Blogs Archives - Page 2 of 6 - Lindeman Reports

Posted on October 17, 2022October 17, 2022 by John Lindeman

How to predict cryptocurrency performance

Many investors are tinkering with cryptocurrencies and wondering where they fit in a properly balanced portfolio. John Lindeman reveals their true place in the investment matrix, and explains how they are likely to perform in future.

Bitcoin was promoted as “digital gold” after a meteoric rise in price following its launch around fifteen years ago. Despite some spectacular crashes, cryptocurrency advocates still insist that they are a secure form of investment, being high tech, innovative, blockchain based and disruptive.

This conveniently ignores their extremely volatile recent performance. For example, Bitcoin’s price has swerved from a high of $93,385 to a low of $25,663 in the last twelve months, and this highly volatile performance gives investors no real clue to its potential performance. It is clear that cryptos do not perform like gold, savings or property, so how can investors make informed trading decisions?

Crypto investors are increasingly using the stock market as a guide

Without any reliable forecasting guide, cryptocurrency investors are reacting to market indicators such as inflation, interest rates and investor confidence in the same way that stock market investors do. This is because shares and cryptos have many features in common, such as the ease, speed and low cost of trading, plus of course, their volatility.

The result is that more cryptos are purchased when investors are buying shares, and more are sold when share investors are also selling.

So, cryptocurrencies are starting to perform as if they were pseudo shares, but there’s one crucial difference between cryptos and shares.

Shares represent real equity, not virtual keys and wallets

Shares represent equity in a company, so you are “sharing” ownership of the company itself. The better that a company performs, the more investors will compete to buy its shares. But, when you buy cryptocurrency, you don’t own anything other than a private key and a digital wallet, so the value of your investment is controlled entirely by notional demand or the lack of it.

This means that while the direction of crypto prices will generally mirror that of the stock market, the intensity of change is likely to be much greater, which is exactly what we have witnessed this year.

The graph shows that year to date falls in major crypto prices have been far more severe than those experienced by the Dow Jones or ASX.

The growing link between share prices and cryptos indicates that any stock market recovery should be accompanied by a massive rise in the price of many cryptos, but which ones? There’s no guarantee that yours will be one of them. This is why Investors should treat cryptos as a high risk boom-bust investment option, offering the same wild roller coaster rides as speculative shares which are bought on hope rather than sustainable business models.

Posted on September 19, 2022October 17, 2022 by John Lindeman

The coming cash flow bonanza

Many investors are wary of buying properties in areas with a high percentage of rentals, perceiving them as being low income, socially disadvantaged areas with high levels of unemployment and public safety issues.

But, is there really any logic to this anti-rental stigma? Such negative thinking could even lead some of us to miss out on the huge cash flow bonanza which is about to be unleashed in many of our property markets. The first thing that investors need to understand is that locations with high numbers of renters are often also the most affluent and that for many households, renting is a lifestyle choice.

Most renters are young, professional opportunity seekers

This graph shows you that wealthy countries with high per-capita incomes such as Switzerland, Hong Kong, Germany and South Korea, also have the highest percentages of renters.

In some countries such as Switzerland, the number of renting households even outnumbers those of owner-occupiers.

It’s a totally different situation in countries with low numbers of renters, such as Albania, Romania, Slovakia and Cuba which are also low income and even economically challenged.

This would seem to indicate that the higher the percentage of renters in a city, region or country, the more affluent or wealthy it is likely to be.

For example, many high income, aspirational young professionals choose to rent in inner high density suburbs such as Docklands, Southbank, Barangaroo, Fortitude Valley or Newstead because these locations offer a wealth of lifestyle, employment, education and entertainment options not available elsewhere. Not only is it cheaper for them to rent than buy, but they can live in an apartment which they could never afford to purchase anyway.

It’s critical that the numbers of the right types of renters is growing

While investing in an area which has the right type of renting households is important, it is also essential that their numbers are likely to increase, because this leads to rental shortages and rising rents.

Since February our international borders have been progressively opened to overseas arrivals, a process which was significantly increased at the recent Jobs and Skills Summit, with the announcement of 195,000 applicants to be accepted under the Work Visa process. They will be joined by thousands of Family, Student and Business Visa arrivals. The vast majority of these new arrivals will be young, aspirational opportunity seekers, and definitely the right type of renters.

