Headlines Screaming Market Doom? Here’s Why You Should Ignore Them

Posted by Gavin Chau

With all the negative talk recently about the possibility of a delayed interest rate cut and renters hitting an affordability ceiling, you could be forgiven for thinking that the property market is dead. Nothing is further from the truth.

I have a few ‘razors’ or principles I use for simplifying a complex investing situation, one of which is the ‘Early-Late Razor’ which is as follows: If you’ve read about it in the paper, you’ve completely missed the boat, if it’s a talking point on Linkedin you’re definitely late, if it’s a talking point on ‘X’ (formerly Twitter) there’s a chance you’re early.

The best way is to look at the data yourself and build an investment thesis around that. If you ignore the mainstream media and look at the facts, it’s clear that the property market is moving up and not just up; it looks like it’s at the cusp of a manic upswing.

What’s most surprising is the pace of growth despite the 13 consecutive interest rate increases we’ve seen. Nationally, prices are up 8.8% yearly and 9.7% in the capital cities. To put this in perspective, this is 38% faster than the long-term average. The reality is that the Australian property market is being torn by two powerful forces at the moment.

On the one hand, we have the effect of higher interest rates sucking liquidity out of the market and holding prices down through reduced borrowing capacity and lower cash flow for anyone with a variable mortgage. On the other hand, we have an enormous supply-demand imbalance pushing prices up. The supply of housing is around 30% below underlying demand, and the population growth rate is the fastest since the 1950s. What’s making the housing supply situation more dire is that housing completions continue to collapse at a pace of 10% per quarter.

When it gets really interesting is when the RBA cuts interest rates later this year. With the removal of that figurative boot from the head of the housing market, prices will make a parabolic move up. This same price action is observable in the final years of each bull market, and there is no reason to think that this time will be any different. This period typically sees prices rise 15-20% annually for two to three years. Again, to put this in perspective for the average investor who puts in a 10% deposit, this equates to an internal rate of return of 30-40%, which easily beats the most sophisticated fund managers and investors on earth.

Having said that, the market isn’t moving up equally, with Perth, Brisbane, and Adelaide coming into the year with the most momentum; this is followed by Sydney (one the perennial favorites in my personal portfolio), with the other states and territories lagging behind for a variety of reasons.

Melbourne is an interesting case because it is now a massive 40% behind the median Sydney price. It has been hamstrung by a range of government policies, from having the highest stamp duties in the country to having the highest taxes for foreign investors to having an additional COVID levy to pay for the government spending during the lockdown period. While this sounds bad, when you do the numbers, it’s a case of investors being penny-wise but pound-foolish. As the affordability gap widens, prices in Melbourne will snap upwards as capital seeks higher returns and begins to flow there again. We’ll see headlines in the mainstream media about Melbourne soon enough.

As with most investments, what the market is actually about to do at important turning points always feels like the opposite of what it’s about to do, and right now is no different. The smart money has already moved into position, but it’s not too late to get on board. Happy investing!

Posted by Gavin Chau, on 30th Apr 2024