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What’s wrong with predictions

What's wrong with predictions

Whenever the unexpected happens, it seems that everyone is keen to predict possible outcomes for our property markets. John Lindeman reveals which forecasts are useful and which to ignore.

As we strive to unravel ourselves from the COVID-19 crisis and the uncertainty it has caused, property market predictions keep coming, ranging from dire warnings of imminent collapse to assurances that the next boom is on its way.

Such property forecasts may be exciting, interesting, or even scary, but they are seldom of any real value to investors, and that’s not just because they often turn out to be wrong!

Predictions often combine different types of property together

Many predictions make sweeping generalisations by lumping together different types of properties as if they always perform the same way, but the potential performance of different types of housing in the same suburb often varies, because they appeal to the many different types of buyers and renters.

For example, units and apartment markets respond to changes in renter demand, as from sixty to eighty per cent of them are investor owned. On the other hand, eighty per cent of houses and townhouses are purchased as homes, so their markets respond to changes in first buyer, upgrader and downsizer buyer demand.

Units and houses can perform very differently, as these two heat maps show:

These heat maps (produced by our patented Housing Market Prediction Solution) forecast the comparative risk of price falls occurring in Sydney council locations for houses and units over the next twelve months.

They reveal that Sydney’s coastal unit markets are at high risk of price falls, while houses in the same locations tend to be at low risk of decreasing prices. At the same time, the outer western suburbs of Sydney have a high risk of house price falls, while unit markets in the same areas are at low risk.

This tells us that Sydney units are likely to perform very differently from Sydney houses in the same areas over the next year. Yet, much of the media provides “property price” predictions, “housing market” forecasts, “home value” indexes or “real estate market” estimates which lump all the houses, townhouses, villas and units together. They show the average performance of them all combined, which is of little practical use and could even be misleading.

Many predictions are for huge markets such as capital cities

Another issue with many property market predictions is that they combine all the suburbs in one city or State together to make a catch all forecast such as “Perth’s housing market expected to crash” or “Brisbane property prices set to boom”, such as this recent example:

We can’t really use these predictions, even if they turn out to be right, because we only buy one property in a suburb, not an entire city. Suburbs in any city are very likely to perform differently from each other and some may boom even as others bust.

For example, if you look again at the two heat maps above, you will notice that there are roughly the same number of areas at high risk as there are those with no risk at all, so by averaging all the areas, we would end up with a moderate risk or low risk prediction for all of Sydney. This may be still be interesting, but is of no practical use to property buyers at all.

Some property market predictions are not meant to be reliable

For any prediction to be of possible value, you need to be able to trust the person making it.

This is because many so-called experts have a vested interest in the outcome of their predictions which has nothing to do with the accuracy of their forecast.  

They will talk up a market purely to encourage you to buy a property from which they will obtain a finder’s fee, commission, kick back, knock on or other financial reward.

We often hear and see such predictions made by project marketers and sellers’ agents who may promote a property market purely because it is in their interests to motivate us to purchase. That’s why property market predictions need to be as accurate as possible, because they could lead us into making decisions involving huge amounts of money and many years of financial commitment.

Make sure that any forecasts you intend to rely on are provided by recognised analysts and experts who have a proven published record of past success. Ensure that they are not based on hidden agendas, gut feel or intuition, but on proven statistical methodologies which have delivered a consistently high rate of accuracy

There’s no “one size fits all” for property market predictions

As you can see from this image, property investment offers us many different strategies to choose from depending on our finances, skills, time and most of all, what results we want to obtain.

We need strong cash flow if we want to obtain income from rent, or seek high imminent growth during our hold period for flipping or cosmetic renovations. We want medium term growth during structural renovations or developments and look for long-term growth with our buy and hold purchases.

In short, there’s no “one size fits all” when it comes to property predictions, especially in these uncertain times.

A high cash flow forecast is of no use in a suburb where we plan to do a buy-reno-sell strategy because we won’t be renting the property out, while a prediction of high market driven growth during our hold period would be very welcome.

