Hotspotting

A recent headline in the Australian Financial Review newspaper summed up why most of the property price forecasts published in mainstream media are hopelessly inaccurate.

 

The Fin Review headline declared “house price growth to slow as interest rates bite”, following a survey of economists by the newspaper.

 

Th survey of 30 economists came up with a median predicted rise in house prices nationwide of just 2.5%, with eight respondents forecasting a decline in property values.

 

The first error is that the Financial Review, which should know better, has sought expert property analysis from people who are not property specialists and certainly not experts on real estate matters.

 

The next mistake is the one that economists seem destined to make year after year – the belief that the biggest factor, indeed the only factor, which determines house price outcomes is interest rates.

 

The error is compounded by the belief that interest rates, which did not “bite” in 2023, would suddenly turn around and “bite” in 2024 - even though it’s likely that there will be no further rises by the Reserve Bank and the next movement in the official rate is likely to be downwards.

 

The inability of economists to understand that their methodology is flawed, and that they need to change, is quite remarkable.

 

Even more remarkable is the persistence with which newspapers seek real estate forecasts from people whose track records in predicting house prices is so bad it’s embarrassing

So the Financial Review would have us believe that property prices will be subdued because interest rates, which failed to impact throughout last year, will mysteriously impact in 2024.

 

Barrenjoey chief economist Jo Masters is tipping 4.8% growth nationally, but with Sydney house prices up just 3.8%  and Melbourne up 3.2%.

 

Oxford Economics’ senior economist Maree Kilroy is tipping a 2.7% gain in 2024.

 

Jarden’s Carlos Cacho expects prices to rise 5% nationally.

 

Australian National University associate professor Ben Phillips expects a “sluggish 2024” for property prices, tipping 4% nationally, but only 3% for Sydney, Melbourne and Canberra.

 

But for truly misguided forecasting, there’s nowhere better to go than to AMP chief economist Shane Oliver.

 

Oliver, who has a long track record of inaccurate property forecasts, says he expects house prices to fall 3–5 per cent this year, but with rate cuts providing relief in the second half.

 

In other words, it’s all about interest rates, even though the results of 2023 proved that it isn’t.

 

Nicola Powell, chief of research and economics at property website Domain and therefore more of a property specialist than those institutional boffins, is more bullish and tips 6-8% increases in house prices.

 

Ray White chief economist Nerida Conisbee, also a property specialist, is also optimistic and expects price rises this year could exceed the gains of 2023, which averaged around 8%.

 

Conisbee says: “The main reason is that many of the drivers of price growth this year continue to be in place, particularly low levels of housing supply. In addition, it is increasingly looking like we will see a rate cut in the first half of 2024. This will further fuel pricing.”

 

The record shows that specialist real estate analysts are far more likely to get it right with their property price forecasts than economists working for the big banks and other institutions.

 

Fulltime real estate analysts have some claim to being experts, while economists do not – and the proof of that is in the results of recent years.

One of the key national trends we’re tracking at Hotspotting is the rise of apartments to challenge the dominance of houses as the dwelling of choice by most buyers.

 

Throughout 2023 we saw growing evidence of rising demand by a range of different buyer cohorts for affordable apartments in good locations.

 

This has led us to rank the inner-city precincts of Melbourne, Brisbane and Sydney among the leading hotspot markets in the nation.

 

The more we do our research, the more we find examples of locations where apartments are out-performing houses.

 

Not everywhere in Australia is producing these results but a rising number of suburbs ARE.

 

In the coastal market of Evans Head in regional NSW, the median price for houses has fallen 15% in the past year, but the median price for apartments has risen 14%.

 

The long-term capital growth average for houses in Evans Head is a healthy 9.5% per year over 10 years, but the growth average for apartments is considerably stronger, at 12.2% per year.

 

In the Wollongong suburb of Fairy Meadow, there were 46 house sales and 64 unit sales in the past year, with the median price for houses dropping 12% but the median price for units rising 16%. And of course units, with a median price in the $600,000s, are considerably more affordable than houses, with a median price above $1 million.

 

In iconic Byron Bay, prices overshot reasonable market levels during the Covid boom and have come back considerably since then.

 

The median house price dropped 25% in the past 12 months, down to $2.34 million. The median price for apartments also dropped, but down only 10% to $1.3 million, and there was a 2% increase in the latest quarter.

 

The long-term capital growth averages also show apartments performing better, averaging 10% growth per year, while houses have averaged 7% per year.