But when we compare their numbers to the total advertised rental vacancies in each State and Territory for all types of dwellings it is obvious that the numbers don’t stack up.

With only 51,000 rental vacancies in Australia, we are facing a massive rental shortage unlike any seen before.

Such rental crises have been partially resolved in the past by renters reluctantly moving into boarding houses, temporary dwellings, granny flats, caravan and holiday parks, even hotels and motels, but the real solution can only be a massive increase in the supply of new rental accommodation. This turns up another issue, because the locations offering lifestyle, employment and education opportunities sought by renters are usually not the same as those preferred by developers.

As asking rents keep rising, this will generate a massive number of investors seeking high cash flow, but even then it is unlikely that the numbers of investors in inner urban locations will be sufficient to meet future rental demand and a huge cash flow bonanza is highly likely.

Posted on August 11, 2022August 11, 2022 by John Lindeman

How the snowball effect creates booms

Housing markets sometimes produce unexpected and dramatic periods of growth after many years of price stagnation. John Lindeman explains that this occurs when the demand for housing starts to exceed the supply of available properties, leading to a snowball effect.

Hobart is one of our prettiest cities, framed by majestic Mount Wellington and the sparkling waters of the Derwent Estuary. A decade ago, it was also the cheapest capital city in Australia to buy property, with a typical three-bedroom house costing around $350,000, half of the then median price in Sydney.

As the graph shows. From 2010 to 2016 Hobart experienced very little price growth giving investors or developers no incentive to buy or build property. Yet the city’s population was quietly growing, generating demand for around 1,000 new dwellings each year. Because of the lack of new housing development, virtually all buyer demand was for established properties.

By mid 2016 a tipping point was reached, as the demand for housing was higher than the number of dwellings for sale.

Hobart’s house prices suddenly boomed with a fifty percent rise occurring in just three years. This led many experts to speculate on what had caused Hobart’s property market to boom so unexpectedly.

The snowball effect is created by a growing shortage of properties

Hobart’s house prices started to rise because the demand for properties had begun to exceed the number for sale.

Constant buyer demand caused the supply to keep falling, creating a snowball effect as prices started to escalate. Hobart was Australia’s best performing capital city housing market for the next three years.

Predicting Hobart’s housing market boom

Back in early 2016 our Housing Market Prediction Solution revealed that the number of properties listed for sale in Hobart was declining, and that potential buyers were beginning to outnumber the supply of properties available for purchase.

The lack of new housing meant that buyers had to compete for established properties. As listings were falling rapidly, it was obvious that the snowball effect was about to occur, and I made my now famous Hobart boom prediction in the property media.

The Brisbane property market boom from 2019 to 2022

Brisbane’s property market has seen house prices more than trebling in the last three years due to the same sequence of events.

Before 2019 the city’s population growth rate of nearly two percent was creating a need for 20,000 new homes each year. But there had been little price growth and Brisbane’s median house price remained below $550,000.

Developers could not compete on price with established homes and the rate of new housing builds slowed down.

The Brisbane property market reached its tipping point in 2019 and over the next three years, Brisbane’s housing prices have boomed, with property values growing by over one third as buyers compete for the stock remaining.

Which city will experience the snowball effect next?

Perth’s population continues to grow and there’s a need for around 15,000 new homes each year. However, Perth’s median house price of $550,000 has only just recently recovered back to where it was a decade ago. This has led to little interest from investors or developers and housing construction numbers have declined in recent years, with developers unable to compete on price with existing dwellings.

Is Perth’s housing market about to experience a similar snowball effect to Hobart and Brisbane? To find out we consulted our Housing Market Prediction Solution.

This shows that the number of listings in Perth has been falling and that buyer demand is now higher than the number of properties for sale on the market.

There is every indication that house prices could start to rise strongly in Perth and based on our studies of the snowball effect, Perth could become Australia’s best performing capital city housing market over the next few years.

Posted on July 23, 2022July 23, 2022 by John Lindeman

Facing the biggest fear of all

Buyer demand is falling in all our property markets, yet the cause of this hesitancy is not solely due to interest rate rises, but the fear and even panic that rate hikes create about possible housing price falls or even crashes.

This fear of the unknown explains why potential property buyers are holding back, even though most of them either have no need of housing finance or are relatively immune from rate hikes.

The chart shows that thirty per cent of homeowners have no remaining housing debt, and have no need of housing finance when they buy another home.

