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The seasonality myth busted

The seasonality myth busted

As each spring approaches, so do those blogs and click baits assuring us that spring is the best time to sell a property. John Lindeman busts this urban myth wide open, explaining that it’s actually the best time to buy.

Potential sellers are often told that spring is the best time to sell their property and at first, this seems a no brainer.

The weather is warming up, gardens look their flowering best and buyers are returning to the property market in droves after hibernating during the long cold winter.

Sellers are also frequently warned that summer is not a good time to sell, because it’s too hot, with many prospective buyers on holidays and not concerned about buying property.

Even worse is winter they’re told, because the cold and wet weather deter all but the most enthusiastic buyers.

There are fewer listings in summer and more in spring

These perceptions have a definite effect on seller behaviour because they encourage fewer vendors list their properties for sale in summer or winter, believing that their homes will take longer to sell and bring in lower prices because there will be fewer potential buyers in the market.

They also motivate more potential sellers to list their properties for sale in spring because they think that there will be more buyers competing in the market. 

They believe that their properties are likely to sell more quickly and for higher prices.

So, all else being equal, you can see that this thinking results in there being fewer properties listed for sale in summer and winter, and more properties on the market in spring and autumn. It is all based on the notion there will be fewer potential buyers in summer and winter and more in spring and autumn. So, is this really what happens?

Australia doesn’t have huge seasonal climate differences

The first issue is that “seasonality” originated in the USA where the weather changes dramatically with the seasons. That’s not the case in Australia – our winters are relatively mild and in cities with temperate or tropical climates such as Perth, Adelaide, Sydney, Darwin and Brisbane, winter is a good time to go house hunting while spring is already sometimes too hot.

Even in our colder winter cities such as Canberra, Hobart or Melbourne, fans flock in their thousands to watch football games and the weather is seldom harsh enough to keep people indoors for long. The seasons don’t affect buyer behaviour as they might in other countries, but there’s a far more important reason why buyer numbers don’t change.

Buyer numbers don’t change by the seasons

It’s simply because the way in which we search for properties has dramatically changed in recent years and now has little to do with the changing seasons.

Virtually all potential buyers no longer do their initial research by travelling from one real estate agent to the next or going on physical inspections, but by visiting on-line listing sites.

They do this all year round, whether it’s raining, snowing or sunny and from the comfort of their homes, at work or while on holidays.

They take virtual tours of a property, including all the rooms and even the surroundings, organise video walkthroughs of each room with the agent, take a virtual walk down the street with Street View and check out the local area with Google Earth.  

As far as residential property buying goes, the internet has been a game changer and is the main reason that buyer searches are no longer seasonal in the way that they may have been many years ago. The idea that “spring is the best time to sell” has become an urban myth, and no longer has any connection with reality.

In short, there is no overall seasonal change in buyer demand patterns and the days when buyer demand rose in spring, or real estate agents were able to lock up their offices and go on summer holidays are long gone.

Yet the persistence of the seasonality myth encourages more vendors to try and sell in spring, and fewer to list properties in summer and winter. This has the exact opposite effect of what they think will happen.

Seasonality as perceived by potential sellers

This picture shows you how potential sellers think that seasonality works. They are told that there are more buyers searching for properties in spring and fewer in other seasons, especially during summer and winter, so they believe that by listing their properties in spring or autumn they will sell quickly and for the best price, because there are more potential buyers looking for properties.  

This encourages more potential sellers to list in spring and fewer in summer

As a result of the seasonality myth, more potential sellers list properties for sale in spring, fewer in autumn, and even fewer again in summer and winter. This would be fine if the numbers of potential buyers followed the same seasonal pattern, but as we have seen, the numbers of potential buyers don’t change with the seasons.

This picture illustrates what actually takes place in the property market during each season. The numbers of buyers remain steady all year, but the numbers of listed properties rise in spring and fall in summer and winter.

Of course, there are many other dynamics that can move property market prices during the course of a year, such as interest rate changes and population growth or decline. But when these are taken out of the equation, seasonality itself has no impact, but the seasonality myth certainly does.

This means that spring is the best time to buy a property because there are more listings and vendors are competing for buyers, while summer or winter are the best times to sell because there are fewer listings and potential buyers are competing for properties.

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How the snowball effect creates booms

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.

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Facing the biggest fear of all

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.

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Rental market winners and losers

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.

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Be cautious with the COVID Census

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.

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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!

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The mindset of successful investors

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.

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Why property prices will keep rising

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.


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

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Why houses and units perform differently  

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.  

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Putting your eggs in one basket

Putting your eggs in one basket

If we were completely confident about the performance of our investments, there would be no point in spreading them around to avoid risk. We would simply put all our eggs in one basket, and invest where the results were going to be the best.

The only reason that investors balance their portfolios is because they aren’t confident about the outcomes, and so they diversify to minimise any potential risk. The logic is that if one of their property investments falters, good performance in the others will still give them an acceptable overall result.

However, spreading your investments around by choosing different types of properties, different locations or even buying in different States doesn’t necessarily cut any potential for loss, because all the areas or types of property or types of property you have chosen still be at risk. 

Let’s look at some of the most common strategies investors use to minimise their exposure to risk and see which of them makes the most sense.

Spreading properties between capital cities and regional areas

Australia’s regional property markets do occasionally outperform capital cities, but their performance is far more volatile This is because housing demand is often limited to one or two sources, such as mining or tourism, or when large numbers of buyers periodically relocate to regional areas.  

This means that if there is strong evidence that a particular regional or rural market is about to boom, it will still be important for you to identify the cause, so that you can “time” the right moment to invest and anticipate when the growth is about to end. 

This means that if there is strong evidence that a particular regional or rural market is about to boom, it will still be important for you to identify the cause, so that you can “time” the right moment to invest and anticipate when the growth is about to end.  

Diversifying in different States

Some investors believe they can minimise their risk by purchasing their properties in several different States or Territories.  

However, this can lead to a huge mistake being made if the properties are all located in the same type of market.

For example, you might diversify your portfolio across several States, but if they are all located in towns with a reliance on the same industry such as mining or tourism, then they are all still located in the same type of market, which means that you haven’t really balanced your risk at all.

Buying several different types of properties

Other investors diversify by purchasing different types of properties, such as houses, units, townhouses, duplexes and apartments.

Unfortunately this doesn’t reduce risk, because each of these types of property can perform differently, even in the same suburb.  

Always invest in areas with the greatest potential housing demand

Irrespective of where you decide to invest, you need to look at the single most important fact about housing investment. The best investments will always be where the demand for housing is so great that it leads to housing shortages.

Strong rental demand delivers cash flow

Rental markets are far more volatile than owner-occupier markets, because the people who live in the dwellings don’t own them, while the investors who own them don’t live in them.

This volatility provides opportunity as well as risk.

Rental markets can offer you high positive cash flow, but also high risk if the rental demand slows down or the market is over developed with new dwellings being sold to investors.

Strong buyer demand delivers price growth

If you are seeking sustained capital growth without speculative risk, you can choose from first home buyer markets located in urban growth corridors and outer suburbs, upgrader areas situated in well-established upper socio-economic areas and downsizer locations located in attractive retiree destinations.

If you are certain that one type of market is about to boom, it makes sense to concentrate all your properties in that type of market.

The only diversification you might then make would be to minimise State land taxes and the impact of natural catastrophes such as floods, bushfires or cyclones.

This is why it is best to limit the diversification of your portfolio to those types of markets which have the best potential to provide the outcomes from property investment that you are looking for.