Signs pointing to tough 2024 for property may be deceptive
Housing cycles were once fairly predictable, but despite economic indicators pointing to a tough 2024 for the property market, things might be different this time around.
I am always asked market predictions and that request has elevated to very high levels as greater uncertainty with greater market uncertainty surfacing.
History has been a great teacher around the real estate cycle. I could usually predict what was going to happen with the market almost to the month, as I have navigated through seven real estate cycles in my career over the past 45-plus years.
The lessons of the past have run through every cycle and while each has had different triggers for market downturns, the outcome is always the same
But for the first time in my career I will say “this time it is different”.
The factors that switch a property market from a boom or a seller’s market into a buyer’s market are predominantly a rise in inflation that comes off the back of strong price growth, that leads to the Reserve Bank of Australia (RBA) being forced to put up interest rates to slow down inflationary pressures.
That leads to a decline in GDP that ultimately leads to a rise in unemployment as businesses shed labour because business has slowed.
This in turn usually forces the unemployed to sell their properties because they are unable to meet their debt obligations. Those forced sellers are more focused on a quick sale then a high price and so they establish the downward trajectory in real estate prices.
It is not until inflationary pressures disappear that the RBA then reduces interest rates, which then leads to increased business activity, which increases employment, which feeds back into a more positive real estate market.
What's so different about 2024's property prospects?
Does any of that sound familiar at present?
Yes, inflation has caused interest rates to rise rapidly. Yes, the economy is starting to slow sharply. Yes, mortgage pressures are almost at peak levels and yes there are some signs of forced sellers in the marketplace.
That is all leading many to predict a tough year in 2024.
However, what is different this time, is the most basic of all drivers of real estate - supply and demand.
The Federal Government have been very clear that they are boosting immigration to record levels – an intake of approximately 500,000 a year over the next couple of years.
That is because the economy has enormous upside potential and that those opportunities need skilled and unskilled labour well in excess of what Australia currently has available.
To boost the economy, we need that migration of labour.
At the same time, we have near record low construction levels. We are simply not building enough homes to house this increased population.
While federal and state governments have announced various housing schemes, history tells us that governments get very bogged down in bureaucracy, which sees timeframes pushed out enormously.
Almost all government schemes end up taking longer and costing more and rarely deliver the outcomes that were originally proposed. At best, it is five-plus years before we will see any real impact in providing supply and in that case the supply will only be modest in number.
What we do know, is that the housing crisis is the worst any of us have ever experienced and the worst of that is the rental market.
Home ownership has been in decline for more than a decade and so the need for rental properties is at the highest level it has ever been, but the supply is not coming online.
That is why for investors, the rental market has been providing the best returns I have seen in 45 years, but even that is not enough to entice enough investors to quickly enter the market.
So, while we are inevitably going to see more forced sellers as we sustain another year of relatively high interest rates, the demands for housing are just simply too high for that to put any weakness into the property market.
My forecast for the road ahead is that demand will outweigh supply and create a rock-solid market moving forward.
Everybody needs a roof over their head one way or another.