Another thirty per cent are investors who claim the cost of housing finance interest and can also raise asking rents to recoup the cost of interest rate rises.

Twenty per cent are upgraders who purchased their homes many years ago when rates were much higher than they are now and for whom a rise in interest rates is quite manageable.

The remaining ten percent are first home buyers who need to borrow most of the price of a property. In theory, this segment of the buyer market is the only one that is directly hammered when interest rates rise, because higher rates reduce their buying power.

Why buyer demand has slowed down

Yet buyer demand has fallen in every market and from all types of buyers, because we become scared about what might happen to prices generally. Fear is one of our strongest survival instincts and facing the unknown is one of our biggest fears. This is why potential buyers are holding back, waiting to see if more rate rises are coming, leading to a property market crash. Even though the experts assure us that all is well, our instincts take over, urging us to wait until the dust settles.

The best way to analyse this phenomenon and the possible outcomes is to look back to the last time that interest rates took a significant upwards hike, which was in 2009-10. (Shown with the red arrow in the graph.) This is because some bank economists are forecasting that a similar rate hike is likely to occur again and that savage falls in property prices will occur as a result.

The rate rise in 2009-10 was the biggest in modern history, but the graph shows that it took the RBA more than a year to implement.

We then had a series of interest rate reductions over the next eight years until the home loan rate was lower than it had been before.

There were no crashes the last time rates rose significantly

What happened to property prices as a result is shown in the graph below. Buyer demand slowed, but while prices fell slightly in cities such as Brisbane and Perth over the next few years, there were no price crashes, and prices kept rising in Sydney and Melbourne although growth was more subdued.

The reason that rate rises don’t lead to property market crashes is that only a small percentage of homeowners are directly impacted, and even fewer are forced to sell because they can’t manage their repayments. The majority simply wait until some certainty returns.

Confidence gradually returned to the property market as interest rates started falling from 2011 onwards and this is exactly what is likely to happen again. In other words, once rates stop rising and it’s obvious that the market is not going to crash, buyer and seller demand will pick up again.

Posted on July 15, 2022July 15, 2022 by John Lindeman

Rental market winners and losers

Rising interest rates, strong population growth and a worsening housing shortage are pushing rental demand well ahead of rental vacancies. While the outlook for renters is bleak, with asking rents about to surge strongly in many areas, this also means that property investors seeking positive cashflow properties will be the winners.

There are two reasons for the growing shortage of rentals. The demand for rental properties is rising strongly and at the same time the rate at which new dwellings are being built is falling. Housing construction has been impacted by rising costs and shortages in both materials and labour which have led to a dramatic fall in the rate of new housing development over the last two years.

Australia’s building timber stocks have been nearly wiped out by the east coast megafires of 2019-20 which were unprecedented in their extent and intensity. This has led to a critical shortage of softwoods used for cladding and frames, with rising prices for metal, structural steel, reinforcing, fixings and fencing, plus soaring fuel, freight and electricity costs.

In addition, two years of international border closures have left developers struggling with an acute shortage of qualified construction workers. As cost and time blowouts worsen, more builders are leaving the industry or going to the wall. The net result is that fewer new homes are being constructed and it’s taking up to a year longer than expected to complete them.

Population growth has continued, and rental demand is rising

Even with closed borders and no overseas migrant arrivals for over two years, our population has kept growing. People are still setting up new households and creating more demand for accommodation, especially rentals. Renters are also likely to be renting for longer than they expected, because higher interest rates reduce their buying power.

This combination of increasing rental demand and insufficient rental supply has created an acute rental shortage, and it’s getting worse.

The graph compares current rental vacancy rates in each State and Territory to those one year ago. They have been falling in all States except Western Australia.

Rental vacancy rates below three percent mean that rents will rise

This is highly significant because our studies have shown that when rental vacancy rates exceed ten percent, all asking rents in an area will be falling, but when they fall below three percent, all asking rents will be rising.

With rental vacancy rates at three percent or less in all States and Territories, asking rents will be rising strongly almost everywhere, but is this situation likely to worsen or improve in future?

Rental demand is likely to rise strongly in future

Rental demand is generated by new households, students, tourist industry workers, permanent renters and construction workers, but the main source of rental demand prior to international border closures were permanent arrivals from overseas. In 2019 Australia’s population increased by 390,000 of which 250,000 (or over sixty-two percent) were migrant arrivals. We can expect their numbers to grow in the next year and beyond as international borders reopen.

