overemphasis on interest rates while neglecting the severe housing shortage and record-high housing growth.

Furthermore, it is commonly assumed that what caused prices to rise will also lead to a decline. During the pandemic, Australia experienced low population growth due to people moving overseas. However, house prices still increased dramatically due to the low cost of finance and reduced spending in other areas. While there was a slight decline when interest rates began to rise, the rebound in population growth prevented a significant fall in prices.

Another misconception is that all housing markets behave in the same way. House prices can decrease in one city while increasing in another. This phenomenon can even occur in neighboring suburbs. Different markets have different drivers; for example, Perth is more sensitive to commodity cycles, while Melbourne and Sydney are closely tied to interest rates. Additionally, small regional towns can experience growth due to the addition of new employers or successful agricultural years.

Fourthly, there is a perception that house prices swing dramatically and quickly. However, the cost and speed of transactions, as well as the settlement process, make housing a less volatile investment compared to shares, which can be traded within minutes. This stability makes house prices less susceptible to changing conditions.

Next, it’s important to distinguish housing markets from financial markets. While financial factors do influence housing markets, demographic changes also play a significant role. Changes in the way people live and work heavily impact property markets beyond residential properties. For instance, shopping centers can thrive even in a poor retail environment if there is strong population growth. Industrial properties are doing well due to the shift in shopping behavior.

Nerida also emphasises that we often underestimate long-term trends. Long-term changes in preferences drive property markets. The pandemic led to the highest-ever movement to regional areas, and many expected regional pricing to quickly decline as pandemic restrictions eased. However, this didn’t happen because the regional movement was already underway before the pandemic. Furthermore, the price increases were not solely driven by pandemic-related movements but were also influenced by strong performances in mining and agriculture.

In conclusion, predicting the future of the real estate market is a challenging task. The current battle lies between the rising demand for real estate, driven by population growth and interstate migration in many areas, and the financial challenges people face in funding their purchases or meeting mortgage repayments. The duration of high-interest rates remains uncertain, making it difficult to determine the outcome of this battle.

As we enter the busy second half of the year and approach the spring selling season, there is much to monitor in the real estate market. If you’re interested in taking advantage of the market upswing, reach out to us as we have a special auction scheduled for September 28th, and bookings are now open. The spring season is an opportune time to capitalise on the real estate market, especially given the exceptionally high auction results and the shortage of properties currently available.

Warmest regards for now, and I’ll be back with you in two weeks’ time.

Warm Regards,

Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group

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