Is the property market actually crashing?

Today's episode was made possible by our friends over at Revoh Fitness. Ready? And good morning! This is the Daily Oz. Oh! Now it makes sense. Good morning and welcome to the Daily Oz. It is Friday the 14th of August. I'm Sam Kuzlowski. I'm Emma Gillespie. House prices are falling across Australia. But that might not make it any easier for potential first home buyers to actually buy one. Sydney and Melbourne are leading the slide. Infrastrate rises have quietly slashed how much buyers can borrow. And new tax changes are reshaping the way that investors are behaving. For renters, the market is feeling almost entirely different altogether. Now there are a lot of words that you can use to describe the current state of the housing market. I don't think housing bubble, housing crisis in some of the headlines, but one word that jumps out to us is complex. Yeah. And to uncomplex the complex. On today's podcast we're joined by Kotalides Gerard Berg, someone who is an expert in the ups and downs of our housing market. And he's going to help us unpack what's really driving this latest trend. What it means whether you're buying or renting, and whether he's ready to describe this all as a crisis indeed. Here's that chat. Gerard, thanks for joining the Daily Oz. Great to be here. Thanks, sir. I wanted to start with the new numbers from Kotalides, the organisation that you are part of from July, that show the biggest monthly fall in Australia's housing market since December of 2022. Can you break this down for us in really plain terms and give us a sense of from your view what is actually happening in the housing market right now? Yeah, so I suppose we need to roll back to the period of late last year where we've seen quite strong growth across the country. But it was becoming clear in those latter few months of the year that we were starting to lose momentum in terms of that home value growth. And that has continued into the start of this year. We saw Sydney and Melbourne be the first market to enter a downturn. And as this has built up over the last couple of months, we've seen the downturns being deeper. And then also wider because we've seen both Brisbane and Adelaide join into that group of cities in decline and Perth just barely treating water. So if he's likely to be the next of the major capitals to join in. If we take a look at what has happened over that period, this is essentially a demand side driven downturn. So we have seen a large number of potential buyers exit the market. And that has impacted the overall condition. And when you say exit, do you mean they've exited the market because they've bought a place or because they've decided that they no longer want to buy a place? Either no longer want to or are unable to buy a property in the current environment. Right. So I guess the number one question that I'm asked is it all the budget? And we've been emphasising the budget changes, impacting investors is just one of these factors that's influenced the overall demand side story. So if we roll back to that period last year where the market was looking at its strongest, we were already seeing a lot of pressures around affordability and the ability to serve some mortgage. So that was that initial starting point. We then had three rate rises from the reserve bank. That really strained both the ability of potential households to borrow the borrowing capacity is reduced at that time. But also increases the repayments on a typical size mortgage. Then following that period we had Iran conflict that hit the hip pocket of people in terms of the increased cost of fuel. So consumer confidence measures are kind of deeply pessimistic right now. And all these factors have built up. It's one layer on top of another. Everything's been pulling in the same direction to bring demand lower. I want to go into some of those factors before I do. I just have a question I've always wanted to ask somebody who lives and breathes this data. Why is it that Sydney and Melbourne tends to always go first when these sorts of national housing upsell downs tend to play out over many months? Yeah, I wish I had a really good answer to explain why. We tend to say particularly Sydney tends to be more volatile than the national average. So it has bigger up swings when mark conditions are stronger. And then tends to be have deeper downturns. Well, it's just a more volatile city. We will be right back with more of Sam's interview with Gerard Berg right after a quick message from today sponsor. I recently saw Rev. Fitness was $9.69 a week and I had to double check that it wasn't some limited time flash sale ending at midnight and turns out it's not. That's just the price every week all year round. There's no lock in contracts or sneaky hidden fees and you get 24/7 access to every club. The catch was that there is no catch find your nearest Rev.O at R-E-V-O Fitness dot com dot A U. And at what point do you sit there and say this is now a national trend. And if there's a certain threshold that you keep in mind, have we hit that yet? Or is there still parts of the country that you're seeing aren't behaving in this sort of downtrend that you've spoken about so far? Yeah, so what we've seen is that it is now a national trend and has been for the past four months. But initially that was just a Sydney and Melbourne story and the weight of them as being such large cities relative to the rest of the country was dragging the overall story lower. Now it is kind of truly a more national story when Brisbane and Adelaide have been joined in. But you know we are seeing some different trends elsewhere. So for example both Hobart and Darwin as much smaller centers have a kind of different story. Right both Darwin and Hobart are incredibly under supplied in terms of the available homes that people can purchase. So as demand has been strong in recent time up until you know late last year, both markets were sort of feeling that that