Property Hub - Investment Insights & Inspiration - Realty Talk: Rate & Real Estate + Pre Auction Offers

Episode Date: April 16, 2023

If you’ve been listening to the news, you’d be convinced that interest rates directly drive property values. But is it that simple?  Over the next few weeks we’re going to test this common perception and to kick things off we do a deep dive with Tim Lawless from Corelogic. And to continue Kevin Turner’s special series on the art of negotiation, we conclude the show with Buyer’s Agent Cate Bakos’ take on making offers prior to auction. RealtyTalk is part of the Property Hub podcast channel, your home for property investment insights, inspiration, and stories from Australia’s top property experts, investors, leaders, and analysts. Subscribe now to get every RealtyTalk episode delivered to you each week for free, and also get full access to Get Invested, the leading podcast for Australians who want to unlock their full ‘self, health, and wealth’ potential and get inspired by the stories of investors, founders, and entrepreneurs. Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media.See omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by realty.com.au, connecting buyers, sellers and agents differently. Greetings and welcome to Realty Talk, your property hub's go-to home for property investment insights, inspiration and stories from Australia's top property experts, leaders and analysts. I'm Bushy Martin from KnowHow Property Finance and this week we start our series of investigations on what really drives property values that we're going to roll out in coming weeks amongst other stories that will help you make much better informed property

decisions. To kick things off, if you've been listening to the news in recent times, you'd be convinced that interest rates are solely responsible for driving property values. But is it that simple? Is there more to property values than just interest rates? Well, to provide a balanced perspective, Tim Lawless from CoreLogic joins us to do a deep dive and test this common perception. And to conclude the show, we continue Kevin Turner's special series on the art of negotiation,

where he quizzes leading buyers agent Kate Bakos on the merits or otherwise of making offers on properties prior to auction. Now, before we get underway, if you're enjoying the show, I want to thank you again for tuning in, and I need to ask you a small but very important favour because we really need your help in order to continue to attract industry-leading guests to share their insights and their innovations.

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Want to know how to invest in your freedom? Visit knowhowproperty.com.au. If you listen to the nightly news and scan the headlines, you'd be convinced that interest rate movements directly drive property values based on the media's current fear-mongering indicator of the hour. But is this true? Is it that simple? Do interest rates up mean property values down? And conversely, do interest rates down automatically mean property values up? Today, we want to test the validity of this common perception to see whether it's as simple as this, or is there more to it? And to dive into the subject, there's no one better qualified than today's special guest,

Tim Lawless, who's well known and highly respected as the Executive Research Director of CoreLogic's Asia-Pacific Research Division, and he's managed a team of economic and data specialists across the nation and New Zealand for over 20 years, which uniquely enables him to provide deep insights and analysis on national housing trends. So welcome back to Realty Talk, Tim. Thanks, Bushy. Great to be here again, mate. Great, mate. Look, it's a topical subject that's sort of been the talk of the town for quite some time now, ever since the RBA started raising rates last year. So to sort of step back from this a little bit to see the broader picture, from CoreLogic's perspective, what are the

main factors and drivers that tend to influence property value movements over time? Well, they're quite broad and they vary by cycle as well. So at the moment, I think it's fair enough that interest rates are having a fairly big impact on housing conditions, but it's not the case in every cycle. So if you look back through previous cycles, other things that are really important would be, say, credit availability. That was the most important factor through the previous downturn that ran between the middle of 2017 and the middle of 2019. If you remember that phase, we had two rounds of macroprudential policies earlier in the piece that dented the market and then the Royal Commission resulted in credit becoming much less available.

