As the world focuses on inflation and interest rates, there's a looming housing supercycle that could dramatically shape Australia's property market. In this article, I dive into what interest rates could mean for property prices and offer guidance for those who have yet to enter the market. Curious about the property boom? Keep reading to stay ahead of the game!
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While most people are focusing on inflation rates, interest rates, and everything in between, there is apparently a housing super cycle that's about to play out.
In this article, I want to share my thoughts on:
I can imagine it would be quite daunting to see the market move further and further ahead while you're not in the game. So, in this article, I'll break it all down for you, and if you're keen to hear my thoughts, then definitely keep reading.
It is very important to understand how real estate works because in Australia, a large portion of people hold their wealth in real estate. If you think about all the millionaires, a significant number of them park their money in property. This is why we see this recurring pattern where the rich get richer and the poor get poorer.
Unfortunately, that system isn't likely to change, which is why my goal here is to educate you so that you can learn what the wealthy are doing and eventually reach that level as well.
I've spoken before about the death of the middle class, and that's definitely playing out, especially over the last few years. If you're interested in my thoughts on this, definitely check out this YouTube video—I promise you'll walk away with some eye-opening insights.
Now, as I usually do, I dive into articles and research to find trends, and something that caught my eye recently was an article titled, "Three Reasons the Housing Super Cycle is Just Getting Started."
It highlights how residential property seems to have this remarkable ability to keep appreciating, whatever the economic conditions. Some argue that real estate will continue to defy gravity in the coming years.
Now, this whole argument that real estate *always* continues to rise—I’m going to challenge that.
I don’t believe it’s that simple. It’s not always uniform growth.
For example, just because there’s a housing super cycle, it doesn’t mean that your one-bedroom unit in Western Sydney is going to skyrocket in value. That’s not how it works.
You have to look at the macro trends, but then dig into the micro details. In some areas, you may have more supply than demand, which means that even if the broader market is trending upward, your property value might stagnate or even decline.
I want you to pause for a second and think about this logically. There are people out there who can borrow right now, and the macro picture might look rosy—let’s say inflation is under control, interest rates have been cut, jobs are plentiful, and the market is moving higher.
In that kind of market, would you prefer to be in a high-performing market or a low-performing one?
Because:
If you’ve purchased a one- or two-bedroom apartment in an area that doesn’t make sense from a long-term perspective, purely because you wanted to "get into the property game," you might be in trouble.
Let's say that property drops in value by 5% while the broader market rises by 5%. Not only is your net worth falling by 5%, but you're also falling behind the rest of the market by 10%.
Think about Sydney in 2022: the market generally moved down by 7-10%, but all of the properties we purchased were outside of Sydney. Those clients are happy now because they bought in a market where the macro looked bad, but their properties still increased in value. So, if national prices dropped by 5% and Sydney dropped by 7-10%, but your property gained 10-20%, you're actually getting further ahead—by not just 10-20%, but also by that additional 5-7% that the rest of the market lost.
This is why I keep going back to the strategy of rentvesting.
When times are tough, it’s not easy to go and purchase a $2 million property in Sydney.
If you’re in Sydney, Melbourne, or Brisbane and you’re looking at your dream home, you could purchase it, but what happens if the market declines?
If your $1.5 million home falls by 10%, that’s a $150,000 loss. I would much rather have a $500,000 property that drops by 10%, because that’s only a $50,000 hit.
Generally, when markets are tough, money flows into more affordable assets. We've seen this play out over the last 24 months, so if there were a correction or crash, I know which assets I'd rather be in: the more affordable properties in the $400,000 to $700,000 range that offer solid cash flow, which will help prevent you from needing to sell during tough times.
Now, let's get back to this. According to the report:
Now, what's important to understand is why assets appreciate during times like these. It’s not because the houses are suddenly better, but because the amount of money in the system increases, causing the dollar’s value to depreciate.
What I mean by that is, a dollar today is not worth the same as it was 20 years ago. That’s why house prices aren’t what they were two decades ago—the currency you use to buy those houses is losing its value.
So, if you have a hard asset, like property, its value remains relatively stable, but the currency you’re buying it with is decreasing in value. Since the introduction of the current currency system, the value of the dollar has depreciated by more than 90%. This makes it seem like the house is becoming more expensive when, in reality, it’s just the currency that’s losing its value.
As a byproduct of this, the asset appears to increase in price, even though its intrinsic value is staying the same.
This concept is crucial to understand because it explains why, during certain times, assets like real estate appreciate. When you look at periods like the global financial crisis, there was a significant increase in the amount of money printed. Fast forward to the pandemic lockdowns, and governments printed more than ten times the amount of money they did during the financial crisis.
Now, these governments hold massive amounts of debt, and they need to fund that debt. Just like you’d prefer to pay off your home loan at a lower interest rate rather than a higher one, governments would much rather do the same. It’s effectively the same principle, though on a much larger scale for governments and central banks around the world.
Historically, housing was an unremarkable asset class, but it eventually became the world’s largest. The report added that:
Now, let’s consider what would happen if interest rates were cut. Typically:
However, the relationship between the economy and what the stock and property markets do isn’t always aligned. In some cases, they do correlate, but not always.
For instance, while interest rates were increasing, property prices actually fell. You’d expect the opposite since a healthy economy should mean higher property prices, right? After all, people are employed and earning income.
