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The 7 biggest influences on our property markets

·7-min read
Aerial view of green suburbs and property.
A change in government is not likely to pull focus from Australia's property markets. (Source: Getty)

With our new Australian Government’s initiatives to address housing affordability at a time of low wages growth and rising interest rates, it’s likely that property will remain a hot topic of conversation.

And while many talk about it as though it’s in a league of its own, this couldn’t be further from the truth. The reality is the property market isn’t an independent sector of the economy.

Rather, it’s inextricably linked to a myriad of other financial, social, and political factors, all of which impact what your family home, or your next investment property, might be worth.

Also by Michael Yardney:

So, what are these factors?

1. Household formation

This oft-overlooked factor is actually more important than overall population growth because what increases the demand for housing isn’t the number of people living in a city (or country), but the number of dwellings needed to accommodate them.

This works in a number of ways.

With more young adults staying home longer to save hefty house deposits, and the trend to more multi-generational households, or more friends and family members pooling their resources and buying a property to share, it's possible the number of dwellings required may decrease a little in the future.

On the other hand, there are more older Australians living in one and two-people households to even out the numbers.

Another factor affecting our housing markets over the past few years is the number of millennials entering family-formation age and moving from apartment living into houses in the suburbs.

2. Demographics

Projections from the Australian Bureau of Statistics estimate that by the end of this decade, our population will be approaching 29 million (1 million less than previously estimated since we closed our borders due to COVID) and there will be almost 40 million Australians by the middle of this century.

That’s virtually adding a Melbourne, Sydney and Brisbane to our population.

To accommodate all these people, It is estimated we will need to build one more dwelling for every three currently existing.

And now that our borders are open to overseas migration, more and more people will want to come and live in the safety of Australia.

Plus, factor in our current population’s penchant for knocking down existing dwellings and rebuilding, and it looks like we’ll require around 200,000 new dwellings every single year.

The question many investors ask themselves is, where will those new dwellings and the associated population growth and infrastructure spending be?

That's not necessarily the right question.

The population-growth corridors of our cities tend to be poor capital-growth locations. Abundant new supply is the enemy of capital growth.

At the same time, these locations tend to be where new families and migrants move. This demographic, which tends to have little spare cash left at the end of the month, are in areas where there is little ability to push up the value of properties – these are not high-wage-earning areas.

3. Affordability

Affordability encompasses dwelling prices, along with employment rates, wages, interest rates, credit supply, GDP growth, and inflation – whether or not someone can afford to buy a property is never just about the price tag attached to the home itself.

Over the past two years, record-low interest rates meant the monthly mortgage repayments for most properties were cheaper than they’d ever been.

And over this cycle, property values increased by 25-30 per cent in many locations, yet wages only increased minimally, meaning we are going to end up with a two-tier property market.

The more highly skilled and highly paid workers will be able to afford to pay more for their homes, while the average working-class Australians won't have more money in their pockets to pay another $100,000-$200,000 for their homes.

An aerial view of houses and property in an affluent, leafy suburb.
Investors should seek to buy property in areas where wages growth is above average. (Source: Getty)

In other words, investors should avoid blue-collar areas or young family suburbs and seek out suburbs where wages growth is higher than the state averages.

These are locations where people can afford to - and will be prepared to - pay a premium to live.

These are often the gentrifying middle-ring suburbs of our capital cities.

4. Credit policy

Property investment is a game of finance, with some houses thrown in the middle.

Only a few years ago, we saw the significant impact changes in credit policy could have on our property markets.

Following the macroprudential measures APRA introduced in 2017, and the royal commission into the finance sector, we witnessed how the tightening in the availability of credit spelled the end of the housing boom.

The fact is people simply can’t buy properties if they can’t access the cash.

This is a much more important factor in slowing our property markets than rising interest rates.

5. National wealth, wage growth and job creation

Our economy is growing strongly, as is jobs creation, and when people feel financially secure in their jobs, they tend to make significant purchases, including new homes.

Interestingly, artificial intelligence experts have estimated that anywhere from 20 to 40 per cent of all jobs could be taken over by robots in the future, meaning there will be fewer employment opportunities for unskilled workers or those who perform repetitive tasks.

Of the jobs that remain, many could be moved offshore to take advantage of cheaper labour costs, further slashing local jobs.

This means we will have fewer people doing more productive work.

All of this could impact buyers’ abilities to save deposits, secure finance, and pay mortgages, and in turn, influence house prices.

On the other hand, highly skilled knowledge workers will keep earning more than average and be in the position to buy new homes or upgrade their current homes.

6. Supply of dwellings

As I’ve already explained, increasing the supply of dwellings is going to be paramount as our population increases and, to do so, will involve large projects such as high-rise apartment towers and new suburb creation on the outskirts of our cities.

New suburban homes under construction.
Australia is set to require around 200,000 new dwellings every single year. (Source: Getty)

But clearing the land and knocking up some houses depends on council zoning, density regulations, transport links and other essential infrastructure – people won’t buy a house-and-land package 40km from the CBD if they can’t get into work, or if local schools, shops, and medical facilities are lacking.

7. Consumer confidence

The six factors I’ve talked about so far only tell half the story.

Regardless of how readily available credit is, or how fast the population is actually growing, people’s perceptions of these things are just as important.

If consumers believe the market is heading downward, whether this is reflected by the statistics or not, it will influence their behaviour.

And of course, at times of uncertainty, people will hold off making significant purchasing decisions like a new home or investment property.

Currently, the media is full of negative headlines scaring off potential property buyers.

Buying property is an emotion-heavy process, and buyers – both owner-occupiers and investors – often let their heartstrings pull them in directions their head might not.

This is the one factor you have some personal control over, and, if you’re savvy, you could use it to your advantage to get ahead of the game.

When other buyers are stricken with FOMO and bidding up a storm for less-than-perfect properties, your research could help you stay calm and avoid buying into the hype.

Conversely, when others are paralysed by fear and bargains abound, your confidence in the advice you’ve received from your buyer’s agent or other professional could see you snap up a fantastic property – without even breaking a sweat.

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