In this October market update, Damien and Jeremy review the latest capital city house and unit data following the RBA's rate rise and the recent tax changes. They look at where the market is cooling, where it is holding up, and what that means for different types of buyers.
The RBA Rate Rise and the Tax Changes
Damien opens with the RBA's decision on 29 September to raise the cash rate by 25 basis points. He notes it is the highest cash rate since November 2011, with inflation and unemployment both increasing.
He then turns to the tax changes: the changes to capital gains tax, the changes to negative gearing, and the inability to get lending within a self-managed super fund for residential property. Damien explains that, as he understands it, losses on a negatively geared property are now carried forward rather than returned as an immediate tax credit. They can be recouped once the property turns positive cash flow, or offset against a capital gain when it is sold. He says many people think negative gearing has been scrapped when it has really been pushed back much further. For someone buying at a higher price point with holding costs of $15,000 to $20,000 a year, he says that credit is not coming back in the meantime, and this is what will hold back many people's accumulation phase.
Jeremy adds that the issue is really serviceability rather than profitability. The profit has simply become very lumpy, arriving in one go when the asset is sold, while cash flow becomes an issue for serviceability.
Capital City Houses: Demand and Growth
Darwin leads the capital cities for houses, with the highest DSR3, the flagship algorithm, followed by Perth, Sydney and Canberra. Jeremy notes the gap between Darwin and second-placed Perth is 10 points, which is significant. He says the market does look pretty ugly nationwide right now, but there is always a good place to invest somewhere in Australia, and there is a spread of demand relative to supply, as there has been for decades.
Jeremy adds that his recent analysis found solid markets in Melbourne and Sydney as well, though they take more diligent research. Damien suggests that someone without a portfolio might make a first purchase in Melbourne or Sydney if they have a time horizon of three years or more, since those markets have not grown as much. For someone looking to get in and out within about three years, he suggests keeping an eye on Darwin. He urges buyers not to rush, because more data is still flowing through, and says some markets, more so unit markets, are still seeing a rise in typical value.
Both hosts refer to a Cotality report, which Jeremy read that morning, showing growth rates slowing month to month, with Perth and Brisbane hit hardest this month and Brisbane especially. Jeremy says the report found about 97% of suburbs around the country have gone backwards recently, though he does not know the time frame and thinks it was the last few months. He points out that the markets he and Damien typically target are in the top 1% anyway, so opportunities still exist. Damien adds that for the past five years you could almost throw a dart at a map of Australia and do well, whereas now buyers need to focus on the data and make careful decisions. He notes that for those with borrowing capacity, there is no need to rush: they can wait until the new year and do their research, or act sooner if a seller becomes desperate and the property can be renovated or value-added.
Houses: Four-Month Change, Stock on Market and Days on Market
Looking at the four-month change since May, Darwin, Hobart and Perth have picked up. Damien says he knows Perth and Brisbane have been hit hardest this last month, likely because of high stock on market, high typical values, and, in Brisbane's case, the biggest run of growth in recent times. Jeremy explains that the positive four-month figures reflect a rush to finish transactions after the May budget announcement, particularly in the SMSF area, which took a couple of months to flow through.
Stock on market is up about 37% in Perth and Brisbane over the four months. Damien expects these markets to see more declines in the coming months, and notes the data can be choppy over December and January, becoming clearer from February. Jeremy says a rise of around 30% over four months suggests buyers are holding back while stock accumulates, against a typical level of about 1%. Damien adds that roughly 3,000 extra houses and townhouses over four months is huge. Darwin shows a 30% increase, but that is only about 70 extra houses, leaving it tight at 303 houses available. Melbourne, Canberra and Hobart show no change, and Hobart has tightened slightly, which Damien and Jeremy describe as a volatile metric for small markets like Hobart and Darwin.
Days on market are up about 32% across the board over the four months. Brisbane is seeing a double whammy of the highest stock on market and days on market rising from 36 to 54 days. Jeremy adds that Adelaide keeps sliding too, and that the change has added an extra couple of weeks to the typical time it takes to sell a property in Australia since May.
Brisbane and Owner-Occupiers
Damien says the Brisbane decline could be a good opportunity for owner-occupiers wanting to move up, for example from a $1 million home to a $1.8 or $2 million one, because they may see a pretty big decrease at the higher price point. He says the media flags it all as negative, whereas he and Jeremy see it as a chance to do research without rushing, with more options than when properties sold with no chance to bid.