But here's the key point: when we purchase real estate in Australia, the majority of us are financing 80-90% of the property price with debt. If people can’t access that debt, they can’t buy the property. Not many people have $1 million or $1.5 million in cash just sitting around. So, what typically happens is you put down a 10% deposit, and the remaining 90% comes from the banks. But in order to secure that loan, you need what’s called borrowing capacity.
Right now, if interest rates are where they are and you can't borrow, that means you're out of the market.
Unfortunately, you have to sit on the sidelines and watch property prices go up while everyone else is saying, "Hey, I bought this, and it went up." What’s going to happen, though, is that interest rates will start cutting within the next 12 months.
How deep and how fast they'll cut remains uncertain, but if history is anything to go by, the pace at which interest rates drop is usually much faster than the pace at which they rise.
Here’s something crucial to understand: every 100 basis points, or a 1% difference in the mortgage rate, increases your borrowing capacity by 20%. That can be the difference between purchasing a property for $500,000 or $600,000.
At present, if there are 10 people able to borrow, they can purchase property in an area with 12 properties available, meaning demand is lower than supply.
However, once interest rates are cut, the number of people who can borrow may increase from 10 to 12, 16, 18, or even 22. That doesn't mean more properties automatically become available for sale. In fact, during these times, we might see the supply of properties diminish.
Currently, we haven’t seen interest rates cut yet, but housing investors are already borrowing at the highest level in over two years. This means people who were sitting on the sidelines but had borrowing capacity are now entering the market.
We are now entering phase two. Phase one was when anyone with borrowing capacity already borrowed and bought assets. Phase two is when people who could borrow but were hesitant, fearing the market might collapse or that interest rates would keep rising, are now entering the market. Phase three will be when everyone has the capacity to borrow, and everyone wants to buy property.
This is why I don't believe a property crash is coming anytime soon. We haven't even entered phase three yet. I would argue that we’ve just stepped into phase two, where people with borrowing capacity are now borrowing.
Another report from Financial Review revealed that:
In addition, Nerida Conisbee, the Chief Economist at Ray White Group, which was a guest on my podcast—another YouTube channel called the “More Than Money Podcast” published a report, stating that:
Remember, interest rates are just one component of the equation. You could look at the macro environment and think everything looks great, but if your specific market isn't performing well, it will still underperform. This is an important point to consider.
Looking at Australia’s house price trends during cash rate adjustments, we can observe some interesting patterns.
In yellow, we see periods of rate cuts, and in grey, we see rate hikes.
After the Global Financial Crisis (GFC), we experienced rate cuts, which led to rising prices. When rate hikes occurred, there was a slower decline in prices before they eventually began rising again.
Over time, with rate cuts, we’ve witnessed a massive bull run in property prices.
During the pandemic, we saw another period of rate cuts, which pushed property prices even higher. But there was also a point where prices fell for the first time in years. This was largely due to changes in the banking sector, such as the introduction of responsible lending practices and intervention by the Australian Prudential Regulation Authority (APRA), which spooked many investors. As a result, investors were unable to purchase more properties, leading to a decline in prices.
This demonstrates that interest rates are only one piece of the puzzle. During the lockdowns, prices surged, and even though rate hikes have been occurring for some time, property prices initially dipped but have since continued to rise.
Now, let’s examine the monthly percentage change in house prices following a rate cut since January 2011.
As you can see, Sydney’s prices increased by 1.4%, Melbourne by 1%, Canberra by 0.5%, Brisbane by 4%, and Adelaide by 3%. This averages out to a 6% increase.
What this tells us is that markets with higher price points, such as Sydney and Melbourne, are more sensitive to interest rate changes. This is why, when interest rates started rising, Sydney and Melbourne were affected the most.
Now, if we do see interest rate cuts, we're likely to see Sydney and Melbourne rebound the fastest.
Does that mean you should rush out and buy anything in Sydney or Melbourne? No, it does not.
Again, while the macroeconomic picture may look great, the microeconomic factors can still be poor. If the only thing you can afford is an $800,000 apartment, unfortunately, most of them will not see significant growth.
This is compounded by the risks of something going wrong with the developer or builder, or issues arising within the building itself, which we’ve seen in a few cases over the past couple of years.
Now let’s take a look this graph:
One positive trend is that construction cost increases are easing.
During the pandemic, we saw the cost of building new properties skyrocket. It’s important to note that the numbers you're seeing now reflect the percentage change—while costs are still rising, they’re doing so at a slower rate.
This doesn’t mean construction is cheaper; it just means the growth in construction costs has slowed. Instead of seeing 15-20% annual increases like we did in the last couple of years, the rate is lower now.
This is important because rising construction costs are factored into property prices.
Developers have two choices: they either build for profit and sell for more than it costs to construct, meaning property prices must continue to rise, or, if there’s no demand and no one is buying, they’ll simply stop building. It doesn’t make sense for developers to build properties they can't sell at a profit. This creates additional pressure on the market because in order for developers to keep building, property prices need to go higher.
I know this is a confusing time, but I’ve done my best to simplify what’s happening. If you’re interested in more insights and want to stay up to date, definitely subscribe to my YouTube channel. I also publish blogs every week.
I hope you’ve enjoyed this article.
I’ll catch you in the next one. Thanks, guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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