Invest
‘Overvalued’ property market in for ‘reckoning’
With future markets signalling an RBA path to rate hiking in coming years, a leading economist and fund manager has warned Australian property investors to consider exiting the market.
‘Overvalued’ property market in for ‘reckoning’
With future markets signalling an RBA path to rate hiking in coming years, a leading economist and fund manager has warned Australian property investors to consider exiting the market.
Speaking on The Smart Property Investment Show podcast, Goldman Sachs and RBA alumni Christopher Joye explained how the future’s exchange paints an interesting picture of what could happen to the cash rate.
According to Mr Joye, the three-year bond rate is the financial market’s best guess of where the RBA cash rate will be in the next three years, carrying significant consequences for property prices.
“If I thought that I was going to get a substantial increase of interest rates over the next three years, I probably wouldn’t be buying,” he said.
“I probably would be looking to defer that purchase and pick up property when prices are falling, because prices will fall significantly if rates increase significantly. That’s going to be your best proxy, your best pulse for global markets.”
Mr Joye said the 10-year government bond yield in Australia is the market’s best guess of where the RBA cash rate will be over the next decade.
“A few months ago, that 10-year rate was down around 1.7 per cent. The RBA cash rate right now is at 1.5 per cent. What that means is, the market was saying, ‘We’re not going to have any rate hikes for the next 10 years’,” he explained.
However, with major political changes in recent months including the election of Donald Trump as the next president of the United States, the domestic 10-year bond yield has surged.
“Suddenly, it’s jumped up to 2.7 per cent, so the market’s saying, ‘Gee whiz, we’re going to get more than a percentage point or more than four RBA rate hikes – standard rate hikes, 25 basis point rate hikes – over the next year’,” Mr Joye said.
If this were to play out, property prices – which Mr Joye believes are 25 per cent overvalued in Sydney and Melbourne – could experience a sharp correction.
“Brisbane, Adelaide and Perth are very different. Perth probably looks cheap. I know people who are moving to Perth to buy property and trade out of the Sydney market. They’re making that switch, which makes a lot of sense if you can do it,” he said.
“If prices fall 15 to 25 per cent, there’s going to be a little bit of mayhem. Housing markets tend to be like a super tank. Once it moves in that direction, it tends to move in that direction for a couple of years at least. It’s not like prices fall overnight, but they’ll continue falling for a long time.”
This may sound bearish, but it does present good opportunities for patient property investors.
“I would be looking to exit the market over the next one to two years before the first hike starts,” Mr Joye said.
“Obviously, if everyone acts on this advice, then this could become a self-fulfilling prophecy. I think you’ll get tremendous opportunities. It’ll take some time. You’ve got to be patient, you’ve got to wait for the rate hikes to fully flow through to capitalise on the valuation change, when prices do fall 10 per cent to 25 per cent.”
Meanwhile, CoreLogic research director Tim Lawless said some movement out of the Sydney and Melbourne property markets is already under way.
“In some of the markets like Hobart, Canberra, Brisbane, potentially Adelaide, we may actually see some further acceleration in the pace of capital gains as investors start to target these markets that offer a much more affordable price point and also a much healthier yield profile,” Mr Lawless told nestegg.com.au.
“A lot of buyers are coming out of Sydney and Melbourne with high levels of equity thanks to the wealth creation effect in those areas, and are now looking to invest into retirement homes and holiday houses in coastal regions as well.”
However, over the longer term, Mr Joye said he is “actually very bullish” on housing, with strong fundamentals in the Australian economy suggesting that residential property will continue to thrive over the next few decades.
“There’s strong population growth, strong immigration. I think China and India are the biggest sources of new migrants to Australia now. The RBA will be raising rates because of economic strengths, not weakness,” he said.
“The share market fell 50 per cent in 2008, but we didn’t all get rid of our equities. People still held equity exposures. Like all markets, the resi market is well overdue for a little bit of a reckoning, but it doesn’t mean it’s not a good asset class.”
Property
Poor wage growth could impede home price growth
With wages growth at record-low levels, a property expert has warned that continuing low and flat wages could impede home price growth. ...Read more
Property
Negotiating a lower interest rate on your property loan
The banks are customer hungry, meaning they’re willing to offer increased discounts to new customers and apply these discounts to existing customer loans, a mortgage broker has said. ...Read more
Property
How to determine the real value of a property
With various factors affecting market value and pricing, can one truly predict what buyers will pay for properties? ...Read more
Property
House prices tipped to soar 20% in 2 years: Westpac
House prices in Sydney are tipped to grow by 20 per cent over the next two years, and by 18 per cent in Melbourne, as a leading economist predicts strong economic growth following the rollout of the C...Read more
Property
5 tips to unearth the next property hotspots
A property expert has bullishly claimed that property hotspots are a “complete myth” that almost guarantees buyers will pay top dollar, and has instead urged buyers to seek out the “warm spots...Read more
Property
Top 10 inland rural towns to invest in
While it’s become apparent that regional housing markets have stolen the spotlight, having outpaced their capital city counterparts in 2020, new research has shown that inland rural towns have also ...Read more
Property
Where to buy under $300k
A positively geared property with high capital growth potential does not necessarily need to carry an astronomical price tag, an expert has said, with new market entrants able to land a home for under...Read more
Property
‘Great Australian dream’ of owning a home lives on amid COVID
Most Australian investors and home buyers were largely undeterred by the events of 2020, remaining eager to push through with their investment plans, a new survey has found. ...Read more
Property
Poor wage growth could impede home price growth
With wages growth at record-low levels, a property expert has warned that continuing low and flat wages could impede home price growth. ...Read more
Property
Negotiating a lower interest rate on your property loan
The banks are customer hungry, meaning they’re willing to offer increased discounts to new customers and apply these discounts to existing customer loans, a mortgage broker has said. ...Read more
Property
How to determine the real value of a property
With various factors affecting market value and pricing, can one truly predict what buyers will pay for properties? ...Read more
Property
House prices tipped to soar 20% in 2 years: Westpac
House prices in Sydney are tipped to grow by 20 per cent over the next two years, and by 18 per cent in Melbourne, as a leading economist predicts strong economic growth following the rollout of the C...Read more
Property
5 tips to unearth the next property hotspots
A property expert has bullishly claimed that property hotspots are a “complete myth” that almost guarantees buyers will pay top dollar, and has instead urged buyers to seek out the “warm spots...Read more
Property
Top 10 inland rural towns to invest in
While it’s become apparent that regional housing markets have stolen the spotlight, having outpaced their capital city counterparts in 2020, new research has shown that inland rural towns have also ...Read more
Property
Where to buy under $300k
A positively geared property with high capital growth potential does not necessarily need to carry an astronomical price tag, an expert has said, with new market entrants able to land a home for under...Read more
Property
‘Great Australian dream’ of owning a home lives on amid COVID
Most Australian investors and home buyers were largely undeterred by the events of 2020, remaining eager to push through with their investment plans, a new survey has found. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