Jeremy points out that this applies to owner-occupiers rather than investors, and says he would not buy an investment property in Brisbane now. There are about 400 suburbs in Brisbane and it is highly unlikely all of them will go backwards, but there is a very good chance an investor would be buying at the peak. Damien says he has pinpointed about five or six suburbs he would target, but would still hold off for a couple of months.
Market Cycle Timing and the Ten-Year View
On market cycle timing (MCT), Melbourne, Canberra and Sydney have the higher scores. Looking at ten-year growth, Brisbane has grown about 130%, Adelaide 126% and Perth around 106 to 107%, whereas Melbourne has grown about 40% over ten years and has been pretty much flat over the last five. Jeremy notes that Sydney's 60% is the best of the lower group, that the contrast is polarising, and that those markets will bounce back.
Jeremy explains that MCT is a score out of 100 that looks at growth over the last six months and one to five years, plus ten years, to find the pattern usually seen before a boom. The best score, Melbourne's 53, is low because nationwide growth over the last five years has been excellent. He says it is not about having a high or low score, but about how a market compares with others.
Damien uses Perth as an example. It was flat for a long time, then grew nearly 90% over the last five years, compared with 107% over ten. Someone who bought ten years ago would have had minimal growth followed by a sharp rise, and might have been better off in Sydney or Melbourne in that period. Jeremy says most growth happens in a short window, typically around three years, sometimes as short as 18 months to two years or stretching to six. It is usually followed by about six or seven years of barely keeping up with inflation. He says this is not a cycle you can set a clock to, but it is roughly how it goes. Damien asks listeners to comment if they would like more content on market cycle timing and when to sell a property.
Damien adds that Melbourne, Canberra and Sydney could suit owner-occupiers, since they have lagged over five and ten years and an owner-occupied home is exempt from capital gains tax. For someone eyeing Perth, he suggests they might rethink and consider renting there while buying elsewhere, but says everyone must do their own numbers.
Capital City Units
Darwin is again at the top for units on DSR3, with an enticing price point and yield and a strong MCT. Jeremy says he has been looking at Darwin units for the last few months and is staggered: a DSR3 of 79, compared with Perth in second place at 64, a price under $500,000 for a state capital, and a yield over 7%.
Jeremy also highlights Sydney units, where the city-wide DSR3 is 60, which is okay, but some pockets are extraordinary. He cites North Rocks, where a standard established two-bedroom unit in a built-up area has a DSR closer to 80 and a price around $600,000, with a yield over 5%. He says this is not visible in the figures because they aggregate all of Sydney's roughly 700 suburbs, not all of which have good unit markets, but it shows opportunities exist elsewhere, not just in Darwin. Damien agrees there are opportunities in Melbourne and Sydney too, and says it comes down to the goal, the price point, and whether the investor is long-term or looking to get in and out.
Damien says the media is all negative, but these markets have had huge growth in recent times. He and Jeremy are confident that exposure to housing is pretty safe in the future, since people need somewhere to live, and that even one investment property plus super is enough to do okay. Jeremy adds that this is not a crash in market conditions but a self-inflicted problem from government tax changes. Interest rates have had some impact, but he believes the majority of the issue is the tax change. He says governments cannot change the need for humans to live in a house, or how attractive Australian real estate is compared with elsewhere. Damien says that if investors have their buffers in place, they should not panic, and should stay strong rather than listen to the media and list their property.
Units: Four-Month Change, Stock and Days on Market
Unit values are holding up much better than houses over the four months. Jeremy says there is usually a flight to affordability after a recent boom: buyers pushed out of the market look for what they can afford, and that is often a unit.
Stock on market for units is up 38% in Brisbane and 31% in Perth, and Adelaide is up 45.5%, though that is only 269 units, since units are not as popular in Adelaide as in Sydney, Melbourne and Brisbane. Jeremy says Adelaide, Brisbane and Perth have all had fantastic growth, so even without tax changes and rising rates you would expect stock on market to climb and days on market to stretch. Days on market are similar to houses, with Brisbane and Perth at the top. Damien says it is a similar story: coming off the peak, combined with tax changes and rising rates.
MCT for units shows Melbourne, Sydney and Canberra at the top again, which Jeremy says tends to go hand in glove with the house results. Their ten-year growth is far lower than the bottom four markets. Jeremy notes Darwin units have grown only 8.6% over ten years, which is basically flat prices for a decade, even after a huge run in the last two years. He says that will rebound, no question.
Is Darwin Investor-Led?