In summary, the only predictions that you can benefit from will be produced with accurate methodologies delivered by reputable analysts. They should identify those suburbs that have the best potential to deliver success for your own preferred investment strategies and they should be relevant to our current economic situation.

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Timing the turning point

Timing the turning point

John Lindeman explains which signals will indicate that we have reached the bottom of the property market and recovery is on its way.

In all the current uncertainty, it’s good to know that there are some property market indicators that point the way forward and help us time those critical turning points.

To demonstrate how they work, I have used the analogy of a plane flight (remember them?) where the aeroplane is our property market and the passengers are potential buyers and sellers.

The take off

As the plane prepares to take off, everyone on board is looking forward to their destination, catching up on some work during the flight, enjoying a rest or the in-flight entertainment. A few optimists might even be looking forward to the in-flight food.

For the property market, this is when optimism is high – buyers and sellers are keen, with both sales and listings rising.

Even though prices haven’t increased significantly, investors are confident that they will. It could even herald another boom, as last year seemed to promise before the pandemic hit.

The inflight safety demonstration

We’re in the air. Uh oh! Thanks for reminding us that things can go wrong. Now we have to assume the crash position, see how to use oxygen masks and where the emergency exits are.

We are even shown how to don life vests equipped with a light and whistle. It’s not comforting to know that disaster could strike – not comforting at all.

This where the property market is right now – everyone has pulled back, suddenly aware of what might happen. We are in a state of shock, with both sales and listings falling as we brace for the worst, but will it occur, or will we land safely?

The crash

Unfortunately, a few flights do end in disaster, and this also sometimes occurs in property markets when demand collapses.

Everyone tries to sell and no one is buying. In other words, as sales drop, listings rise dramatically. Property prices fall, and many investors are ruined.

Such events are rare in our history, and have occurred most recently in towns such as Port Hedland and Moranbah at the end of the mining boom, when prices fell by over 90%.

The safe landing

Luckily, virtually all flights end with a safe and happy landing. The passengers are now excitedly looking forward to their holidays, business meetings, catching up with friends and family, or simply arriving back home again.

In the property market, such times herald the start of a real boom. Prices are shooting up and it’s hard to find properties listed for sale because buyers are snapping up properties as soon as they go on the market. 

It’s what occurred during the height of the Sydney and Melbourne property market booms of 2001 – 2003 and 2013 – 2018.

Which signals tell us when we have reached the bottom?

The two indicators that show us where any property market is poised are sales and listings. They are both easy to find for any area, with annual sales provided free of charge by major data providers and the number of listings available from either of the two major on-line listings sites.

Because sales indicate the level of demand, while listings reveal the amount of supply, we need to use them together to tell us whether property markets are confident, concerned, crashing or booming and it is their trend over several months which indicates where we are heading.

How_to_read

Where are we now?

We are currently very much at the “concerned” stage, with everyone waiting to see what will happen next. In that regard, it is important to remember that there are around fifteen thousand suburbs and towns in Australia, and they will not all respond in the same way. Some areas are showing real cause for concern, while others will continue to hold up well.

It is a comfort to know that the only property crashes we have ever experienced have been the result of rash investment in markets driven by speculative price growth instead of a genuine demand for accommodation. It is our continuously growing population that has always underpinned housing demand, and that’s also the key to future property market performance.

What will happen next?

While our sales and listings indicators tell us what is likely to happen, they can’t explain why, or when. To do that, we need to look at the dynamics of the current crisis and what changes will create economic recovery and then lead to housing market growth.

Read John Lindeman’s Post-COVID boom towns revealed blog to discover which suburbs and towns will have high price growth and cash flow potential when this crisis is finally behind us.

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Post-COVID boom towns revealed

Post-COVID boom towns revealed

Rising above the uncertainty and rumblings of doom and gloom, John Lindeman reveals suburbs and towns that will have high price growth and cash flow potential when this crisis is finally behind us.