Not only can we expect the numbers of overseas arrivals to start rising again, but most of these households must rent on arrival, and remain renters for several years before they are sufficiently well established to buy their first home. Rental demand, especially in the inner urban areas of our major cities is expected to shoot upwards as a result and is highly likely to send asking rents soaring.

The graph shows the potential rental shortages or surpluses in each State and Territory over the next year.

We have compared the likely availability of rental dwellings to the expected demand for them from new renting households, permanent renters, interstate movers and international arrivals.

Can a massive rental supply crisis be averted or corrected?

There are only two ways that such a shortfall can be prevented or corrected. The first is by direct government action, dramatically reducing the number of permanent arrivals to Australia. This would not only lead to even more labour shortages, but could also result in a wages and salary explosion with worsening inflation.

The second is by a massive increase in the number of new homes being constructed. This would require a direct reversal of the current trend which saw dwelling approvals over the last year fall by nearly twenty-five percent. Such new dwellings would also need to be located in areas with the greatest potential rental demand, which are often not the locations favoured by developers.

As neither of these solutions are likely to occur in the foreseeable future, we are entering a period when investors looking for positive cash flow will be the winners.

Posted on July 10, 2022July 15, 2022 by John Lindeman

Be cautious with the COVID Census

The last Census was conducted in August 2021, when our international borders had been closed for over eighteen months, State borders were firmly shut and the southern capital cities were in lockdown.

Much of the data illustrates the abnormalities that these restrictions on movement caused, but the stats also reveal how some people simply avoided them altogether by secretly slipping away to safety.

There have only been a few times when Australian’s have felt sufficiently threatened to make a run for safety, such as during the Second World War. Many Sydney homeowners feared invasion, and some fled over the mountains, returning when the danger was over. The new Census data has revealed that some people did the same thing during the pandemic.

There was a secret slip away to safety

People who were lucky enough to have holiday homes located away from the lockdowns, restrictions on movement and the COVID-19 threat itself were able to quietly relocate to the safety of their holiday homes until the danger had dissipated.

One of the most public of these slip aways was that of former NSW Arts Minister Don Harwin, who was fined $1,000 by police and resigned his portfolio when he was discovered living at his Pearl Beach holiday home in an apparent breach of the coronavirus public health orders.

Holiday homes were used as bolt holes

There are around one million holiday homes around Australia, mostly only occupied during peak holiday seasons, but the last Census, which was conducted in August when Sydney, Melbourne and Canberra were in lockdown, shows that many of these were temporarily occupied during the pandemic as bolt holes.

With Melbourne being the most locked down city in the world during the crisis, it’s not surprising that the percentage of empty holiday homes in regional Victoria fell dramatically when the 2016 Census figures are compared to last year’s “pandemic” Census. In other words, the number of holiday homes that were occupied during the Census actually rose, even though they would not normally have been occupied in August, when the Census is conducted.

This slip away to safety also occurred in New South Wales with Sydney in lockdown during the 2021 Census. The figures show that the percentage of holiday homes that were occupied during the lockdowns rose when compared to the previous Census.

Empty holiday home numbers actually rose in no lockdown states

This flight to safety did not occur in States where there were no lockdowns in force at the time of the 2021 Census, as the data from some of the most popular holiday home locations in Queensland, Western Australia and Tasmania clearly shows.

It seems that many people in Sydney, Melbourne and Canberra slipped away not just to avoid catching the virus, but to get away from lockdowns, while there was no such motivation in Brisbane, Adelaide or Perth, where no lockdowns were in place.

Much of the 2021 Census data was skewed by the pandemic

The slip away to safety highlights the fact that last year’s Census was conducted at a very unusual time in our history. Much of the data collected was not typical, with closed international and State borders, restrictions on movement and lockdowns in place during the Census in many areas.

For example, rental demand in the Melbourne CBD collapsed during the pandemic because of closed borders and lockdowns. The number of unoccupied units trebled from 2016 to 2021 with nearly one third of inner Melbourne apartments being empty during the 2021 Census.

It’s a similar story in student precincts, where the number of students dropped dramatically as they returned home. Kelvin Grove is an inner suburb of Brisbane with several tertiary institutions and a teaching hospital. The number of student group households fell by 25% during the pandemic.