pressure. Yes demand has come off a little bit as those pressures have built up. But there is still quite a shortfall there versus what we're seeing in Sydney and Melbourne for example where these prolonged periods of total properties listed for sale exceeding the five year average. And in markets like Brisbane and Adelaide that are now just pushing up or just above that average level more recently. You know that in your role you do your best to kind of establish exactly what is happening in the market rather than comment on whether something is good bad or otherwise. But to put something that may border on that to you the narrative in Australia especially for young people has been that they found it hard to break into the housing market. If we're seeing house prices coming down, is that necessarily a bad thing for the overall state of of housing and affordability in Australia? I guess first off the way housing is often presented is really only from like a single perspective and that is perhaps of an existing owner or an investor in the market. So generally you get this kind of perception across most media sources that rising prices good falling prices bad. Certainly if you're looking at it from the perspective of someone who's trying to just get their foot in the door in the first place, they're looking at generally going, hey falling prices gives me a greater opportunity. So I think perspective is everything on this and that's a huge chunk a huge chunk of people who are listening now would probably feel something like that. Absolutely. I guess so the challenge for first-time buyers right now is that the properties that they are often targeting for potential purchases aren't the ones that are necessarily falling in value. Right. Okay. Spell that out for me. So I guess you know we often talk about like what's happening in Sydney, for example, what's happening in Melbourne at these sort of citywide levels. But when we're typically talking about that, we're typically talking about the median property in that market. So one way that we're trying to show this in a clearer way is we break up the market into different segments. So we'll have the top 25% or upper courtile properties as the most valuable properties that top top quarter. We'll look at the middle and then we'll look at the bottom 25% or lower courtile of properties. And so since this slowdown in demand since late last year, the gap between the performance of the upper courtile and lower courtile or the more more expensive and less expensive properties has done widened. Right. So when values have been dropping more recently, it's really been led by those higher value properties. These are segments where there are fewer buyers to begin with. When the demand starts to push lower, they exit first, they see the most rapid declines. When you look at those lower courtile properties, they have been the ones where there's been, well, it's where we're first home buyers from typically buy. They have the gross competition because affordability is often meant that people who might have been looking for a property in the middle have been forced by their borrowing capacity or by their own budgets to look for those properties as well. It's also been an area that a lot of investors up until recently had been playing into looking to buy low and sell high in the future. So that competition has been more intense in those lower courtile properties. Now those values are falling in Sydney and Melbourne. Right. They're still rising in some of those mid-tier cities though. Interesting. Just reflecting that level of competition. And so I guess by that logic you've laid out there, they are falling in that lower courtile, but by not as much. March. So a first home buyer might not be as magically ready to enter the housing market because of this downturn as they could be if the houses were performing or not performing the same level as a multimillion dollar properties. That kind of correct? That's right. Yeah, you could argue that it's never been a better time to snap up a bargain in the $4 million range, but there's not many people who can even consider playing in that field. So it's difficult. The other thing to consider though from a first home buy perspective is that if there is one segment of the buying public who is most impacted by interest rate increases, it's first homebites. We're yet to see the data, but we're waiting to see what the lending data is for the second quarter of this year. That breaks down, who's been borrowing, is it investors, is it first homebites, is it people who are already on a home, but looking to purchase a different home, so another owner or a buyer. That's going to be fascinating to see because I tend to think that first homebites are the most rate sensitive. They're having to save a large deposit. They don't have an existing home that they're trying to sell and make another purchase. They don't have the considerations that investors had previously been able to negatively gear a property. So I think those rate increases really had a more sizable effect on first home buyers than they did on any other part of the market. When you see patterns play out like was detailed in the July report and that what you're expecting over the next couple of months, what typically happens to the rental market? If we've got people listening who are perhaps having their leases come up in the next couple of months, should they be expecting what we've seen over the last couple of years of quite substantial jumps on average in their rent or is the downward pressure on the cost of buying a house? Does that perhaps mean that rents should well clearly still go up by not as much? Yeah, unfortunately the answer is it's not going to be a good story for renters. Right. It comes down to it's very much a different market. So when we look at what's available out there in the marketplace, we look at total listings of available rentals, it's been well down since kind of 2022 and is