Or go back to the previous downturn before that, it was after the global financial crisis and a lot of the stimulus or the fiscal support had been removed and interest rates had started to rise. Or even prior to that, it was a shock. it was the global financial crisis. So I think that the things that are most important when you think about housing is understanding the whole environment, not just one factor. And I think it was always going to be the case that when interest rates started to rise in this cycle, households or property markets would probably be more sensitive to that

because they were moving off crazy lows or emergency lows. And the rate hiking cycle has been so rapid and so significant. And it's happening against a backdrop of record levels of household indebtedness as well. So that's probably the key reason why we're seeing the market responding at the moment. But it goes well beyond just interest rates rising. You could also see things like sentiment was falling well before interest rates started to rise. In fact, Sydney and Melbourne housing prices peaked way back in the beginning of 2022. It's like five months before interest rates started to rise. And that was due to things like affordability and sentiment coming down. So yeah, I think to look at the market in isolation like that is going to be way too

simplistic. Yeah, I totally agree. Well, sort of expanding on that point, do property value driver impacts vary across suburb, region, state and national level? And if so, what are your thoughts on why? Significantly, absolutely. And I think it's fair to say the property market is an absolute microcosm. And, you know, we're certainly guilty of reporting the market in fairly macro terms. And that's important as well. You know, macro drives policy, you know, interest rate decisions or credit decisions aren't really being driven by what's happening in, you know, Parramatta or across some of the regional markets. So the macro trends are important. But if you're buying or selling a home, you really need to understand what's happening well below that macro

level, what's happening in your own street, let alone suburb. So a few examples of what happens, say, at the suburb level, at the moment, I'll just use the current trends as a really good case study. We can see that this downwards trend we've been seeing in housing values over the past year or so has mostly been evident in the upper quartile of the market, the more expensive end of the market, which also led the upswing, by the way. So it probably had higher to fall from in unscientific terms. But arguably, that's also where we tend to see the market respond more to changes in the environment, be it credit policy or interest rates. If there's a shock, you generally find the more expensive markets tend to react earlier. Whereas if you look at, say, some of

the more affordable markets around Sydney, still pretty expensive market, but some of the mortgage belts, haven't seen values fall anywhere near as much as what they have in your upper quartile. But more recently, we've started to see some evidence that housing prices in Sydney might be edging a little bit higher. Once again, that's being driven by your more expensive markets. There's probably a little bit of opportunistic buying happening now that values have fallen so much. The initial shock of higher rates is wearing off. And you could probably also argue that as we approach a peak in the rate hiking cycle, confidence is probably already starting to improve a little. And again, I think we're seeing the evidence that that's taking place or shifting

earlier in your more expensive sub-regions. That's a good call. And I think from the supply side, and again, I'd be interested in your thoughts here because I know you did a lot of research on this, but my understanding is that the number of listings is well down on what it has been historically and that's probably sort of propped up to some degree yeah property values in some areas what are your thoughts there yeah the listings story is just um it's it's extraordinarily tight so just based on the last four weeks of data we're seeing capital listings are about 20 below their five-year average at the moment for this time of the year but listings can be really seasonal you know they they tend to fall away sharply through late december and january for

obvious reasons and ramp up. So it's really important to compare back to the same points in time seasonally. But based on the seasonal comparisons, listings are like 20% down on where you'd normally expect them to be at this time of the year. Not necessarily because they're being snapped up really quickly. That's certainly not the case. We are definitely seeing homes taking longer to sell. It's really the case of vendors or prospective vendors just waiting on the sidelines. And I think, again, this comes back to just consumer sentiment being really low. And this is one of the key things we find with the correlation between consumer sentiment, which is a really broad reading, it sort of factors in everything that's going on, and how households

are feeling about the economy and their ability to hold their job and that sort of thing. When sentiment's really low, like it is at the moment, it becomes really hard to make high commitment decisions like buying or selling a home. I think that's what we're seeing at the moment is that people who are thinking about selling their property are just waiting it out for now. They're waiting on the sidelines, which is probably, as you say, Bushy, I think really helped to support or keep a floor under housing prices. If we're seeing a real rush in people looking to sell, I don't think they'll be met by a commensurate level of demand. We probably would have seen larger falls in housing prices by now. Yeah, it may also be a fear that, because as you

would know better than I, as rates go up, borrowing capacity comes down. And there's probably a concern that if I sell my property now, I may not have the horsepower to go and buy another one. Yeah, no doubt. How much influence that's having, I'm not sure. But well, when I ask the bleeding obvious question then, Tim, is there a direct inverse correlation between interest rates and property value changes? Well, we can definitely prove something up statistically. So yeah, if you look at some of the calculations that CoreLogic have done, as well as other data providers or publishers, it's pretty clear that generally higher interest rates are net negative for housing markets. But it's not a one-to-one relationship, or it's not a pure relationship.

