The market is in chaos, but does that make it a once-in-a-decade opportunity

Six months ago, the Australian property market was awash with confidence. Now, according to property strategist Steve Douglas, Executive Chairman of SMATS Group, “chaos is all over the country”.

Buyers are waiting and sellers are hesitating. Policy changes have unsettled investors, transaction volumes have slowed and nobody seems entirely sure where the market is heading next.

Recent data suggests the caution is having a tangible impact. Annual inflation eased to 3.8 per cent in June, down from 4.0 per cent in May, although underlying inflation remained at 3.6 per cent. At its August meeting, the Reserve Bank of Australia left the cash rate unchanged at 4.35 per cent, keeping financial conditions tight for households, investors and property businesses.

Housing itself remains a major source of inflationary pressure. According to the ABS, housing costs rose 6.8 per cent over the year, driven in part by electricity and new dwelling costs as builders passed on higher labour and materials expenses.

At the same time, housing finance has softened. ABS lending data for the June quarter showed new dwelling loan commitments falling 5.4 per cent in seasonally adjusted terms, while their value declined 5.2 per cent to $97.6 billion, excluding refinancing. Investor lending fell particularly sharply, down 8.6 per cent — its largest quarterly fall since September 2022.

For Mr Douglas, however, that uncertainty is precisely what makes the current market interesting.

His central argument is not that the problems facing property are imaginary. He describes a genuine crisis in housing supply and construction affordability. But he also believes the fear surrounding the market may be distracting buyers from the fundamentals underneath it: population growth, housing undersupply, low vacancy rates and the increasing cost of replacing existing homes.

A market stuck in a standoff

Mr Douglas said recent tax and policy changes have created a classic stand-off.

Buyers have become hesitant because they expect prices to fall further. Sellers, meanwhile, do not want to accept what they see as low offers. The result is fewer transactions and weaker sentiment.

The latest lending figures reinforce that picture. Owner-occupier loan commitments fell 3.3 per cent in the June quarter, while first home buyer commitments declined 2.9 per cent. Investor commitments fell considerably further, dropping 8.6 per cent following a 4.7 per cent fall in the March quarter.

That investor decline is particularly significant because they play an important role in supplying rental housing and supporting new development. Mr Douglas argues that stable and predictable negative gearing and capital gains tax settings will be important in maintaining investor confidence, rental supply and future housing investment.

There is another problem with a market in which fewer properties are changing hands: price movements can become difficult to interpret. When transaction volumes are low, every sale can carry disproportionate weight.

For buyers who have been waiting for certainty, that may be an uncomfortable message. Mr Douglas’ view is that certainty usually arrives after the opportunity has become obvious to everyone else.

The panic may be obscuring the real problem

Mr Douglas said much of the political and public debate has focused on the wrong issues.

While discussion has centred on taxation, negative gearing and investors, he argues the fundamental affordability problem is much simpler: Australia needs more affordable homes, and it cannot solve the problem without building them.

Yet building is becoming increasingly expensive. Land, labour, duties and regulation all add to replacement costs. The latest inflation figures provide a timely reminder of that pressure, with housing costs rising 6.8 per cent over the year and new dwelling costs continuing to reflect higher construction inputs.

Mr Douglas believes the existing housing market is now trading at a significant discount to what it would cost to create equivalent homes today.

He estimates established properties are, in many cases, around 20 to 30 per cent below replacement cost.

That does not mean every property is a bargain. It does mean, in Mr Douglas’ view, that buyers should look beyond short-term sentiment and ask a more fundamental question: What would it cost to replace this asset?

Interest rates are still part of the equation

The temptation in an uncertain market is to look for a single factor that explains everything. At present, interest rates remain one of the most important.

The RBA’s decision to hold the cash rate at 4.35 per cent in August provides some stability, but it does not amount to easy financial conditions. Borrowers are still dealing with significantly higher financing costs than during the ultra-low-rate period, while the central bank has retained the possibility of further action should inflationary pressures strengthen.

For property buyers, investors and developers, that means financing costs cannot simply be ignored.

But Mr Douglas’ argument is that interest rates should be considered alongside the structural realities of the housing market rather than in isolation.

“If construction costs continue to rise, population growth continues and housing supply remains constrained, a period of weak demand does not necessarily eliminate the underlying shortage.

“Indeed, the current lending slowdown could itself contribute to tighter supply conditions if investors and developers retreat from the market at the same time that Australia needs more housing,” he said.

The fundamentals have not disappeared

Mr Douglas’ opportunity thesis rests on the forces he believes will eventually reassert themselves.

Population growth continues. Housing supply remains constrained. Australia is not building enough homes to meet sustained demand. And when supply cannot keep up while demand remains strong, he argues, prices ultimately have to adjust upward to find a balance.

This is why he warns against endlessly waiting for the “perfect” time to buy.

The danger, he says, is not simply paying too much. It is procrastinating through a period of weak confidence, only to return to the market once demand has recovered and competition has intensified.

His advice is more measured than simply buying anything available: if a quality property represents fair value and a buyer can afford it, they should consider acting. If it is not a good deal, wait.

The opportunity is not the crisis

Arguably Mr Douglas’ most provocative claim, is that the current crisis may ultimately create an opportunity bigger than the crisis itself.

“There is a big crisis ... but I think the opportunity is in fact bigger.”

Market chaos does not automatically make property cheap. Falling confidence does not guarantee a bargain and buyers should not confuse fear with value.

But sentiment can create a gap between what people feel about a market and the underlying economics of that market. Mr Douglas said that gap may be unusually wide right now.

The latest data gives some weight to the idea that caution has become entrenched. Inflation is easing but remains above the RBA’s target range. Interest rates remain restrictive. Housing lending has fallen, with investor borrowing experiencing the sharpest decline. Meanwhile, the cost of building and replacing housing remains elevated.

“For investors, that combination creates a difficult environment but potentially an interesting one,” Mr Douglas said.

“The worst time for confidence can sometimes be the best time to investigate; not because panic is good, but because panic can make other buyers hesitate.

“For those able to look through the noise, the question may not be whether the market feels comfortable today.

“It is whether today’s discomfort is creating opportunities that will be obvious only once the market starts to feel comfortable again.”

Note: This article is based on the Steve Douglas presentation, The Australian Property Market: Crisis or Opportunity, and reflects his analysis and views. It is not personal financial advice.