2024; a real head scratcher

With 2024 well underway, let’s take a look at some of the high level economic issues that are going to shape all property uses and some of the challenges that are going to need the RBA, Local, State and Federal government to act co-operatively as they mostly did during the pandemic. The blame game between these institutions in 2023 was not healthy for the country and effectively eroded confidence at all levels.

Household savings are currently at their lowest point since December 2007, that heady period just before the GFC. Middle income and low income households are being squeezed very hard at present with any of those savings gained through the pandemic, largely eroded. Having stated that, Australians continue to manage their household budgets well, making sacrifices where they can. As a result, residential mortgages in distress remain at circa 0.5% of all bank mortgages. Because Australian’s have a recourse loan contract, they are less likely to walk away from their debt as may be the case in other countries which can have the effect of resetting the market, but at extraordinary cost. Low household savings also impact those persons in rental properties as well, particularly when the demand for housing of all types sees the national average vacancy rate at approximately 1.1% at the time of writing. The ability to save for a deposit remains challenging with the upshot being that boomerang kids returning home to save is real…and they are leaving home later as a result. Whilst not defined as group households, it is thought that if this was the case, it would have significantly greater representation in the Abs data, particularly the census.

The above graph is possibly one of the reasons our Millennial generation coined the term, “Okay Boomer”. Whilst the Boomer generation certainly had interest rates in the high teens, they also had annual wage to house price ratios half what they are today…call it a wash. Despite the perception around interest rates still not being in double digits and therefor “not really bad yet”, the simple fact is that finance is more expensive today than the average of the last five, ten or twenty years. Buying a residential property is not cheap. The challenge for our industry is to remove the term, “The bank of Mum and Dad”. If this really does become part of the development and societal vernacular, we have failed our emerging generations of young adults. In a country with significant land holdings, natural resources and a generally well educated populace, we must strive to do better in this area.

Affordability remains an issue that is reinforced in the chart above which reflects the strong growth in housing market prices though more noticeable in Sydney and Brisbane. Wage price growth whilst sound over the past three years though slowed more recently, has been a reflection of the strong employment market rather than any significant gains in productivity or government investment in achieving significant gains in productivity. As a result, wage price gains are now limited which could see prices stabilise for a period of time. There are however caveats to this…significant caveats.

Annual migration into Australia accounted for 624,100 people in the year to June 2023. This is extraordinary, bordering on negligence when one considers that a high rate of annual migration previously was 250,000 people. The East Coast of Australia over this period of time accounted for 412,450 people. These huge influxes at a time when supply chains were just starting to reconnect again meant that the development and construction industry was placed under enormous pressure.  The demand drivers of migration may well push prices marginally higher as competition for housing continues to escalate on the back of this expansionary population setting.

Construction materials remain highly inflated both in terms of the long term average as well as when compared, year on year. Building new homes is costly with house price construction up 37.8% from Dec 2019 and other residential construction up 17.5% for the same period. Whilst 17.5% is better than the former, it is somewhat misleading as many medium to higher density projects have not reached commencement because the cost of building these projects is prohibitive. This is kept the inflation costs down, because very little has started and developers are reluctant to enter a cost plus contract…as are their financiers. It is perhaps for this reason that there is considerable angst in the development community that regional plans are more about infill which is significantly more expensive to develop than greenfield when considering site acquisition, building costs, nimbyism, smaller dwellings, lack of green space etc despite the advantages usually gained in proximity to public transport, retail etc. (This is not a binary argument, there are pros and cons to both.)

What’s wrong with the above graph? If you have 412,450 people moving to your States and building approvals have trended down over the same period, the development industry is in a long period of catch up which suggest a house price correction is highly unlikely on those metrics. Combine higher building costs, constrained supply through regional plans, lower building approvals and commencements, record levels of migration, unemployment rates still sub 4.0% and an interest rate cycle that is at its peak with inflation falling faster than anticipated…the established market may well increase in value narrowing the gap to new product. Despite the construction industry being at record levels of administration and liquidation, that labour still exists and is employable, a concept sometimes lost in the media. Having said that, we need more tradespeople and less days lost to industrial disputes which is currently running circa 3,900 days for the September quarter 2023.

In our opinion, 2024 will arguably continue like 2023 ended, searching for a definitive direction. It has the potential to be a great year for real estate, particularly if interest rates start to fall, though this will be around nervousness in the economy…take from one hand and give with the other. CPI now sits at 4.1% and falling like a stone. Our call for is a potential rate cut in April when the RBA meets. There is a lot of conflicting economic data combined with a highly unstable geo-political outlook. This will not be a year of steady as she goes.

Finally, The National Property Research Co. turns 25 this year. Thank you to all of our past and present clients (and those yet to be). It has been an amazing journey so far. You have made us think, strive to be smarter and we hope we have been able to return the favour many times over.

We look forward to catching up with you all in 2024.

Matt Gross  |  Director  |  mgross@nprco.com.au