If you think about some of the reasons why interest rates might increase, generally it comes back to, I know at the moment it's a little bit different, but generally it comes back to the RBA trying to cool down the economy. At the moment, it's more about inflation being very high and lifting rates back to something that's more normal, even though they're above the decade average now. So typically you'd see some downwards pressure on housing prices, but when interest rates start to fall, generally that could be the start of a new cycle as well. But like we just talked about before, there's a lot of other things at play. So a really good example would be when

interest rates were rising between sort of late 2003 and about 2000, or even during the early parts of the GFC, interest rates were still rising and the housing market went through some pretty strong growth cycles. The reason we're still seeing housing values rising despite interest rates going up was simply because the economy was so strong. Unemployment was really low. The mining boom was underway. There was some huge infrastructure projects. Confidence was really high as well. That was enough to offset the factor of a higher cost of debt. Rental markets were pretty strong. Migration was really high as well. So there's a whole bunch of factors there to explain why housing prices were still very positive, even though interest rates were rising.

And we could be coming to a point now where the housing market looks to be like it's maybe moving through a trough. Maybe it's the eye of the storm. I'm not really too sure just yet. But it's still at a time when interest rates are quite high. So whether or not that's the factors of, say, overseas migration starting to flow through into purchasing demand a bit earlier, I wouldn't be surprised if that's the case, simply because vacancy rates are pretty much as low as they'll go, which means if you're a skilled migrant coming in either permanently or for a long term, it's going to be really hard to find rental accommodation. If I can buy into the marketplace at a relatively good price, chances are we could see that normal lag in population growth

migrating into purchasing demand much shorter than it is normally. Yeah, very good point. So apart from the sort of upper quartile that you've already spoken about, from the property perspective, where, what, and who are most affected by interest rate changes and your thoughts on why? Well, I think when you look at the biggest impact on interest rates, it's not immediate. And interestingly enough, here's a really good example. Today, we just saw APRA release their quarterly ADI statistics.

So these stats are simply looking at different types of lending, like what proportion of loans are being issued on ILVRs or high debt to income ratios, that type of thing. And that's all reducing. Lenders are becoming much more conservative. But another stat in this set of data is what proportion of loans are behind on their repayments. And that just started to tick a little bit higher through the December quarter. So remember, these stats are a little bit lagged. So we're looking at December at the moment, and arguably this trend would have progressed by now. But we're just starting to see some evidence

that some borrowers are falling behind on their mortgage repayments. A lot of households had some pretty decent savings to dip into. A lot of them are still on fixed rates and yet to migrate onto variable rates. For a lot of lenders, it takes them three months to pass higher variable rates onto their borrowers as well. So there is a bit of a lag effect in interest rates going up. And I think as we see this trend progress, it probably will be your sort of more lower socioeconomic or mortgage-built markets that get more impacted by interest rates staying higher for longer.

And you'll probably find some of the more affluent markets or the more prestigious markets, even though they've worn the downturn, the brunt of the downturn to date, they'll probably be the first markets to bounce back and maybe not record as much of a peak to trough decline as some of the mortgage belts as we start to see distress becoming a little bit more prominent. Yeah, well said. So Tim, a recent media report indicated that a 1% increase in interest rates over a quarter results in a national house price decline of about 1.34%. How does this line up with CoreLogic's data and research? Yeah, we've run the same numbers and And in fact, based on that correlation, our numbers are actually a little bit higher for every 1% rise in interest rates, the decline in property prices is a little bit larger.