In these unprecedented times, if there is one certainty that we can hold on to, it is that growth will return to our property markets. As the restrictions on movement and travel are eased, some areas will exeprience greater demand for accommodation than others, and they hold the key to finding post COVID boom towns.

Which areas are most at risk right now

Some property markets are at high risk of price falls occurring, and before we can look at the boom potential locations, we should take note of areas that investors need to avoid right now.

They are suburbs where accommodation demand has been largely dependent on short-stay business and holiday rentals, international students, tourists and workers in the hospitality industries. Rental demand has collapsed in these locations as demonstrated by these examples:

The impact of COVID-9 on rental demand in these areas is clear, with advertised rental vacancies nearly doubling in Brisbane CBD, more than doubling in Melbourne CBD, Docklands and Sydney CBD and trebling in Southbank since the crisis started three months ago.

Around half of the investors in these suburbs and others like them in similar high density inner urban precincts are currently hanging on to empty apartments, for which they must continue to pay holding costs without any rental income.

The prospect of price falls in such locations is almost certain, and they could be significant as desperate owners try to offload their properties no matter what, before they become mortgagee in possession nightmares.

However, selling now would be the worst possible outcome for property investors in such areas, as these same areas will bounce back quickly and strongly once travel restrictions are eased and rental demand returns.

Where will the best opportunities lie?

In fact, the areas worst hit by the collapse in short term business and holiday rentals, tourism and overseas migration will be the first to bounce back as the current restrictions are lifted.

Recovery will closely follow the progressive ending of the current restrictions on movement and travel.

When freedom of movement is once again permitted in Australia, we can expect a huge revival in property markets reliant on rental demand from day trippers, holiday makers, business trips and students.

In addition to inner urban precincts such as the Sydney, Melbourne and Brisbane CBDs and their surrounding high-density suburbs, growth will return to popular holiday destinations such as those shown in this table:

In the longer term, our full economic recovery will require an opening of international borders as we experience a huge rise in tourism, international students and migrant arrivals from Europe, Asia and Africa of people seeking the security, safety and opportunities that Australia offers.

After every major international crisis, war or other catastrophe, Australia prospered and our property markets boomed when our borders were opened. There is no reason to believe that the same won’t occur when this crisis is behind us.

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Caught with their pants down

Caught with their pants down

Experts who are claiming that the property market will not be affected by the current crisis will soon be caught with their pants down. Why? Because they’re looking at the wrong numbers.

One of the main reasons that so many experts “get it wrong” when making property market forecasts is because they rely on data which tells us all about what has already taken place, but nothing about what is likely to occur.

That’s what some of them are doing right now, claiming that the latest published data shows the property market’s ‘resilience’,  even that prices are ‘buoyant’ – but their data is pre-COVID.

Pants_down

Current sale price data refers to events that occurred months ago

The latest sale price data seems to show us that housing prices have remained stable during the current  crisis, prompting some experts to predict that they won’t fall at all.

But this data refers to sales that occurred several months ago, because there’s a long time lag that takes place before sales turn into published sales results. 

This timeline image shows how properties take months to sell. First, negotiations about the sale price, deposit amount and settlement terms are concluded, followed by the exchange of contracts and then settlement. The sales data is collected by government agencies who then on-sell it to data providers. They in turn collate and finally publish the sales information. The entire process can take anything from a few to five or more months to complete.

That’s why the latest sale price figures can at best only summarise events that occurred months ago. They can’t even tell us about the present, let alone the future. So, be very wary when experts talk up a market based purely on published sales and price data, which some of them do quite often.

Historical data misleads us when market conditions change

Using published housing price data is fine when both sales and published data are trending the same way, but it can totally mislead us if market conditions suddenly change, as they have recently.

Right now, the number of property sales is falling rapidly, but any drop in sale prices won’t show up in the published figures for some months.

The graph explains how this works, with sales shown in red and the resulting published price data shown in blue.