Tourism came to a sudden end in popular holiday locations and the number of workers in tourist related industries such as accommodation, hospitality, restaurants and specialist retail fell. As most of these are usually students and backpackers, rental demand collapsed as well.

While the 2021 Census data will still be extremely useful, this is one Census where the information will need careful checking to see if the data may have been skewed by the impact of restrictions on movement, lockdowns, interstate travel, social distancing and international border closures that were in place at the time. And of course, the stats show us that not all people obeyed the health regulations and simply fled to the safety of their holiday homes until the lockdowns were over.

Posted on June 14, 2022June 14, 2022 by John Lindeman

Tips and traps of buying overseas

Tips and Traps of buying overseas

As price growth in our housing market slows down and some areas are experiencing price falls, many investors are once again turning their attention to buying overseas.

John Lindeman reports that you can’t buy a property in some countries unless you are a citizen, while buying property in others can earn you a residency permit.

You can even buy a villa or even an entire estate in some parts of Italy for €1. Yes, that’s right, just one euro. So, what’s the catch?

Many houses in Italy’s most picturesque locations have fallen into decay as their owners pass away and younger people move away.

To combat the issue, authorities in regions such as Sicily, Sardinia and Tuscany are offering these once grand villas and even whole estates at buy prices of only €1.

The only condition is that buyers must renovate their properties. The aim is to restore towns with medieval, Saracen or even Roman heritage buildings that have fallen into disrepair and boost local economies by encouraging more tourists to visit.

Buy a property in Spain and receive an honorary residency permit

Some countries enthusiastically welcome overseas property buyers, with Spain and Portugal even offering residency permit enticements to foreigners who buy a property worth over €500,000.

This is because housing demand in many European and Asian countries is flat as their populations decline. Not only are fewer babies being born, but young people are also emigrating.

You can’t buy a property in Switzerland unless you are a citizen

The opposite applies in Switzerland, where the government is charged with discouraging foreign immigration and restricts property ownership to those people who are citizens. But before you jump into foreign home ownership, it is also important for you to know the tax and legal systems that apply, as they could be very different from ours.

Beware of wealth, property, value added and inheritance taxes

For example, if you rent out the property during your absence, both the local country and Australia may tax your income from rent, unless Australia has an arrangement with the other country which takes the tax you have paid overseas on rental income into account.

Most countries have a capital gains tax, plus an ongoing property tax similar to our state-based land taxes, but some also have property related taxes that do not exist in Australia.

These include value added tax, which is applied to improvements made by the owner, wealth tax applied to properties worth more than certain amounts and inheritance tax which kicks in when the property passes to beneficiaries.

In some countries, inheritance tax is low or non-existent when properties are left to spouses or children, but become onerous when estates are left to others, or if immediate family are bypassed in a will.

And on the subject of inheritance, it is worth noting that some countries oblige you to leave your property to your next of kin in accordance with the established practice of the country.

This means that your lover or mistress, if you have one in France, is entitled to a share of your French estate when you pass away. This could be quite a shock to the family back home!

Posted on April 12, 2022April 12, 2022 by John Lindeman

The mindset of successful investors

Over the last fifteen years I have answered hundreds of questions from property investors at live training events, workshops and bootcamps, but never so many and none so urgent as when markets begin to stagnate, and the future seems uncertain.

Here are the four most pressing questions I’ve received at such times and my answers, which may help you to achieve your own mindset for investment success.

How important is timing my purchase vs time in market?

Baron Rothschild once famously said, Buy when there’s blood in the streets. What he meant is that the best time to buy is when everyone else is trying to sell.

The issue with this is that we don’t know that the bottom has been reached until growth has returned, so buying at the apparent bottom could only mean further falls are coming.

To this famous quote I would add: Buy when there’s blood in the streets, but not if it’s yours.

In other words, it’s never a good time to take risks with your investments, especially with property which is easily the biggest investment most of us will ever make. The best time to buy is when we are confident that good growth is about to return, or has already started.

How can I take a long term perspective, when the news is becoming negative?

Over the last decade, our news sources have changed dramatically. We now rely on digitally delivered media for the news that we traditionally obtained from magazines, periodicals and daily newspapers.

As a direct result, the use by or expiry date of news stories has shrunk from weeks to hours and even less with grabs and headlines only catching our eye for seconds.