But again, I'll just go back to the dangers and looking at interest rates versus housing prices in isolation. There's also the opposite correlation that generally, if there's the inverse, if interest rates fall, you generally see housing prices rise by X percent. So, yeah, I mean, it's a little bit dubious of these rules of thumb or correlations that are based on single factors rather than the multivariate environment that we know is really important to housing prices. So, yeah, definitely not saying it's incorrect.

I'm sure it's right. But, you know, over time, say over 20 or 30 years, these are the sort of statistics that come out of that type of a model. they tend to be quite smoothed out and don't really account for the significant differences between cycles that we've seen over time. Yeah, extremely well said. Now, I want to sort of turn to the inflation subject for a minute, because as you've already said, the interest rates up is directly about calming demand and easing inflation. So just like your thoughts on, And are there better or other ways to manage inflation, spending and demand and the flow

on effects to property values and just relying on interest rate changes to do it? Yeah, I'm sure there are. And no doubt, this is a couple of days worth of macroeconomic theory that some people can talk about. That's definitely not my cup of tea. But I think when you look at the inflationary environment earlier in the cycle, it was very much being driven by non-discretionary elements of inflation. And what I mean by that is it was things that we couldn't stop spending on, like food or utilities, fuel, shelter, stuff like that.

The good news about inflation now, and part of the good news is it's probably peaked back in the December quarter of last year. So core inflation is already coming down. But we've also seen a pivot of inflation towards discretionary items really driving inflation rather than non-discretionary. And the good news there is as households become a little bit more thinly stretched, absolutely, they're going to pull back on things they don't need to spend their money on. So in that case, absolutely, monetary policy is going to work. It's a blunt instrument. The other ways we can get inflation under control is probably through fiscal measures as well. So we haven't seen much response here.

Like the government, for example, could stop spending as much or start really targeting their spending on areas that may not influence inflation as much. Maybe reconsider some of the taxation policies that are in the wings as well. As unpopular as that would be, you'd have to think if people have more disposable income, then they're going to be spending more, driving inflation higher. So that's generally the two mechanisms, monetary policy and fiscal policy. we've definitely seen a lot on the monetary side RBA is doing all the heavy lifting here with a really blunt instrument arguably we haven't seen enough on the fiscal side where politically you

know it's it's a it's a game that's being played where the government uh feels like they need to live up to their commitments and maybe um not curb spending as much as what we need to see yeah and a good read of that situation as well I'd put it just to round out the conversation And then, Tim, I'd like you to grab out your crystal ball from it if you can, because I'd love for you to give your best guess, if you like, read on future mortgage rate changes and its impact on property value movements in the medium term, if you're prepared to do so. I'll give it a go. Man, it's so hard at the moment. Well, I think trying to forecast any time is hard, but now is really hard. So on interest rates, I think we're nearly there.

Maybe one more hike is my view. If you look at, say, the people that do this for a living, interest rate forecasts that the big four are generally still at 4.1% apart from CBA at 3.85. I'd certainly put myself in the 3.85 camp. That means one more rate hike from here, which I think would be next month in April. Financial markets have pulled back a little bit. They were generally above 4% as their peak in the rate hiking cycle. they're now a little bit below 4%. So even financial markets are becoming a little bit less bearish. So yeah, for what it's worth, I'd say one more rate hike in the wings and then

we'll probably see the RBA at least pause. If not, that's where they'll stay until interest rates start to come down. Maybe late this year, but probably more realistically early next year. If interest rates, if I'm wrong and rates go a little bit higher, say up to 4.1%, I think there's a much higher chance they'll start to come down late this year rather than early next year. In terms of housing prices, there's some really interesting trends going on at the moment. If you look at our daily series through the middle of February into the first half of March, we've seen a real positive trend emerging, led by Sydney. Sydney up about 0.8% over the past four weeks melbourne's back into positive four weekly uh territory so is perth