The black circle reveals where we are right now with sales falling, but published prices still risng.

The graph shows that the current fall in sales can have only one outcome – lower published prices in the near future.

Time_lag

The good news is that when buyer demand picks up again, hopefully not too far away, increased sales will follow and then prices will rise..

This is why those experts who are now claiming that property prices will be unaffected by the current crisis will soon be caught with their pants down.

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Black swans and the property market

Black swans and the property market

Commentators are referring to the current crisis as a black swan event, which is something that is totally unexpected and has a major impact. Does the property market have its own black swans?

As our European forebears ventured out into other continents such as Asia, Africa and then finally the Americas, all the swans they ever encountered were white, just like the swans back home.  

Because of this, it became accepted wisdom that black swans could not exist, simply because none had ever been seen. But when Australia was discovered by the Dutch, they found the impossible – black swans!

Black swans are not just examples of something that is completely unexpected. They provide conclusive evidence that we should never rely purely on past performance to make any predictions about the future.

Many property market experts rely on past performance

You might think that the existence of black swans would have put an end to the practice of relying on the past to make predictions, but many property market experts still do just that.

They often use past performance to predict the future, inventing rules such the property market cycle or the property clock, like the example pictured here.

These give us a false sense of security by making it apear that the property market  always performs in a regular, predictable way, and that when prices have fallen, recovery and then growth will soon follow.

How many times have you heard spruikers talking up a property market based on how well it has recently performed? Many investors will not invest in an area until growth has actually started, believing that it must continue, because the property clock is pointing to 9 am.

Then along come the black swans, making a mockery of those predictions. Buyer  demand unexpectedly collapses, or overdevelopment creates a huge overhang of listings, or renter demand vanishes and markets crash even though they were predicted to boom. In the confusion, investors retreat from property investment embittered and hurt.

These property market black swans are painful reminders that future performance is not based on the past at all. The property market works according to the laws of supply and demand, just like any other commodity and only by understanding them can we make more accurate predictions about the future.

The property market doesn’t rely on past performance

For example, the current restrictions on travel have impacted rental demand in student precincts, tourist destinations and short term Airbnb type business and holiday lettings. Not only has rental demand plummeted, but owners, desperate for revenue, are listing their vacant properties in the longer term rental markets and competing for tenants with other property investors. 

This has nothing to do with the property market cycle, the property clock or past performance at all. It is the increase in rental supply combined with a drop in demand which is leading to a substantial reduction of asking rents in many locations where students, tourists, holiday makers and those working in impacted industries reside, especially our inner urban high density unit precincts.  

With the collapse of these rental markets, some investors will be forced to sell their properties, even at a loss, because they can’t manage the holding costs, such as maintenance, repairs, insurance, rates, management fees and loan repayments. This in turn could lead to a fall in property prices as well as rental income in those areas.

The long-term result will be the opposite of current performance

The longer term performance of these same markets is likely to be the exact opposite of the short term impact. This is because local, then interstate and finally overseas rental demand will be restored once the restrictions are over. On the other hand, the supply of rental properties is likely to be much lower than the potential demand due to sell offs by investors and reductions in the numbers of new high density developments.

This means that property buyers are about to be handed a once in a lifetime opportunity to secure inner urban units at the most affordable prices ever. Once the crisis is behind us and the price declines have ended, these areas will start to deliver both high cash flow and the prospect of soaring price growth.

Let’s not worry about finding black swans, when we will soon be able to fly like eagles.

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The impact of the current crisis on rental markets

The impact of the current crisis on rental markets

The property investment landscape keeps changing almost daily as our governments struggle to keep the economy afloat with new directives and incentives. John Lindeman urges investors to hang in there, because the long-term outlook for rental markets is likely to be totally different to the situation we are facing right now.

