Why Price Forecasts Are Often Wrong

While the media is keen to forecast drops in house prices, property industry experts warn there is no accurate way to read what is likely to happen in property markets.

Ray White chief economist Nerida Conisbee says if you are able to predict the future direction of prices, either up or down, you are doing pretty well.

“But to get the scale right is almost impossible,” she says.

She says at the start of the pandemic there were predictions of a 30% drop in property prices, but in fact the opposite happened, with a national boom emerging.

PropTrack economist Paul Ryan says, while it has only recently started making predictions, it is difficult to accurately predict the trends.

“If you get one variable forecast wrong, then you are wrong about everything else,” he says.

Forecasts are often based on an index populated with theoretical data which tries to place a value on every property, even if it has not sold recently.

Buyer Priorities Are Changing

Homebuyer demands are continuing to evolve as Australia emerges from the long period of Covid lockdowns.

Developer Mirvac’s latest customer survey reveals the top priority of many homebuyers is the location rather than the house.

They survey finds that 70% of homeowners had as their top priority being within walking distance of parks and playgrounds. This desire came in 6th on the list in 2020.

Bigger backyards are also high on the list, as is being close to schools.

Mirvac head of residential Stuart Penklis believes the pandemic changed the way people think about how they are living.

“I think being able to walk out of your home or your apartment and not have to get in a motor vehicle to travel to an amenity, is something that is now at the forefront for all new residents,” he says.

Matt Mears of Lendlease says designs which feature fibre to the home, solar initiatives and fully electric communities are also very popular.

Exports Hit Record Levels

Australia’s economy is continuing to bounce back with new figures showing the national trade surplus has surged to another record high.

The increase comes on the back of strong iron ore, minerals and coal shipments with $55.6 billion in exports during June, driving the surplus to $17.7 billion.

The ABS figures show total exports are above market expectations.

Westpac senior economist Andrew Hanlan says the total exports figure exceeded expectations by about $3 billion.

He says there is underlying strength in imports which are up by 2%.

ANZ economist Madeline Dunk says the trade figures are underpinned by sales of coal, iron ore and LNG but Australia’s biggest buyer, China, has been trying to limit its reliance on coal imports, and its steel output is expected to weaken this year.

“Given this and the fact that commodity prices appear to have peaked, we think the trade surplus will soon start to slide,” she says.

Investors Not Deterred By Higher Rates

Rising interest rates have not scared off property investors who still see value in real estate as a result of rising rents and low vacancy rates.

New data from the Australian Finance Group shows investor lending increased in July to 28%, which is the highest it has been since late 2019.

Buyers’ agent Rich Harvey of propertybuyer says rising rents will help investors absorb interest rate rises.

“Investors are lured by higher yields as rents increase by 10% and probably by 15% to 17% by the end of the year,” Harvey says.

CoreLogic research director Tim Lawless says rents are set to continue increasing as demand outpaces supply while SQM Research data puts the national average vacancy rate at a record low 1%.

Louis Christopher of SQM says there are signs that some regional rental markets may have peaked with an easing of vacancies.

Mortgage broker Chris Foster-Ramsay says many property investors are cashed up and ready to buy.

Worst Rate Rises May Be Over

Fears of continuing interest rate rises may be unfounded, with economists suggesting the worst of the increases may be over.

The RBA has lifted the official rate by 1.75% since 3 May. AMP chief economist Shane Oliver now predicts the cash rate will peak at 2.6% by the end of this year or early next year.

“It looks like the RBA is getting traction in slowing demand far earlier than normal,” Oliver says.

“While job indicators are still strong, these are lagging indicators. By contrast consumer confidence is at recessionary levels and well below where it’s been at this point in past rate cycles.”

RBA governor Philip Lowe says while they expect to take further action to normalise monetary conditions it is not a “pre-set path”.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he says.

Discounts For Low-Risk Borrowers

While interest rates generally are on the way up, banks are still offering discounts and incentives to win over borrowers.

Research by financial comparison site Canstar shows that up to half of all lenders are now offering discounts to borrowers who have a sizeable deposit or home equity.

Canstar’s Steve Mickenbecker says numerous lenders looking to boost their market share are offering the discounts.

The Canstar research shows 49% of banks are offering customers with a 40% deposit or equivalent equity in their home a discount on their interest rate worth an average 0.21%.

The research also shows that those with a 30% deposit or similar level of equity can find deals for lower rates with almost a third of lenders offering a 0.13% reduction.

Mickenbecker says borrowers need to take initiative and ask new or existing lenders about discounts on offer.

“Do not wait for a bank to tell you because it rarely happens,” Mickenbecker says.

Owner-occupiers Make Loan Switch

The number of people refinancing with different lenders is on the rise as borrowers try to secure better deals in a rising interest rate environment.

Australian Bureau of Statistics figures show the number of borrowers changing lenders is 25% higher than it was in June last year.

ABS Head of Finance and Wealth Katherine Keenan says the latest figures show the value of owner-occupier housing loan commitments increased by 9.7% in June.

“As interest rates rose in recent months, borrowers sought loans with lower interest rates and lenders competed to attract them,” Keenan says.

First Home Buyer numbers are down 8% over the month to 9,393, which is now similar to pre-pandemic levels.

Loans to investors fell by 6.3% nationally. In NSW loans are down 10.5% to $439m, Victoria, 3.4% to $100m and Western Australia down 10.6% to $78m.

ABS building approval data also shows the total number of buildings approved fell 4.7% in June, after a 10.8% rise in May.

Building Costs To Ease Next Year

Surging construction costs have made many projects unviable, with a number of developers deciding to shelve projects until next year when prices are expected to ease.

Quantity surveying firm Rider Levett Bucknall (RLB) predicts increases in construction costs will slow from 11.5% this year to 5.5% in 2023 on the Gold

Coast while in Melbourne they are expected to halve to 4%.

In Sydney, cost increases are forecast to drop from 6.9% to 3.9%.

RLB Ocean head of research Domenic Schiafone expects pressure on supply chains will start to ease by the end of this year.

“This easing of demand should allow manufacturing and logistics to get back to normality,” he says. “The easing of demand should also see a softening of material prices, with the high levels of ‘demand-led price premiums’ reducing due to lessening demand.”

Home-building costs were one of the key factors driving up Australia’s inflation figures with new dwelling prices by 20.3% in the past year.

No Evidence Of Looming Crash

There is little evidence that the property market will undergo a sharp correction, according to real estate economist Nerida Conisbee.

Conisbee says even though sentiment has shifted there is little mortgage distress among home-owners at the moment.

As a result, she says it’s hard to understand why so many forecasters were predicting big price drops.

“The conditions are just not in place for the sort of house price declines that some forecasters are putting out there,” she says.

Datt Capital fund manager Emmanuel Datt describes the current forecasts about house prices as “nothing short of ludicrous”. He says low vacancy rates and growing rents mean property remains an attractive prospect for long-term investors.

Datt says in the current market rents are rising at more than 10% a year.

While borrowers may not like increasing interest rates, Datt says they will do everything they can to not default on their loan and will cut discretionary spending and look at cheaper refinancing options.