8 issues that will determine the year ahead
Forecasting the performance of the property market in 2018 is anyone’s guess. Depending on what you believe, boom/ bust or somewhere in between, you are sure to find an analyst that agrees. The issue with making a forecast is one tends to be prone to confirmation bias.
‘A confirmation bias is a type of cognitive bias that involves favoring information which confirms previously existing beliefs or biases’ as defined by one source.
The key to accurately reading any market is to understand the dynamics that move the respective markets and watch the play rather than look for commentary that is in sync with your personal bias. We have outlined 8 issues that are sure to be influential to the fortunes of the 2018 property market.
Was the dominant influence on the 2017 market and could well be again in 2018? APRA have the power to influence the retail banks lending standards and they used this influence in the strongest manner to stop a 5-year boom. Will APRA leave regulation as is, tighten further or relax? Whichever way they go it has ramifications for the property market and a definitive signpost for market watchers.
- Economy & Employment
The property boom stopped due to APRA’s regulation. Below that, interest rates stayed at record lows and the economy in generally powered along. Unemployment is near all-time lows. Despite what is being quoted by some, record low interest rates with a strong economy is not the stuff of ‘housing crashes’. The GFC and subsequent meltdown in US house prices was caused by irresponsible mortgage lending, a deteriorating economy and rising unemployment. The housing market here is not facing any of those challenges.
- Sentiment & Confidence
As the boom faded, the doomsayer’s voices grew louder. The end of the boom does not mean the start of a crash – although some segments of the market will feel pain. Unlike the pragmatism of the commercial market, residential real estate is very emotional and sentiment based. Confidence in the property market was clearly dented in the second half of 2017. How confident home buyers are about the short-term future of the market will be a determining factor on where prices head.
Foreign buyers may be replaced by foreign sellers in the ‘off plan segment of the market’. The Chinese Government’s attempt to stop capital out flows to foreign countries means there are many investors looking to re-sell their off-plan apartment before settlement. Value is sure to emerge in some larger scale developments. How much do prices need to drop before first home buyers and opportunistic investors decide to jump in? Houses close to the city seem to be the best bet in 2018 and expensive brand-new apartments in suburbia seem to be the highest risk.
- Investors & Rents
Return on investment has been dropping and looks set to continue to decline into 2018. The additional supply of dwellings into the market has seen rents stagnate as prices rose dramatically in the past 5 years. Low yields and high house prices could see many landlords decide to sell up and cash in on their investment. A healthy property market requires investors to create demand. Negative gearing benefits were pared back in the May 2017 Federal Budget. Losing taxation benefits in combination with low and falling yields may see investors sit it out in 2018.
- Global shock
North Korea conflict, stock market crash, severe economic downturn in China or global credit squeeze are all examples of the sort of issues that could change everything in an instant. A lot of good news is priced into markets, one major global shock could change everything.
- Interest rates
For the first time in a longtime, interest rates do not seem to be a dominating factor in the market. Rightly or wrongly the view is the RBA will stay lower for longer when it comes to rates. Some even suggest that the next move for rates could be down if households struggle with debt levels.
- Supply and days on market
When clearance rates drop, the stock levels swell. In a very short time frame, days on market begins to blow out. The market works in the exact reverse when clearance rates are high. Number of listings versus sales in each month gives a fair indication of whether a market is turning over nicely. These are leading indicators that will let you know the market is performing away from blunt indicators such as the ‘median house price’ or version of.
The lesson in the market is that there can be price corrections within larger cycles. A long-term and short-term view is always advisable when buying and selling.
BY PETER O’MALLEY Author – Inside Real Estate