{"id":185865,"date":"2024-12-31T19:30:35","date_gmt":"2024-12-31T08:30:35","guid":{"rendered":"https:\/\/propertyupdate.com.au\/?p=185865"},"modified":"2025-01-08T23:32:09","modified_gmt":"2025-01-08T12:32:09","slug":"which-indicators-are-most-important-to-property-investors","status":"publish","type":"post","link":"https:\/\/propertyupdate.com.au\/which-indicators-are-most-important-to-property-investors\/","title":{"rendered":"Which indicators are most important to property investors"},"content":{"rendered":"

There\u2019s an endless stream of news articles discussing the economic factors that influence property prices: interest rates, unemployment, the supply of new homes, rezoning, and population growth \u2013 just to name a few.<\/p>\n

Having followed the property market closely for more than two decades, I have two observations to share.<\/p>\n

First, I\u2019d love to have a dollar for every forecast claiming that Australia isn\u2019t building enough houses; this conclusion keeps resurfacing annually, often backed by analyses funded by the property industry.<\/p>\n

Second, it astounds me how often property price growth predictions miss the mark.<\/p>\n

I recently interviewed David Bassanese, the chief economist at Betashares, on this topic and thought it would be useful to share my insights here.<\/p>\n

\"Property<\/p>\n

Keep in mind that most buyers and sellers may not be rational<\/span><\/h2>\n

When forecasting property price movements, it\u2019s important to remember that two-thirds of property buyers are owner-occupiers.<\/p>\n

Their purchasing decisions are influenced by many factors, most of which are non-financial.<\/p>\n

For example, a buyer might not mind slightly overpaying for a home if they plan to live there for decades and benefit from lifestyle advantages like proximity to family, work, and schools.<\/p>\n

In contrast, when we buy stocks, we carefully consider whether the price makes sense in terms of future investment returns. \r\n

<\/div><\/p>\n

Stocks are traded thousands of times a day, allowing for a price-discovery mechanism that accurately reflects their intrinsic or technical value.<\/p>\n

This makes it easier to predict investor behaviour, as their decisions are typically based on logical financial data.<\/p>\n

This is where many economic analyses and forecasts of property prices fall short \u2013 they often neglect the impact of behavioural finance.<\/p>\n

Take the analysis surrounding the\u00a0\u201cfixed rate cliff\u201d<\/a>, which received significant attention in early 2023.<\/p>\n

Many commentators predicted a rise in mortgage defaults and arrears.<\/p>\n

However, they overlooked that homeowners would go to great lengths to avoid selling their homes.<\/p>\n

If unemployment remains low, a rise in interest rates and repayments is unlikely to trigger forced sales \u2013 but certainly a decline in consumer spending.<\/p>\n

Additionally, banks apply a 3% buffer when assessing loan applications, and credit conditions are relatively tight, so borrowers must jump through a lot of loops to get a loan approved.<\/p>\n

That\u2019s why I\u00a0wrote in early 2023<\/a>\u00a0that the \u201cfixed rate cliff\u201d would likely be a non-event.<\/p>\n

The key takeaway is that you can\u2019t rely solely on data; understanding property owners\u2019 psychology and lending conditions is just as important.<\/p>\n

What factors are important to consider?<\/span><\/h2>\n

I discuss the indicators that I think are most useful to long-term property investors.<\/p>\n

Interstate migration is more variable than overseas immigration<\/h3>\n

The long-term trend with interstate migration is that NSW loses about 5,000 people per quarter, Victoria loses around 1,000, and Queensland gains roughly 6,000 people.<\/p>\n

This is depicted in the chart below.<\/p>\n

\"Net<\/p>\n

It\u2019s important to note that between 2008 and 2018 (the black rectangle), Queensland\u2019s net interstate migration averaged 3,000 people per quarter, which is 50% below the long-term trend.<\/p>\n

During this period, the median house price rose by only 2.3% p.a., roughly in line with inflation.<\/p>\n

Since 2018, both interstate migration and property prices have increased.<\/p>\n

Although Perth isn\u2019t shown on the chart, it\u2019s important to highlight that interstate migration was negative from 2013 to the end of 2020.<\/p>\n

However, it has turned significantly positive since early 2021, leading to robust property price growth over the past 18 months.<\/p>\n

\"pencil<\/picture><\/span>

Note: <\/span> A recent trend worth mentioning is that Victoria experienced significant negative net migration during COVID-19, with many people moving to Queensland. However, that trend has now reversed, and Victoria is seeing positive net migration, currently sitting 1,500 people above the long-term trend. While this isn\u2019t a huge number, it indicates that things are moving in the right direction for Victoria. <\/p><\/div><\/div><\/em><\/p>\n

When it comes to overseas migration, the distribution among states tends to be relatively consistent: 34% go to New South Wales, 31% to Victoria, and 15% to Queensland.<\/p>\n

In my view, interstate migration serves as a good proxy for property market sentiment \u2013 essentially reflecting how homeowners feel about a particular state.<\/p>\n