very low by historical standards. So this has meant that rental vacancy rates have been extremely tight across the country and when you have that situation, it means you've effectively got a lot of potential renters competing for the same rental property and landlords respond by increasing rent. Sure. With rents being so high and at a huge proportion of household income going towards rents, it's actually a record high as of March now at affordability measures. It is possible that we might start to see some changes in that household composition as a way to address the rental pressure. So adding an extra person in the household if that's possible, perhaps the home office becomes a luxury that people can simply kind of forward versus being able to continue to be in a rental property. Yeah, it'd be interesting to see if that data even then matched up to return to office rates going up if people are deciding to give up a home office in a rental for another housemate and then come back to the office. It's so interesting how it's all intertwined. Yeah, absolutely. It's something that we could see happen for potentially younger renters who for whom it may be an option. They may exit the rental market and return to the family home as well. So there are all these ways that the market can adjust on the demand side in response to these large increases that we are seeing. A final question from me. I've seen a lot of headlines particularly in the last seven days with words like bubble bursting housing crisis. Quite dramatic, somewhat apocalyptic terminology used. Do you think we're there? You look at that kind of headline and you go, it generates clicks, doesn't it? And I think that is a little bit of the story that we see with those types of headlines. Is it very clip-ready? Yeah. If you're in the housing market, as I say, there's an owner occupier for a long period of time. Say you've bought your house and you want to live there for 15, 20 years. A relatively modest percentage decline in that value over that period doesn't affect you if you are able to continue to service the mortgage if you are continuing to just live your life. It's not really a huge issue. There's been lots of talk about negative equity for example, where potentially people who might have bought at the top of the cycle, particularly those who use the first 5% deposit scheme, may find themselves in this negative equity position. Now that's a terrible position if you are forced to sell. The asset is worth less than the loan that you're trying to repay. But if you continue to live there, if you are employed and continue to service your mortgage, a period of negative equity is just a minor inconvenience essentially. People can ride through that without too many dramas. So I think there's been a lot of hyperbole around the catastrophe and particularly like we have saying from the perspective of someone who is looking to get their foot in the door, they're not really seeing low prices as a catastrophe. Really, really interesting. Thank you for bringing a bit of a bit of reason and a bit of calm to this discussion because you're right. We do see a lot of headlines all of us, especially on some of the social media channels. On this issue in particular in Gerard, it's been lovely to talk through it with you in a calm way. No problem. Sam, thank you so much. That was an incredible interview. There is so much noise in this space. I always find it super helpful when we get a down-to-earth expert on who can just help us separate factor and fiction and figure out what's really happening. Totally. And I think the bit that I really valued in that chat was how he showed how connected everything is, be it employment, be it the ways in which people are treating their homes. I mean, the stuff that he had to say about whether we all prefer to have home studies or not was a very interesting way to view the market. So now I've got a tip for you. TIP IT TIME! I haven't done one of these in a while since my very famous Eastern Roselle's episodes. We won't revisit the trauma there. No, well I think. That's why I said to say you were right. And I can pick them. And they were wrong. And I can pick them. And you know how to pick them. So what have you picked today? Guess how many cars you can buy new in Australia that have a CDE player? I would be thinking none. There's one left. There is one car left. The mighty Subaru WRX. The Rexie. The Rexie. The Rexie is now, as of the last couple of months, the only brand new car you can buy in Australia with a CDE player. Wow. And you know I'm just thinking about 16 year old Sam getting his L's, 17 year old Sam getting his P's. Growing on my temper trap CD, maybe a little bit of parachutes cold play with a few stretches. I was rinsing Watch the Throne, Jay Z and Kanye West's album. And every speed bump that I went over in my 1999 VW Golf would skip a track. So it was very fun and exciting. You never knew what you were going to get. I thought it was super interesting. It was only one. And then the last little bit of trivia. In what year was the first time you could buy a car with a CDE player in Australia? So I'm guessing around the early 2000s? No, no. The first car with a CDE player to be available in Australia was 1986. Oh. Now we've got the Subaru WRX. The first car in Australia. And Mercedes Limousine. Was the first car in Australia to have a CDE player? Wow. What a riches to rags, to riches, tail. Thank you so much Sam. That is it for today's deep dive. Thank you so much for joining us. We'll be back a little later on today with your evening news headlines. But until then have a good one. My name is Lily Madden and I'm a proud Aranda Bunjlong Calcutty and woman from Gadigal Country. The daily odds acknowledges that this podcast is recorded on the lands of the Gadigal people and pays respect to all Aboriginal and Torres Strait Islander nations. We pay our respects to the first peoples of these countries, both past and present. [BLANK_AUDIO]