Jeremy addresses the commentary that Darwin is an investor-led market. Before buying in Darwin, he checked this first, because if investors were buying from owner-occupiers and putting those properties on the rental market, vacancy rates would rise. He gives the example of a suburb with 500 houses, 100 of them owned by landlords. One vacant property means a 1% vacancy rate, and each switch from owner-occupied to rental would add roughly another 1%. Over the last 12 months, he says, vacancy rates in Darwin have actually gone down.
He believes much of this commentary comes from hearsay rather than data. As an example, he describes three properties for sale in a Darwin suburb: a new build, an over-capitalised renovation, and a "Goldilocks" property that is just right. All the buyers agents and investors turn up to the third one and conclude the market is investor-led, while owner-occupiers at the other two reach the opposite conclusion. He compares this to viewing the Earth from the International Space Station versus looking out your kitchen window.
Damien recalls similar negative commentary about Hobart years ago, saying it would not do anything, yet it boomed through around 2017 to 2019 and outperformed other markets. Jeremy remembers the arguments about declining population growth and claims the boom would be short-lived, when it kept going for about five years. He also recalls noticing a Sydney boom start around Mount Druitt, where a house could be bought for under $400,000 with a 6% yield, and prices doubled from 2012 to 2017, just before Hobart. Both say it comes down to research rather than opinion. Jeremy adds that opinions are in oversupply and research is in undersupply.
Key Takeaways
Damien says the property market is clearly cooling. Data updates around the fifth or sixth of each month, so they will keep analysing it. He says units are outperforming houses, which could be an opportunity for investors. At around the $450,000 mark with a really high yield, someone might be only $3,000 to $5,000 a year out of pocket, about $100 a week, which is holdable, and capital growth on top would be a bonus.
Jeremy adds that good yield opportunities exist elsewhere in the country if serviceability is an issue, with yields of 5 or 6%. He cautions that investors who bought three to five years ago and have equity should not expect to repeat the same thing as easily. Results will be harder to get, and only about 1% of the market, not 10%, will move that way, so investors need to be much more discerning.
On social media claims that anyone who bought a year or two ago is "cooked", Jeremy says someone who bought a year ago in Darwin probably has decent capital growth, though they may have lost some recently, and most of Melbourne has gone backwards. He doesn't see this as cooked: the key is being able to sit through the tough times, with cash flow buffers and a surplus in place for exactly this circumstance. He says many fake experts appear in the good times and are not prepared for the bad, and he believes this will be one of the roughest periods. Wars, a fuel issue, the global financial crisis and COVID have not really hurt Australian real estate, he says, but self-inflicted tax changes have. Even so, he calls it temporary, a tough time to sit through for maybe a year or two.
Jeremy recalls that when Labor planned to abolish negative gearing and lost the unlosable election, he posted that he was okay with it being abolished, provided it was phased in gradually. His reasoning is that investors are shunned because of cash flow, there are fewer rentals, vacancy falls, rents rise, properties become close to cash flow neutral, and investors return to restore balance. He says he does not believe there is historical data showing negative gearing pushed up prices, and calls the change a vote exercise. Damien adds that nothing is safe, even super, and the government might change things again early next year. He suggests investors who are fully fledged could hold off, track the data monthly, identify pockets and jump in when there is more confidence.
Damien says the markets he is most wary of now are Perth and Brisbane, because of their big growth runs and the skyrocketing stock on market and days on market. Jeremy says the up-and-coming markets are those that have not had the historical growth, especially for long-term investors, naming Melbourne for the long term and Darwin as booming now. He would not be keen on units for a buy-and-hold investor because of the potential for oversupply. Damien adds that lending capacity is the big issue: with, say, $1.1 million of capacity, a buyer could get a house in Melbourne on a longer-term view and a unit in Darwin, or a unit in Sydney's western, northern or southern corridors.
Closing Thoughts
Jeremy's final point is that past growth does not predict the next cycle. He notes many people use CAGR (compound annual growth rate) in back-testing, showing that Perth or Brisbane has done 100% over ten years as proof of how it will perform. He says fake experts use good past growth as a reason to expect good future growth, but the reverse is true: every year of above-average growth tends to be followed by a year of below-average growth, and vice versa. So investors should flip it on its head and want a low CAGR, not a high one.
Damien says that tough periods like this are going to be difficult for many property businesses, and that the investment firms will struggle over the last four months. He and Jeremy say their thoughts are with them. They also note that another slowdown comes with Christmas, and thank listeners for supporting the channel.