Our news sources focus on immediate and imminent issues, on breaking news rather than in depth analysis. Don’t expect such news sources to deliver any insights into property investment, but rely on proven and trusted providers of property market information to give you their long term perspectives.

How long should I hold a property to see great results?

There is no one answer to this question, because every suburb and each property is different, offering a mix of risk, volatility, cash flow and growth potential. The period of time you need to hold also depends on your desired outcomes, which could be quick market driven growth for a renovation or small development, consistent cash flow and growth for a SMSF investment, or long term buy and hold security.

In general, the areas and types of property which offer speedy price growth also carry the greatest risk of price falls, because they tend to have large numbers of renters and investors.

Renters don’t own the properties they live in, so they tend to move often, while investors don’t live in the properties they own, so they can buy or sell more easily when conditions change.

So, rather than being a matter of time, it’s a matter of choosing the areas and types of property which have the best potential to deliver the results you want.

How can I get over the disease of analysis paralysis?

It’s no wonder that investors often end up confused, with so much information and so many contradictory forecasts to choose from.

Over the years I have seen an incredible array of property related stats, housing data and economic information being used by different theorists and strategists at various times to make their housing market predictions.

They have relied on finance data, population trends, unemployment stats, housing approvals, affordability, stock on market, vendor discounting, time on market, auction clearance rates, rental yields, gentrification, property clocks, past performance, market cycles, market tightness, on-line search trends, prices, sales, listings and many more to generate their forecasts.

The only thing missing from this list is probably the study of tea leaves, or maybe tarot card readings. The point is that there is not just so much data available, there is too much data.

The easiest way to get over analysis paralysis is to rely only on information provided by recognised analysts or experts with proven published records of past success, and who use statistical methodologies which have stood the test of time and delivered a consistently high rate of accuracy.

Posted on March 12, 2022March 14, 2022 by John Lindeman

Why property prices will keep rising

Some bank economists are predicting that house prices will fall this year or in 2023 as interest rates increase, but property market analyst John Lindeman explains why property prices will continue to rise.

Economists are concerned that the Reserve Bank will soon raise interest rates to slow down inflation, because inflation is very hard to reign in once it takes hold. They believe that higher interest rates will make housing less affordable, and that lower buyer demand will then push prices down.

It seems to make sense that higher borrowing costs will reduce buyer demand and therefore prices will fall. But, it’s hard to test this theory, because interest rates have gradually declined since 1990 when the standard variable home loan rate was an eye watering 13.5%.

For over 30 years property prices have grown and interest rates have fallen

The graph tracks this gradual fall in loan rates since 1990 and shows that it has been accompanied by a steady rise in Australian median house prices over the same time.

There certainly is a strong correlation between falling interest rates and rising property prices, but does this mean that the reverse is also true? How can we be sure that if interest rates rise, property prices will fall?

In the last 30 years property prices did not fall when interest rates rose

The major banks have lifted their standard variable home loan rates several times since 1990 and the last rises in the official cash rate ended over a decade ago in 2011. This graph shows you the change in the Australian median house price that took place after each group of rate rises occurred.

As the graph shows, house prices did not fall as a result of interest rate rises. It is possible, of course that property prices might have increased more quickly if interest rates hadn’t gone up when they did, but the point is that they did not fall. The simple reason for this apparent contradiction is that most of our property owners are immune from or resilient to the impact of interest rate rises.

Most of our property owners are immune from interest rate hikes

One third of our housing is fully owned, with mortgages having been paid off and there’s no remaining debt.

The owners are mostly older couples living in empty nests and when they sell, it will be to downsize. This means that interest rate rises are of no concern to them.

Another third of our housing stock is owned by investors who can claim the cost of housing finance interest against all their other income. This means that interest rate rises reduce the amount of income tax they pay. In addition, they can also raise asking rents on their properties to recoup the cost of any interest rate rises.

Only one third of our residential properties have mortgages which are being paid off by owner-occupiers. Most of them, however, purchased their homes many years ago when rates were much higher than they are now. Their financial situations have improved since then and they have probably paid down some of their debt, so a rise in interest rates is quite manageable and does not motivate or force them to sell their homes.

Only first home buyers are badly impacted when interest rates rise

Higher interest rates impact the purchasing power of potential first home buyers more than other property buyers because they need to borrow most of the purchase price. This graph shows how the number of first home buyer housing finance loans fell in 2012 after the last succession of interest rate rises took place.