brisbane's flat adelaide which has been one of the more resilient markets and strongest markets through the the cycle seems to be the one market that's not really you know re-accelerating or flattening out as the class is just gradually falling in value now at about 0.4 percent month on month yeah i still feel like it's too early to call the bottom of the cycle we know that it's probably one more rate hike. It's arguable that the full cycle of rate hikes hasn't actually caught up with household balance sheets yet. Labor markets are going to loosen up a little bit. The economy will probably weaken. So all these things mean there's still some downside risk for housing. And I think the best case scenario would be probably a second half of the

year that's flat. And then as interest rates start to come down and we see sentiment improving, Hopefully the economy starts to ramp up a little bit and migration is really mature by then. I think that's when we'll start to see housing cycle once again moving consistently into positive territory. But I definitely wouldn't expect any growth cycle over the next year or so to be anything like what we saw through the pandemic.

Yeah, I totally agree. We sort of missed the apple aisle here. Given it's sort of been the darling of the property game for quite some time now, any thoughts on Tasmania and what the outlook is there? Yeah, well, Tassie's had a pretty spectacular run, hasn't it? It's been a standout market over the past five, even 10 years. It's interestingly one of the few markets

where we're actually seeing listing numbers are picking up. Compared to last year on our account of listings, total listings in Hobart are up about 75%. That sounds pretty alarming, but they're off like hardly anything a year ago. If you remember back in sort of early 2022, Holmes and Hobart were selling in like nine days. So even though listing numbers are up quite substantially,

they're off a massively low base, a really low base. So I'm not too concerned about a 75% rise. Listing numbers are still like way lower than they were back in 2014, about half of what they were. But affordability has become a bit more challenging across Tassie. Migration seems to have slowed down a little bit as well. But you'd have to imagine medium to long term, Tassie is still going to be a very good market as we see a lot of people looking to, you know, climate refuges. And even though it has seen quite spectacular growth, housing prices are still a lot more affordable than buying in Melbourne or Sydney.

But let's keep that in mind. And so, yeah, I think even though the market will probably underperform maybe the next year, I think longer term it's still going to be quite a strong performer given its affordability, its climate, and its low-density environment. Yeah, very well said. Look, as always, Tim, you always come to the table with some very timely insights and put some context around this whole discussion around interest rates so we can see it in perspective. so I really want to thank you for coming on and joining us and sharing that with us on the show today. It's always a pleasure Bushy, thanks for inviting me along mate. Thanks Tim. Well as you've heard while interest rates and inversely associated buying capacity movements do have an influence on the demand side of property values, it's just one of many factors at play in the dynamic multi-faceted

world of changing property conditions. So you need to look beyond the nightly news to better understand what's really going on. And CoreLogic's extensive data and reports are a great place to start, which you can find at corelogic.com.au. As one of Australia's most outstanding buyers agents, Kate Bakos has a wealth of knowledge and experience when it comes to helping families secure their dream home or the perfect property to add to their investment portfolio. So who better to talk to about successful negotiation? and this time I ask Kate if it's wise to make an offer prior to auction. That's coming up next. Property depreciation is the natural wear and tear of a building and its assets. Property

investors can claim depreciation as a tax deduction each financial year. Depreciation is a non-cash deduction. This means you don't need to spend any money in order to claim it. On average, BMT tax depreciation fined residential investors almost $9,000 in first full financial year deductions. Call BMT on 1-300-728-726 today for an obligation-free quote. Oh, it's such a dilemma when you find the property you want, then you find it's going to go to auction and you think, oh no, I'm not going to turn up on the day of auction and have to bid, but you know, maybe I can buy beforehand. Yeah, a great temptation. Let's just talk about that with Kate Bakos. Kate is our special guest on this series. Kate is a buyer's agent out of Melbourne.