There will be a short-term increase in rental supply

As a result of the shut down in the travel, hospitality and recreational industries and a near total movement lockdown, the short-term rental market has collapsed. Owners of holiday homes, short stay rental accommodation and Airbnb type lettings are desperately trying to reposition their empty properties to attract longer-term tenants.

This is leading to a rise in rental vacancies, particularly in areas previously favoured by business travellers, tourists and holiday makers. In addition, many tenants are downsizing, seeking cheaper living options as they try to cope with reducing incomes. The short-term impact for property investors in many locations will be falling asking rents, reduced cash flow and longer vacancy rates. 

For some landlords there will be another hit to their cash flow, with some media outlets portraying the “no eviction” directive as a form of tenant relief, or an excuse for tenants not to pay rent.

The Real Estate Institute of Australia is urging tenants to keep paying rent, as not to do so could affect their credit rating and tenancy record.

Eviction

Even so, there will some who take the opportunity not to pay the rent, while others may be unwillingly forced to go into arrears. This will then have a knock-on effect for investors, as some landlords may decide to sell their properties rather than face the grim prospect of paying the costs of providing accommodation for tenants who are not paying rent in return.

However, abandoning the property market right now could be a huge mistake, as the longer-term scenario for property investment paints a much healthier picture.

There will be a longer-term increase in rental demand

There are two facts that property investors should keep in mind, once we have hopefully safely emerged from the other side of this crisis. The first is that the supply of rental properties will be much lower in future than it is right now.

  • Some investors will sell their properties because they can’t hold on or because they believe that the situation will only deteriorate further.
  • The construction of new housing, especially high and medium density off the plan developments is slowing down.
  • Many potential property investors are adopting a wait and see attitude until they believe the crisis is over and the economy has recovered.

Taken together, these circumstances will lead to a serious shortage of rental accommodation once the crisis has passed.

The second is that the demand for rental accommodation will rise, both from existing households who become renters and from higher numbers of overseas arrivals, most of whom must rent for years before they become sufficiently established here to be able to buy a home of their own.

Australia has always been seen as a land of hope and opportunity after such international tragedies, and this is highly likely to be the case again. The graph shows how our population growth rates peaked in the years following international crises such as the First World War, the Second World War, the Petrodollar crisis and the Global Financial Crisis. 

Even more revealing is the fact that our population has always grown, even during the worst years of war or recession – we have never experienced an actual fall in population, unlike many other countries. This has generated a continuously rising demand for housing, especially in our larger cities.

Once the crisis is behind us, rental shortages will emerge and asking rents will rise again, especially in high density precincts and well-established suburbs. housing prices will follow as property once again becomes the investment asset of choice for most investors. The message from this is; don’t panic – hang in there if you can.

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The toilet paper panic and property prices

John Lindeman reveals the close correlation between the recent toilet paper stampede and the property market.

Many of us were amazed by the recent scenes of people stampeding to buy toilet paper, and some of us may even have joined the frantic rush to grab a few rolls before supplies ran out.

Supermarkets were left without toilet paper for weeks afterwards and with toilet paper supplies only now slowly returning back to normal, many of us are left wondering “What was all that about?”

After all, the actual need for toilet paper did not rise; the shortage was created purely by massive panic buying.

Toilet_paper

In statistical terms, this event was a classic “self-fulfilling prophecy”, which is when the prediction itself causes the result. But did you know that exactly the same panic buying events often occur in the property market?

Man

It starts when we hear about certain locations where properties are selling faster than hot cakes. We are urged to be quick, or we’ll miss out.

More and more investors rush in to buy and they actually create the shortage that is being predicted.

Such frantic buying often leads to dramatic price rises, but unless the demand is backed by a genuine need for more dwellings, the shortage quickly turns into a surplus and prices collapse.

While having cupboards full of surplus toilet paper is not a major issue, buying a property on the basis of speculative demand can lead to real problems. Always make sure that any property investing opportunity you are interested in is backed by actual rental or owner occupier demand, and not purely by demand from speculative investors responding to the same messages as you are.

