‘It Should Never Have Happened!’

‘It Should Never Have Happened!’

I am not an economist, I am a pragmatist. I am not a pessimist, I am a realist, and the reality is that at the end of year 2022 we are coming out of a real estate boom that should never have happened.

Early in 2022 property prices peaked throughout the world. In late May 2022 interest rates rose breaking an 11-year downtrend. In June 2022 I wrote a blog headed ‘The Boom is Over’ and property prices have been in retracement mode ever since.

Why do I say, ‘it should never have happened?’ Because it was all due to P-plated politicians paranoid that the Pandemic would bring on a recession, which it didn’t but now it’s about to due to a massive uplift in interest rates, amongst other things. Interest rates should never have gone below 2%. All Australians were into property many for the first time because money was readily available at virtually no cost. It was cheaper to service a mortgage that to rent the same property.

In contrast to 12 months ago, the household focus is now on the higher cost of everything the most significant being the increased cost of a mortgage. On a $500,000 loan that is an extra $1,000 per month just to pay the interest without any benefits. The ‘reserve funds’ of most households to cover price surges will be gone by early 2023. With other added costs it will mean that discretionary spending will come to a halt so it’s tata to hospitality and travel. The unintended consequence of an overshoot in interest rates on the downside is that there are now people who own property who should never have been allowed that opportunity. Mortgage delinquency will be a real concern in this sector next year.

The market is now in a rental boom that again resulted from the overshoot in interest rates. The bottom end buyers were predominately purchasing rental properties but are now owner occupied. The resultant under-supply of stock in this sector is a major concern and at the moment in our not insignificant rent roll we have virtually no vacancies. Some of our landlords are feeling sorry for tenants but I would remind you that a tenant is only paying a 5 – 10% increase in rent whereas a mortgaged homeowner is paying 100% increase in interest. For the decade since the GFC in 2009 there were very few rental increases but eventually all markets return to the mean, and this is just another example of that. The increase in supply that is required to offset a depleted market is at least 2 – 3 years away and significant rent increases will continue through that period.

On a positive note, the major indicators that dictated the mood in 2022 are changing. The supply chain is starting to normalise and in the last 4 months the cost of containers has dropped 75%, oil prices 40%, steel prices 50% and the supply of microchips is getting back on target. We are all hopeful of a resolve in the Ukraine war but the rebuild will be long and costly. On the inflation front there is a glimmer of hope with the latest monthly figure for October in the U.S. coming in under expectations. The next monthly figures for November and December will confirm whether the fight against inflation is being won and so end the rise in interest rates. Any relief in this area will create a positive response and the property market will stabilise.

Major gains in the property market during 2023 will not occur however we are coming off a once in a hundred-year boom which delivered outrageous gains some of which will now be given up in the retracement process, but the net outcome will be positive from where we were pre- Pandemic.

Jackman & Treloar through 2022 has enjoyed the fabulous support of all of our clients and we thank you sincerely for that. We have and will continue to work very hard in providing you with the ultimate service in all matters of real estate.

Wishing you all a Very Merry and Happy Xmas and the best in all things in 2023.