Kate, how do you handle it? How do you feel about pre-auction offers? I feel that the one reason that shouldn't have you make a pre-auction offer is if you're nervous about bidding at auction. That's not a good reason to avoid an auction. If you're feeling that way, get someone who can bid confidently for you. There's a time and a place for a pre-auction offer. There's several times and places, but there's certainly good reason to go forward to auction as well in a lot of cases. And it's important to discern between the two. So if I'm considering a pre-auction offer, it's because of two things. Either I think I can buy it better by moving forward now, knowing what I know about the campaign and the potential buyers,

or it's such a rare property, it would be hurtful and damaging for the client to miss it if we're in a moving market. So let's say it only comes up once or twice a year, a property like this, and it's perfectly suited to them. They don't want a chance missing out. You could then have a conversation with an agent about buying it prior and what that number could look like. But something that a lot of people miss, and this is vital, there are some properties that can't be purchased prior to auction. There are some that legally have to run through. And then there are others that the vendor and the agent are really keen to have them run through. so if you're trying to get an outcome that's not physically possible you could be showing your

cards and you could be annoying the agent two things that you don't want to do when heading to auction yeah you could be turning the the seller off as well and i think you've got to be understanding about where the seller sits in the cycle too because in the very early stages of a campaign they're probably going to have their heads in the cloud i mean let's face it you've got to look at it from the seller's point of view and that is they've gone to auction because they've probably been told they're going to get a premium price so that's what they're going to hang out for and an agent will tell you too that you know if the if the seller's going to accept a pre-auction offer they'll probably be wanting a premium price that's right no one wants to

knock a vendor off their chair with a crazy price tag unless there's a good reason for it other times though agents can sometimes hint that the vendor would be open to selling prior find out why? Is it because there's not a lot of interest in the campaign, in which case you could do really well on auction day? Or is it potentially because they have spotted something else that they'd like to make an offer on and it's going to auction or selling prior to their auction date? Or are they looking at a really tight settlement? There's lots of reasons why vendors are happy to have a result prior to auction, but you've got to be on top of that and understand what the agent's motivation for trying to get you to consider putting an offer forward is because if the

campaign's struggling you'll more likely than not get a great result on auction day. Yeah and one thing you should remember too if you are going to make a pre-auction offer there's every chance well I'd say every chance that the seller is not going to come back and countersign because that's immediately giving away what their reserve price would be and no agent in their right mind would let a seller do that at an auction campaign. Yeah very unlikely it would be a most unusual situation if you're faced with that. And if you've got really good dialogue with the agent and you've had a good trusting relationship or a series of good quality conversations throughout, they might be prepared to speak to you and to, they certainly take us

into their confidence and talk openly sometimes. And you'd expect that between a buyer's agent, a selling agent, but if you've got that kind of dialogue, you might be let in and they might be able to explain what's going on but i think the essential thing is don't be afraid of going to auction if that's your motivation for trying to get it prior it's the wrong reason yeah get a buyer's agent to bid for you if you're afraid of bidding yourself what do you reckon kate oh look even just a really confident uncle anyone if you're really nervous and you think you'll make a mess of it then get someone who's confident and be very very clear about your walkway price tag so true okay i want to come back and revisit a topic we have already covered in the series but

But I think that it's so important and that is best and highest offer or best and final offer, call it whatever you like. But I think it just needs a little bit more explanation about how it works because it can be really quite a difficult situation for a buyer. So I'll come back in our next episode, talk to Kate Bakos, the buyer's agent at Melbourne about that very subject. I'll see you then. And that brings us to the close of this week's show.

Another big thanks to our special guests, Tim Lawless and Kate Bakos. And before we go, make sure you don't miss another episode of your trusted voice for all things property by subscribing to the Property Hub on your favourite podcast player now, where you'll also enjoy the Get Invested podcast

delivered to you each and every week. Thanks again to realty.com.au, BMT Tax Depreciation, Apiro Marketing, DM Media and Southern Cross Austeria for their ongoing support. I'm Bushy Martin from KnowHow Property Finance and along with Kevin Turner

and the entire Property Hub Realty Talk team, we thank you for getting invested in yourself by investing in us. And we look forward to seeing you again next week. Miss something in this week's show or want to catch up on past shows? Do it anytime at realty.com.au where we connect buyers, sellers and agents differently.

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