How will post COVID-19 property markets perform?

Our modelling has revealed that the COVID-19 pandemic is likely to result in significant changes to our housing markets, but also that the immediate, or short-term impacts are likely to be very different to the longer-term outcomes.

Areas with short term risk are easy to identify

There are some property markets where buyer demand is falling right now, such as those relying on tourism, accommodation and recreation services. Regional areas relying on pack-packers to pick fruit and vegetable harvests may also suffer some setbacks. On the other hand, supply is also falling in many suburbs as vendors pull their properties from the market, so any price falls are likely to be short lived.   

Buses

Markets at risk from falling rents are short-term business, holiday, Airbnb and student rental locations. The collapse of these short-term rental markets has forced owners to list them as longer-term rental vacancies, which is leading to a rise in rental vacancies and rents could fall in some locations as a result. This is also likely to be short lived, because when the temporary restrictions on movement and assembly are lifted, these markets will quickly bounce back.

Some suburbs and towns have high growth potential

We expect a general surge in housing demand to occur after the current crisis is over and the restrictions on movement and assembly are lifted. Rental demand will rise as tourism and holiday markets recover and we will experience an influx of migrants from other countries. As a result, many suburbs will experience excellent growth, with buy prices right now at their lowest.

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The current crisis and the future of property prices

The current crisis and the future of property prices

Given the unprecedented situation in which we find ourselves, what is the impact on the value of your homes and investment properties likely to be?

It is a sad fact that apart from the impact of the virus itself, the ever more restrictive controls on our movement and assembly designed to slow down its spread are also having a tragic side effect on employment, business and the economy generally.

The main problem with making any forecasts is that the landscape is changing so quickly that a correct prediction now may turn out to be completely wrong in three months. Even so, here are some facts I can share with you:

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The number of potential property buyers is likely to fall

Sales will fall in coming months because people are losing their jobs, businesses are suffering and the capacity of many potential home buyers to obtain housing finance is being eroded. In addition, even those of us who are not directly affected will delay making major decisions, such as moving house or buying an investment property until the crisis has passed.

Some experts believe that this will result in falling prices and soon there may even be talk of a possible property market crash, but while it is certain that fewer people will buy a home or investment property in the coming months, we need to measure both sides of the equation to get a true perspective.

The number of property listings is also likely to fall

The first effect of a fall in buyer numbers is that fewer properties are sold. This leads to longer days on the market for listed properties and a gradual fall in the number of listed properties as potential sellers take their properties off the market or decide not to sell them until things pick up.

In addition to this, the ban on public auctions and open house inspections will encourage some owners to put off listing their home or investment property for sale in the belief that these bans, plus the dangers of viral contamination will deter all but the most enthusiastic buyers.

The balance between supply and demand is not going to change

The most probable outlook is that any reduction in buyer numbers will be accompanied by a drop in the number of properties listed for sale, so that both demand and supply fall together. In fact, the balance between them may not change significantly, as the graph shows.

Source: John Lindeman, Unlocking the Property Market, published by Wileys

At the worst this trend could lead to a small fall in sale prices and at best, it could see prices rising slightly. Either way it will take many months to become apparent because properties are listed for months before they are sold, and it then takes several more months before the sales data is published.

Ignore the scaremongers who predict a housing market crash

Many experts are comparing the current situation to previous economic crises such as the Global Financial Crisis, the early nineties recession and even to the worst one of all, the Great Depression, when wages and salaries fell from 1930 onwards and unemployment rose to twenty per cent, remaining above ten per cent of the workforce for five years.

Australia’s population kept increasing all through those economically depressed years, but new households had to become renters as housing finance was impossible to obtain. This pushed rents up to fifty per cent of household incomes, while house prices slowly fell, as the graph shows.

 

Source: John Lindeman, Unlocking the Property Market, published by Wileys

The worst year for house values was 1931, when they tumbled by eighteen per cent, but further price falls were minor and in some years prices even rose. There are however, some quite significant differences from those years to the present.