How much money is flowing into property<\/h3>\n

In Australia, about 75% to 80% of properties are bought with a mortgage, making access to credit an important driver of housing demand and price growth.<\/p>\n

Interest rate settings can impact demand for property.<\/p>\n

When rates are lower, borrowing capacity increases and it makes property ownership more affordable.<\/p>\n

However, interest rates aren\u2019t the only factor to consider.<\/p>\n

Right now, we\u2019re seeing interest rates at a nearly two-decade high, yet lending volumes remain high \u2013 only 14% below the record levels of 2021.<\/p>\n

What\u2019s likely more impactful are credit policy settings, as these determine which households and demographics can secure loans.<\/p>\n

Banks use a benchmark interest rate, which is currently set at 3% above actual rates, to calculate borrowing capacity.<\/p>\n

This means they\u2019re effectively using a rate of between 9% and 10% (amortized over 25 years) to assess an applicant\u2019s borrowing capacity.<\/p>\n

As a result, lower- to middle-income earners are often locked out of borrowing to invest in property.<\/p>\n

This is evident in data from CBA: in the first half of this year, 51% of investment borrowers had family incomes of between $200,000 and $500,000, while 24% earned over $500,000.<\/p>\n

In total, 75% of investment borrowers have incomes exceeding $200,000, indicating that borrowing to invest in property is primarily feasible for high-income earners.<\/p>\n

Even then, higher-income earners are having to navigate lower borrowing capacities too.<\/p>\n

One consequence of restricted borrowing capacity is that investors and homebuyers must target more affordable areas.<\/p>\n

I believe this trend has contributed to property price growth in cities like Perth, Adelaide, and Brisbane.<\/p>\n

\"Property<\/p>\n

Housing supply probably won\u2019t be a factor<\/h3>\n

There\u2019s been a lot of discussion about housing supply in Australia.<\/p>\n

For the past 20 years, I\u2019ve consistently read reports stating that we\u2019re not building enough homes and that there\u2019s a supply shortage.<\/p>\n

Yet, from my perspective, the market appears relatively balanced.<\/p>\n

For an increase in supply to significantly impact investors, we would need a dramatic influx of new housing and the necessary infrastructure to support it.<\/p>\n

The likelihood of this happening anywhere in Australia is quite low \u2013 we have a poor track record of building infrastructure efficiently and on time.<\/p>\n

Therefore, I don\u2019t believe that investors focusing on high-quality, investment-grade locations should be overly concerned about the new housing supply.<\/p>\n

In established investment-grade areas, the primary way to increase housing supply is through higher-density development, such as building more apartments and townhouses.<\/p>\n

Dr Peter Tulip has researched\u00a0how development regulations and restrictions contribute to housing<\/a>\u00a0supply and affordability.<\/p>\n

His findings suggest that overly stringent planning regulations substantially contribute to worsening housing affordability.<\/p>\n

The supply of apartments in capital cities can also affect price growth.<\/p>\n

For example, we saw a significant increase in apartment supply in Melbourne from 1999 to 2009, and in Brisbane from 2012 to 2016.<\/p>\n

During these periods, the surge in supply contributed to a slowdown in apartment price growth.<\/p>\n

State governments are pressuring local councils to approve more developments in inner-city areas that already have the required infrastructure.<\/p>\n

Whether they will succeed is a topic for another day.<\/p>\n

However, increasing density in these areas could indeed influence property price growth and local knowledge and research are necessary to assess the likelihood of this risk.<\/p>\n

\"Data<\/p>\n

Only a handful of data is important<\/span><\/h2>\n

To effectively predict property price growth, it\u2019s essential to understand owner-occupier psychology.<\/p>\n

Buying a home is a long-term commitment, and owners are likely to endure various challenges before considering a sale.<\/p>\n

Credit policy settings and borrowing capacity play an important role, as they determine the amount of money flowing into property markets and which buyers are active.<\/p>\n

Interstate migration can also serve as an indicator of changing sentiment, often foreshadowing shifts in property price growth.<\/p>\n

Finally, the stringency of planning restrictions and the level of apartment supply can significantly influence property price growth in specific locations.<\/p>\n

<\/div>\r\n
<\/div>\n","protected":false},"excerpt":{"rendered":"

There\u2019s an endless stream of news articles discussing the economic factors that influence property prices: interest rates, unemployment, the supply of new homes, rezoning, and population growth \u2013 just to name a few. Having followed the property market closely for more than two decades, I have two observations to share. First, I\u2019d love to have…<\/p>\n","protected":false},"author":9,"featured_media":176993,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[54,3,1186],"tags":[572,1183],"class_list":["post-185865","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-property-updates","category-property-investment","category-weekly_latest","tag-feature-featured","tag-homepage-top"],"acf":[],"yoast_head":"\nWhich indicators are most important to property investors<\/title>\n<meta name=\"description\" content=\"There\u2019s an endless stream of news articles discussing the economic factors that influence property prices: interest rates, unemployment, the supply of new...\" \/>\n<meta name=\"robots\" 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