Bear case, bull case, risk case, nut case.
What’s the bull case and the bear case for property from here?
I tend to be bullish, but I’m always curious to know what the view looks like from the other side of the fence.
Well, The Australian Financial Review Property Summit in Sydney last week laid out both sides in one panel session.
The bear case was represented by celebrity property dude Mark Bouris from Yellow Brick Road. He sees prices falling as the economy slows and unemployment ticks higher in the year to come.
Job losses will result in an increase in homes for sale, and this will be compounded by borrowers who were on cheap fixed rate loans struggling to cope with much higher variable rate loans.
“My gut feeling is that we’ll see an increase in the supply of markets for sale. That will have a negative impact on the price of properties across Australia,” Bouris says.
He thinks the recent increase in properties for sale is an early warning sign that some homeowners are trying to get in front of that potential shift in market dynamics while prices are strong.
But Nicola Powell, chief of research and economics at Domain had a different take. She sees prices rising.
Yes, new listings over August were 20 per cent higher in certain cities, suggesting that the traditional spring selling season has come early.
But she says the increase in stock more likely reflects the fact that buyers and sellers – remember, most people are both at the same time – are growing more confident that interest rates have peaked.
Powell argues the combination of some lingering FOMO (fear of missing out) in the market and strong population growth can keep prices rising.
But an increase in properties for sale will mean that the sort of rises we saw in the June quarter – when Sydney prices jumped 5.3 per cent, double what you’d expect to see in a normal upward cycle – are unlikely to be sustained.
Yeah, that kind of pace was never going to be sustainable. But I’d agree that prices should keep moving higher from here.
But there are still risks.
And those risks were highlighted by Shane Oliver at AMP.
Oliver sees two contradictory forces pushing against each other. On the one hand, historical supply shortages are being exacerbated by booming immigration; AMP estimates that we should be building between 220,000 and 240,000 homes this year to keep up the demand, but housing starts are likely to come in at about 170,000.
But if housing shortages support prices, the economist in Oliver refuses to believe that the laws of economics have suddenly stopped working. The fall in mortgage rates from 17 per cent in the late 1980s to as low as 2 per cent in the middle of the pandemic helped to boost prices, so the rise in mortgage rates to 6 per cent must – surely – have an opposite effect.
“This is the thing that makes me really nervous. Anyone who knows anything about asset prices knows that interest rates do matter.”
Oliver says the average borrower on an average wage with a 20 per cent deposit has had their buying capacity reduced by 30 per cent due to higher rates.
Yeah, I’m curious about all that as well.
My sense is that the surge in immigration and the collapse in vacancy rates is keeping a floor under prices – people will pay whatever it takes.
And I think it would take a sudden lurch higher in the unemployment rate for prices to fall.
And that wouldn’t be my central forecast.
But I’d be lying if I said it wasn’t a risk.
JG.