The housing market looks like it is about to turn.
Three main signals are present:
- Auction clearance rates are rising. Melbourne is the nation’s auction capital, and preliminary clearance rates over the weekend were a middling sort of 73%. That’s by no means a boom but is well above a slump. And the trajectory is upwards.
- Interest rate rises are over — or all but. Markets pricing in a small chance of a rate rise in the next two months are pricing in a much higher chance of a cut in the six months thereafter. It looks like new mortgages won’t get much more expensive than they are now.
- Migrants are pouring into the country at a rate comparable with the fastest pre-COVID years. Meanwhile rents are frothing up, pushing consumer price inflation to uncomfortable levels. As property prices fall and rents rise, property yields go up.
A few years ago, investors would have been lucky to make 3% yield on an inner-city rental in Sydney or Melbourne. Now it’s approaching 5%. If they own that investment property outright, that’s a credible return. If they have to borrow to buy it, they can take the tax advantages of negative gearing.
Rising yields will tempt some property investors back to the market, and that might make people think a fire is about to be lit under the famously resilient Australian property market.
The risk for young buyers
Don’t be misled. The history of house prices is not just a tale of rising prices. There can be long flat spots. The end of a fall does not have to mean the start of a rise.
Young buyers are wearing 1990s fashions again — beige pants and baggy T-shirts are back. But they may not be aware that in the ’90s, Australian housing prices went nowhere for a decade. Prices were fairly flat, as the next chart shows. It’s an index chart, with 2010 set equal to 100, to make it easy to compare changes over time.
The chart shows both nominal and inflation-adjusted (“real”) prices. Real prices were even flatter than actual prices. Owning a house didn’t get you ahead of inflation in the ’90s.
The key decades to focus on in Australia are the 1980s and ’90s. Other than a quick burst of activity around 1989, house prices don’t budge much in inflation-adjusted terms. They were a decent way to keep up with inflation, mind you, but not a good way to get ahead.
Of course, Australia’s house price growth is world-beating. There are lots of places out there where owning property has been a dog of an investment. To illustrate the point, we might as well go from one extreme to another and look at Japan.
As the next chart shows, Japanese house prices are where they were in the late ’80s. And in inflation-adjusted terms, they are no higher than during the late ’70s.
I just got back from Japan, incidentally, and from one rural hotel I stayed in I could see an enormous empty apartment building. Buying an apartment there outright would cost about ¥10,000, roughly US$100, I later found out. Japan’s property market is in bad shape!
One explanation is that Japan’s population is falling. Surely it is Australia’s population growth that has provided extra demand and undergirded property price growth.
But debates are raging about the future of population in Australia. Never before has migration been discussed in such frank economic terms, with all its costs and benefits laid bare. A cut in migration is quite possible, and if population growth becomes smaller, the relentless pressure on house prices may decrease. That could leave the most recent generation of buyers with less capital growth than they expected.
The lesson of the past two decades is that property investing is a surefire way to wealth. But economic opportunities change over time and the easy goals that one generation was able to score are not always there for the next. Buyer beware.