Firstly, the current crisis has not been caused by an economically induced restriction of finance, but a socially created restriction on our movement and assembly. Once these are lifted, economic recovery should be fairly quick. Secondly, our population growth rate is one of the highest in the world, and this will resume when the crisis is over.

The demand for housing will not fall and rents will rise

The main take out from this comparison is that if our population keeps growing in the future (and this is highly likely), then housing demand will rise as well, especially in our major urban centres. Another similarity with the Great Depression is that rental demand will increase and rents may rise if housing finance is difficult to obtain.

The key to survival for both renters and investors is cash flow – rents will go up and so property investors should buy in areas with the highest rental demand and insist on short leases, while renters should look for suburbs with high numbers of rental vacancies and lock in the longest possible lease periods.

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When will Darwin’s housing market boom again?

When will Darwin's housing market boom again?

by John Lindeman

The Darwin housing market is relentlessly continuing its decline, even as recoveries occur elsewhere. John Lindeman explains why, and how to pick this market’s turning point.

The Northern Territory is the most sparsely populated state or territory in Australia and seems much too far away for most investors to get excited about, especially with its house market on a seemingly endless downward spiral. Yet back in 2009 Darwin’s median house price was on a par with that of Sydney as the graph shows and its rental yields were the highest on offer in any capital city.

Syd_Melb_Dar

The dramatic rise in Darwin’s housing prices at the start of the current millennium led many experts to assume that this was connected to the coal and iron ore mining boom which was occurring at the time.

In more recent years, the population of Darwin has been falling and there was a net loss of over 1,000 residents to other States in the last year, but what is behind this exodus? Could it really be due to the end of the mining boom or is this a classic false correlation and there’s actually something else that’s causing people to leave, and leading to a decrease in housing demand?

The Northern Territory economy relies on mining for over 16% of its economic output, but there has not been any decline in demand for its minerals in recent years which would explain Darwin’s fall in population. In fact, demand for the Territory’s non-ferrous and high-technology minerals, fertiliser commodities, gold and uranium have grown in recent years.

Demand for oil and gas has also risen, even though Darwin acts only as a support hub for the offshore oil and gas fields located along our northern coastlines and these operations have little impact on the local housing market.

The secret to Darwin’s housing market performance is that it is the defence capital of Australia, the embarkation point and logistical supply and support centre for virtually all of our overseas military, peacekeeping and border security engagements. Every service person stationed overseas requires the support of ten logistics personnel back in Darwin and so housing demand swells there whenever we have large scale overseas commitments and then it quickly declines again when they end and the personnel leave.

Our successive and significant defence and peacekeeping commitments grew rapidly from 2000 onwards, with 6,000 military and police personnel deployed in East Timor and over 7,000 personnel stationed in the Solomon Islands from 2003.

Thousands of military personnel were also engaged in warfighting operations in Iraq and Afghanistan. These deployments propelled the Darwin housing market upwards as the troops were rotated in and out of Darwin, with support personnel and their families making Darwin a temporary home.

More recently our defence forces have been deployed in the north to combat smuggling and prevent illegal immigration under “Operation Sovereign Borders”. We have participated in international stabilisation efforts in Afghanistan and operations to counter Islamic State, but these commitments have now declined, resulting in the current fall in the city’s population and a decline in Darwin’s housing market.

These high numbers of temporary residents changed the nature of the Darwin housing market for several reasons –

  • The personnel and their families were nearly all renters.
  • Their rents were heavily subsidised, resulting in high rental yields.
  • They left Darwin when their term of duty was over.

Property investors were drawn to Darwin from the early years of the millennium because of the high rents on offer, but with the result that nearly half of all dwellings in Darwin are now investor owned rental properties. When you compare this to the rest of Australia where only one third of dwellings are investor owned, it is easy to see that the high percentage of investor owned properties gives this market its volatility.

