Is there a 'buy the dip' moment coming for the Australian property market?
You may have read a few articles over the past few weeks calling for a cataclysmic crash in property prices. Experts such as Christopher Joye of Coolabah Capital have been particularly vocal on the matter.
And while prices have fallen by around 5% across Australia's capital cities since the RBA's first rate hike, some property experts now believe it's not going to be as bad as some would have you think...
So is a "buy the dip" opportunity opening up in Australia's property market?
History tells us that the Australian housing market has been quite resilient to recessions and that pullbacks in house prices have not lasted very long.
The last downturn was between mid-2017 to mid-2019, with a slide of almost 10% nationally. Sydney prices fell 15% and Melbourne prices 11%. The price declines were caused by a change in lending standards, which became much stricter.
Prior to that, the next significant period of price decline was during the GFC. This involved an 11-month period when house prices fell 8.5%, based on data from CoreLogic.
Should we be investing in property now - at a time when property prices are coming down? I reached out to two experts, John McGrath – CEO of McGrath Limited (ASX:MEA) , and Pete Wargent - Co Founder of BuyersBuyers, for their take on the matter.
Here are some of the key insights:
- Things probably won’t be as bad as the worst predictions are suggesting.
- There are always opportunities.
- As always, it’s all about location, location, location - McGrath and Wargent share their thoughts on the best places in the country to buy.
How does the current downturn compare to historical examples?
According to McGrath, we are witnessing one of the fastest correcting property markets in more than 40 years. And while CoreLogic notes the rate of decline compares to those seen during the GFC and early 1980s, McGrath believes this all reflects borrowing rates. "Rates will increase to around 5.5%," he said. "If rates go much higher, the market will be hit harder as a result. Historically, Australians have paid an average of around 7% for mortgage interest rates so it’s not as much the real level of current rates but the rapid increase from where we were six months ago."
As for Wargent, he notes that it is interesting that forecasters are predicting greater declines in this cycle than previous cycle, and in some cases, considerably larger declines.
To state the blindingly obvious there are few forced sellers around at the moment, with rental vacancies also tracking at close to two-decade lows.
Wargent also points out that context matters. “Sydney’s prices remain 34% higher than at the time of the 2019 election, and in Brisbane and Adelaide prices remain 48% and 47% higher, respectively."
Viewed through this lens, such a correction is hardly surprising, or even problematic.
And whilst Wargent rightly points out that nobody can say for certain how long the downturn will run for, his best guess is that sentiment is unlikely to turn positive until households have greater certainty about where the terminal cash rate for the cycle is likely to fall. “There are always markets within markets, but if pressed I’d plump for a peak-to-trough decline of about 10% in nominal prices across the capital cities, with the potential for a bigger decline in Sydney”.
What, if anything, is different this time and how will it affect the outcome?
McGrath noted a number of key elements in the current downturn, pointing out that prices are starting to fall in previously strong markets like Sydney, Melbourne, Canberra and Hobart.
In Sydney and Melbourne, I think we’re already halfway through this market correction. Prices are probably down 5%-8% from the peak in October and we might have a few more per cent to go through the next six to 12 months
Like Wargent, he makes the point that context is important; “Remember this decline is coming off a 35%-40% increase in the past few years.” McGrath goes on to note that it’s good news for buyers, especially those that have been in the market for a year or so and have missed out on homes due to competition; “The situation now is if you buy this year, you can be confident of getting a 5%-10% discount on last year’s prices”.
Meanwhile, Wargent was quick to acknowledge that the dynamics of every cycle are necessarily somewhat different, and that “the past two years really have presented with us some unprecedented scenarios - Immigration and demographic trends have been fascinating to watch over the past few years, for example.” Wargent went on to note, however, that there are many other factors which make this cycle different, “including the fastest pace of monetary tightening since 1994!"
What evidence are you looking for to be a buyer of residential property?
When it comes to evidence, there are a few main ingredients McGrath is looking at; “I’m expecting interest rates to rise by 1.25%-1.75% over the next 18 months” he says, noting that will allow for a period of consolidation in the market after such big price gains. “Late last year, the previous cycle was overheating, and we need a breather now to slow down the sustained price escalation.
But I think the whole country will have a soft landing off the back of this correction.
McGrath also commented that most Aussies are still well ahead in terms of their investments and mortgages, as they were smart enough to put savings amassed during lockdown into their offset accounts or straight onto their loans to reduce interest payments. Finally, McGrath put the current interest hiking cycle into context, highlighting that “the average interest rate in Australia over the long term is 7%. Just 15 years ago, that was the norm. And while any increase in mortgage payments ahead will impact affordability, in the long term we think we’ll settle at rates still well below historical averages.”
Wargent also like to consider a broader horizon, saying that as an investor looking at long-term trends,
I’d almost always be a buyer in some part of the country…normally the question is where and what to buy?
Wargent went on to say that cautious prospective buyers on the sidelines will be looking for signs that the cash rate may be reaching a peak, or at least that the Reserve Bank is set to taper the pace of its hikes. “If you’re trying to fine-tune your entry point you’ll need to keep a close eye on year-ahead inflation expectations, bond yields, and futures market pricing for interest rates…but you’ll necessarily miss the bottom by doing so.”
Is there a 'buy the dip' moment coming and when do you think it will arrive?
When it came to this question, both experts had strong views.
McGrath said, "I think we’ve already seen the majority of the price reductions due this cycle but it may get a little worse before it plateaus, perhaps another 3-5%.” He went on to say that given the large and immediate discount from the recent peak that buyers have been afforded, the window of opportunity won’t last forever.
Buyers who missed out last year should take advantage of the market taking a breather within the next 12 months
And finally, where McGrath thinks the best place to invest is: "I believe that one dollar invested in Queensland real estate will be better than anywhere else in Australia."
Wargent provided equally compelling insight, noting that the current market in Sydney already represents genuine ‘buyer’s market’ conditions.
After last year’s market frenzy you can now buy with relatively little competition, and frequently at prices 10-15% lower than their 2021 high watermarks
Like McGrath, he also likes Queensland, but is a little more specific with the location, saying “There are still some affordable options in Brisbane’s northside suburbs, on the Gold Coast, and even on the Sunshine Coast, but buyers need to be much more careful about what they buy and the price they pay after a surge through the pandemic.” Wargent also provided some grist for the contrarian buyer, saying that they “may be taking a look at houses in Perth.” Wargent ended with this valuable insight for all property investors;
The only way to negotiate deep discounts, in my experience at least, is to buy when vendors are at their most fearful or pessimistic.
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