Brisbane price predictions for this cycle

Posted by Gavin Chau

After nine years of sideways movement, Brisbane has been one of the star performers this cycle. In the last four years, prices have sprinted to catch up. With house prices increasing by 78% and unit prices increasing by 47%, the pace of growth has left people wondering if the market has any more steam left.

Everything you need to know about the Brisbane property market

Brisbane is an interesting market because it is one of the few that seems to skip a cycle before making a spectacular move to catch up in the following one. Fortunately for Brisbane investors, this is the cycle where it catches up, and we’re about halfway through. Why they skip a cycle remains a mystery. In any case, it happens often enough that it’s something we shouldn’t ignore.

Historical pattern

In the graph below, I have used a logarithmic scale to see the magnitude of the changes more clearly. We can see that the market tends to be characterised by 10 years of flat growth followed by 10 years of extremely fast growth.

The highlighted sections cover two 10-year periods: the first is from 1990 to 2000, when house prices averaged 3.9% per annum, and the second is from 2010 to 2020, when they averaged 2.9% per annum. These are very uninspiring figures indeed.

However, September 2000 was followed by 10 years of rapid growth, during which the market snapped upwards, averaging an almost unbelievable 12.1% per annum, close to double the pace of the national average. Some of this was due to the global commodities supercycle, which lasted from 2000 to 2014, but it played a significantly smaller role in Queensland than in Western Australia.

It is also interesting to note that the long-term average growth rate of 8.3% per annum is exceptional compared to other asset classes and our national housing market. During the 43 years of data we have available, the housing market has maintained this pace of growth through a wide range of wars and crises:

The Gulf War (1990-1991)
Yugoslav Wars (1991-2001)
Afghan War (2001-2021)
Iraq War (2003-2011)
War in Syria (2011-present)
Russian Invasion of Ukraine (2022-present)
1980s Debt Crisis
Asian Financial Crisis (1997-1998)
Dot-com Bubble (Late 1990s)
Global Financial Crisis (2007-2008)
COVID-19 Pandemic (2020-present)

It is reasonable to assume that whatever fundamental factors that allowed the Brisbane housing market to grow through these crises will continue to drive it forward. This is one of the most robust and practical ways to zoom out and get the clarity required to make an investing decision. It hasn’t failed in the 140 years of data that I’ve studied. If you get the macro part right, it doesn’t matter what the micro is…. A rising tide will lift all boats. You cannot say the same about getting the micro part right – that’s simply fine-tuning.

Where are we in the cycle?

If we switch back to a linear scale and apply a regression analysis, we can get a good idea of where we are in the cycle now. While it sounds very complicated, it can be considered a fancy way to create a line of best fit through all the data points. If the current prices are below the regression line, they are undervalued. Conversely, if they are above the regression line, they are overvalued.

The dotted lines on the chart above are the regression lines (or the line of best fit for the dataset). The ‘R2’ value on the equation is the first thing to look at. This is the ‘goodness of fit,’ which can be interpreted as the regression model explaining 95.77% of the variation in house prices and 90.77% of the variation in unit prices. Immediately, we can tell from this that the regression will indicate where prices will be heading with a high probability.

The prices alternate between moving above and below the regression line, but they always return to the line. This is because the property is a mean reversion asset. Regression is also known as ‘regression to the mean.’ While prices can rise or fall, they always return to the mean.

Prices for houses are sitting on the regression line, which would mean that they are technically at fair value now. However, directionality is important, and they are currently in the middle of an upswing. Over the course of this cycle, we will likely see prices continue to rise further until they are above the regression line. This will likely continue until around 2027. During the last cycle, once Brisbane’s house prices broke the regression line to the upside, they saw a 92% price increase. While I don’t expect this to happen again due to declining affordability, I expect prices 30-40% higher than where they are currently by the end of the cycle.

Brisbane units are deeper under the regression line than houses, indicating more room for upward movement. When they broke the regression line last cycle, prices increased by 60% at the peak. Again, we don’t expect to see this, but a further 30-50% growth could be on the table by the cycle top – especially given that prices are still below the regression.

Overall, the total returns for people already in the market in Brisbane still look very good for the remainder of this cycle. Rental yields have seen plenty of compression due to the price rises, but they remain reasonable at 3.2% for houses and 4.5% for units. The vacancy rates remain near all-time lows at 1.1%. This means there remains a critical shortage of rental accommodation despite the huge rent increases already seen. Brisbane very much remains in a rental crisis with no clear end in sight.

Incredibly Brisbane has seen an average rent increase of 11.6% per annum over the last three years and 7.1% per year over the last seven years.

This has been the fastest pace of rent growth in living memory, and while the tenants are beginning to run out of capacity to see this pace of rent growth continue, we still should see 5-6% growth over the next 12 to 18 months before things settle back to the long term average of around 3%.

This means that for people who have already entered the market, holding costs will continue to fall as rents increase and interest rates decrease over the next few years. More importantly, even though the cycle is already halfway complete, prices will continue to rise—once rates drop, most investors who got in a few years ago will see their holding costs turn positive while the dwelling prices continue to rise.

It’s the Goldilocks period for property investors: when your asset pays you while its price increases, you get money for nothing.

Posted by Gavin Chau, on 12th Nov 2024