Why property investors should ignore the panic

National home values just recorded their sharpest monthly fall since December 2022, and the downturn that started in Sydney and Melbourne has now spread to Brisbane and Adelaide, two cities that had shrugged off nearly every headwind of the past two years.

Anyone reading the coverage this month will recognise the feeling.

The headlines arrive in quick succession, each one more alarming than the last, and there is a persistent pull to do something in response, whether that is selling, refinancing, or lying awake recalculating a loan-to-value ratio that hasn’t actually changed.

Most of the time, the right response, however, is to note the headline and get on with the ordinary business of holding a well-chosen asset for a long time.

Consider the last 10 years of property investing in Australia and the headlines that dominated the conversation.

In 2020, Australia entered its first recession in almost 30 years, as pandemic lockdowns delivered two consecutive quarters of negative economic growth. Emergency rate cuts and government support saw the market recover within months. Some forecasters predicted residential property to fall by more than 20 per cent.

Then came 2022 and 2023, when the Reserve Bank lifted the cash rate from 0.10 per cent to 4.35 per cent across 13 increases, the fastest tightening cycle since the early 1990s.

Inflation peaked at 7.8 per cent in the December quarter of 2022, the highest reading in more than three decades.

Against this backdrop, several major banks and prominent economists forecast that national house prices could fall by 15 to 25 per cent from peak to trough.

Given the scale of the rate rises, a downturn was possible, but the forecasts were widely wrong. National dwelling values fell 7.5 per cent from their April 2022 peak to their January 2023 trough, before rising 8.1 per cent by November 2023 and reaching a then-record high.

Running alongside this was the mortgage cliff, with a wave of fixed-rate loans rolling from rates as low as 1.95 per cent onto variable rates of 5.5 per cent or higher.

More than $370 billion in fixed loans expired in 2023, and the commentary at the time anticipated a wave of forced sales and defaults.

That wave never arrived. Households cut spending, refinanced where they could, and largely absorbed the shock.

The commercial divergence

While residential commentary stayed fixated on these macro headlines, industrial and logistics property spent this period defying every macroeconomic indicator.

Prime industrial rents grew 18.1 per cent nationally in 2023, only trailing the 24.9 per cent peak recorded at the start of that same year, according to analysis from JLL.

Office and retail told a different story. Office transaction volumes collapsed by 64 per cent between early 2022 and 2023, the weakest run since 2009 according to CBRE, as hybrid working structurally reduced demand for space.

CBRE’s analysis showed retail transaction volumes fell 47 per cent year-on-year in the December quarter of 2023, as pricing uncertainty and higher debt costs weighed on commercial property investor appetite.

Medical and healthcare property sat apart from both extremes, with Burgess Rawson reporting cap rates softening only modestly, from 5.46 per cent in 2022 to 5.77 per cent in 2023, thanks to the sector’s non-discretionary demand.

Self-storage showed a similar pattern, with Cushman & Wakefield research showing that Australia’s two most prominent listed storage trusts reported cap rate movements of just five and 12 basis points across the entire tightening cycle, a negligible shift compared to the broader market.

None of these outcomes were the product of a lucky guess.

Medical property held firm because of a non-discretionary, ageing-population-driven demand base, while self-storage held firm because investor appetite kept outpacing available assets, even as borrowing costs rose.

The investors who did well were not the ones who reacted to the panic-inducing headlines. They were the ones who understood which demand drivers were structural, and which sectors were simply exposed to sentiment.

The counter-cyclical advantage

Understanding which sectors are structurally sound is only half the advantage. A downturn driven by sentiment rather than fundamentals is precisely when a counter cyclical buyer can capitalise on the other half.

Vendors under pressure during 2022 and 2023 were not confined to residential property, and a buyer with capital and conviction in a structurally sound sector often faced less competition than they would have found 18 months earlier.

The advantage went to investors willing to act while others were reading the same alarming headlines, not to those who mistook reflexive caution for prudence.

Ignoring risk would be foolish, but treating every headline as a risk is a different kind of foolishness.

What actually matters is an asset’s underlying quality and its structural demand. Everything else is noise generated by a media cycle with its own incentives.