While rent demand was rising, rents also increased and investors competed to buy properties. This resulted in high price growth, but when rent demand started falling prices followed, as investors tried to sell their empty properties at the same time.

Only new defence, peace keeping and border security commitments operated in or from Darwin will turn this housing market around, so canny investors will keep an eye on possible changes in our overseas commitments as it is the presence of personnel in Darwin who are associated with our overseas military, peacekeeping and border security activities which underpins demand for housing in the city.

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The pandemic panic and our property markets

The pandemic panic and our property markets

by John Lindeman

The coronavirus outbreak is creating questions, fear and even panic as it spreads and has the potential to affect many of us personally. How will it impact our property markets?

The effects of the coronavirus crisis are proving to be very similar to what took place during the biggest viral outbreak Australia has ever had, the Spanish flu pandemic of 1919.

The similarities are so striking that the outcomes for our property markets are also likely to be the same.

Panic

Unlike shares, which react quickly and violently to such scares, the property market is far less volatile – it takes months before sale prices move in response to changes in demand. We are already seeing a decline in new coronavirus cases reported in China, and by the time any local property market shift is apparent, the worst of the outbreak will probably be behind us. 

The demand for housing will continue to outstrip supply

Housing investors have nothing to fear for one simple reason – housing demand is closely linked to population growth and in that regard, we have one of the fastest growing population rates in the western world. This leaves our largest capital cities in a more or less permanent state of housing undersupply, so that if fewer people can afford to buy, more have to rent.

To find out what the coronavirus outbreak is likely to cause locally we need only look at what took place during the worst pandemic ever to strike our shores.

This was the Spanish flu of 1919, which was brought here by soldiers returning from the First World War and then quickly spread through our major cities.

The current outbreak compared to the Spanish Flu Pandemic

The events which unfolded in response to the Spanish flu are strikingly similar to what is occurring right now. As the media whipped up fear and hysteria with alarmist headlines, people grabbed anything that they thought might protect them.

Overseas arrivals were quarantined, public events were cancelled, people wore facemasks and those infected were isolated and the worst cases hospitalised. By the end of 1919 forty per cent of the population had caught the Spanish flu but only 15,000 people had died.

Housing demand totally overwhelmed the effects of the flu

Despite expectations, capital city housing prices didn’t fall at all, as the graph shows. They actually boomed in 1919 and then continued to rise by more than ten per cent each year until 1921.

Clearly, buyer demand was rising to such an extent that it completely overshadowed the effects of the Spanish flu.  

The reason for this growth in housing demand was a huge rise in our population, as the green line in the graph shows. During 1919 our population grew by over 100,000 people, despite the fact that the Spanish flu had taken 15,000. The increase was caused by soldiers returning home after years away during the war who were joined by thousands of refugees and immigrants fleeing a war-ravaged Europe to start new lives in Australia.

Housing demand is always closely linked to population growth

Our population grew by more than 100,000 each year during the first post war decade and resulted in severe housing shortages in our biggest cities. Housing prices rose for several years and this was followed by rent increases as housing demand grew from those who couldn’t afford to buy.

The similarities to the present are obvious – we have one of the highest population growth rates in the western world as the graph shows.

Our current growth rate is similar to the post First World War period and it is driven largely by permanent overseas arrivals who need immediate housing.

 

Australia is once again set to become the lucky country

As a result of its location, abundant natural resources, vibrant culture and positive outlook, Australia became known as the lucky country. We continue to be seen as a safe haven during times of international strife or recession and the Spanish flu experience shows us that our population growth rates are likely to rise rather than fall once the panic is over and borders are opened again.

There are other significant similarities to the Spanish flu outbreak and the current pandemic as well, such as falling interest rates and plunging share prices. In 1919 Investors abandoned savings and shares and flocked to the safe haven of property. There is every indication that they will do the same again.

Taken together, all these indicators suggest that property prices will continue to rise in our major capital cities despite the pandemic, and that they could rise strongly once coronavirus has become old news.