Some highly leveraged recent first time buyers in new outer suburban first home buyer areas may experience mortgage stress when interest rates go up. If enough of them are forced to sell for personal, family, financial or employment reasons and the number of potential first home buyers also falls, there is a risk that property values in first home buyer locations may fall.

First home buyers only comprise around one tenth of all home owners, and despite the personal and social impact of such events when they have occurred in the past, local markets have always bounced back into growth within a few months. Yet there have been several times in the past when our housing market as a whole has fallen in value and this suggests that there must be another cause.

Housing prices fall when the amount of housing finance is restricted

This graph shows annual Australian capital city house price changes from 1901 to the present. The red arrows indicate years when house prices went negative, and property owners experienced a fall in the value of their dwellings.

The only times when housing prices went backwards were during the First World War, the Great Depression, the Sixties Credit Squeeze, the Recession “We had to have”, the Global Financial Crisis and most recently, as a result of APRA restrictions on the amount of housing finance that investors could obtain from the banks.

Each of these events was a recessionary crisis which severely cut the amount of housing finance that was available to property buyers. Unlike interest rate rises, which may impact only around ten percent of property owners, a lack of housing finance affects all potential first home buyers, upgraders and investors, who together make up two thirds of our housing market.

This is why house prices don’t fall when interest rates rise, but when there’s not enough housing finance available to potential buyers.

The aim of interest rate rises is to curb inflation, not hit housing prices

Interest rate hikes are a broad brush tool which the Reserve Bank uses to slow down inflation. The graph shows past groups of rate rises and how this tactic has worked in the past. It’s the reason why interest rates will increase again if the rate of inflation grows.

Because rising interest rates only impact a small percentage of home owners, we should look at the reason that they are increased, which is to slow down the rate of inflation. Is there a link between rising inflation and housing prices?

Housing prices have always moved in sync with the rate of inflation

This graph shows the relationship between capital city house prices and inflation from 1901 to the present time and demonstrates that housing price movements and inflation have always been in sync with each other.

In fact, as the graph also shows, housing prices have historically tended to move more vigorously than inflation rates but always in the same direction.

In addition, the graph demonstrates that during periods of rapidly rising inflation such as the post-war years and the seventies hyperinflation years, housing prices experienced their most dramatic price growth in our history.

In summary, it is clear that interest rate rises only impact a small percentage of property owners, while property prices on the whole rise whenever the rate of inflation increases. If inflation goes up this year or next, so will property prices.

Sources

Basic Community Profiles 2016 Australian Housing Tenure, Australian Bureau of Statistics
Lending Indicators (First Home Buyers), January 2022 Australian Bureau of Statistics
House Price Indexes: Eight Capital Cities, 6416.0 Australian Bureau of Statistics
Housing Finance Australia 5609.0, Australian Bureau of Statistics
CoreLogic Home Property Value Index, CoreLogic published Monthly Indices
Cash rates and standard variable home loan rates, Reserve Bank of Australia Statistics
Inflation from A Series, B Series, C Series, D Series, IRPI and CPI data obtained via Data on Request, Australian Bureau of Statistics

Posted on March 12, 2022March 12, 2022 by John Lindeman

Why houses and units perform differently

Many forecasters lump all types of properties and all areas and localities together, as if they always perform the same, but just as one suburb can perform differently from another, the performance of houses and units can vary significantly, even in the same locality.

We’ve produced some heat maps using our patented Housing Market Prediction Solution to compare the forecast growth potential in Sydney Local Government Areas for houses and units during the rest of 2022.

These two heat maps show you that Sydney units and houses, even in the same council areas, are likely to perform very differently over the next nine months.

The reason for these variations in their predicted performance is that unit and house markets respond to different dynamics.

For example, most units are investor owned which means that their performance is tied to current and future rental demand. As our international borders reopen, we can expect a huge rise in migrant and refugee arrivals, most of whom will settle in areas near employment opportunities and where rents are more affordable. Rising rents will motivate more investors to buy units in these locations and prices will increase.

On the other hand, eighty per cent of houses and townhouses are purchased as homes. Recent price rises and prospective interest rate increases will cut buyer demand in first home buyer locations, but have less effect in upper socio-economic areas, where price growth is likely to continue.

That’s why houses and units can perform differently in the same area at the same time.