 

In another icon, Surfers Paradise, apartments are selling twice as fast as houses – and the median price for houses has dropped 5% in the past year but the median for apartments has increased 13%. 

 

The long-term capital growth averages are a healthy 8.3% per year for houses and an even stronger 10.2% per year for apartments. And the rental yields are 2.8% for houses and 5.4% for apartments.

 

Price, once again, is a key factor – with median prices of $1.76 million for houses and $600,000 for apartments. Right now, apartments are typically selling in 28 days, with almost 1,500 unit sales in the past year.

 

At Coolum Beach on the Sunshine Coast in Queensland, both houses and apartments have excellent long-term growth averages, but apartments are better – 14.4% per year versus 13.1% per year.

 

Right now apartments are selling twice as fast as houses in that suburbs – 27 days for units and 54 days for houses, with relative affordability a key factor. The median prices are $1.3 million for houses and $780,000 for apartments, keeping in mind that many well-located apartments in this location have spectacular beach and ocean views.

 

Apartments are increasingly popular in Canberra, where the median price for houses is close to $1 million but the median for units is $590,000.

 

In the suburb of Chifley, the median price for houses dropped 12% in the past year to $1.06 million, while the median price for units rose 25% to $530,000, with relative affordability a driving factor.

 

The long-term capital growth averages are 7.1% per year for houses, and 11.7% per year for units.

 

Units currently are selling faster than houses in Chifley and the yields are better – 4.5% versus 3.6%.

 

In the Canberra suburb of Casey, houses are taking an average of 52 days to sell, but units only 34 days. The median price for houses has dropped 7% in the past year, while the unit median has risen 3%.

 

The long-term growth averages are 6.4% a year for houses and 8.6% a year for units.

 

And units have higher rental yields – 5.3% versus 4.1%.

 

There are many, many more similar examples to be found across the nation – providing growing evidence that one of the dominant paradigms in real estate (that houses do better than apartments) is being challenged.

The key word in real estate is shortage.

 

It was the key factor in the property price rises we have seen in the past year, in the face of multiple increases in interest rates.

 

And it’s going to get worse before we see any improvement.

 

Australia continues to build far too few new dwellings – and the forecast for 2024 is grim, from the viewpoint of addressing the shortages that are helping to drive up property prices and rents.

 

It’s predicted that home building will occur in 2024 at the slowest pace in more than a decade.

 

The Federal Government has set a goal to build 1.2 million new homes over the five years from 2024 – an average of 240,000 new homes each year – which is a rate of construction that has never before been achieved in Australia.

 

Currently the industry is falling well short of that target – and is likely to continue to do so, given that the building industry is blighted by shortages of everything, rising costs and building companies going broke week by week.

 

Investment and advisory group Jarden Australia says the government goal of 1.2 million homes is looking increasingly unlikely.

 

Jarden economist Carlos Cacho says: “Despite housing prices picking up again and despite the chronic undersupply of housing, we haven’t seen a pick-up in sales. On our numbers, we expect housing starts in calendar year 2024 to slow to about 155,000, which would be the lowest since 2012.”

 

So we need to build 240,000 to meet the Federal Government’s fanciful target, but the outcome his year is likely to be 155,000 new homes.

 

The higher cost of materials, land and finance are making it harder for developers to build dwellings profitably.

 

Jarden says Australia’s housing shortfall, expected to be at least 175,000 homes by 2027, reflects the failure to meet the key drivers of demand including smaller household sizes and the recent uplift in migration.

 

Extreme labour shortages have added to construction costs, delaying projects despite growing demand under-pinned by record-low vacancy rates and strong population growth.

 

The outcome is that we are likely to see sale prices and residential rents continuing to rise across Australia.

 

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Media misinformation is the scourge of real estate consumers everywhere.

And nowhere is the problem of rubbish in newspapers and other media more vivid than when they publish lists of the top suburbs for real estate performers across Australia.

Invariably, these lists are bogus because they’re made up of locations that make the list because of statistical aberrations.

Journalists love their lists – they’re a really easy headline, like “The Top 20 places for capital growth in 2023” – and they either don’t know or don’t care that the locations on the list are there because of “lies, damned lies and statistics”.

The research companies like PropTrack and CoreLogic are happy to provide these lists because it’s easy publicity and so they ask their computers to spit out a list and send it off to the media.

With computers, even in this era of AI, it’s a case of garbage in, garbage out. And if you don’t clean up the list your computer throws up, by checking for statistical oddities and aberrations usually caused by small sales samples, then the list will be rubbish.

But they don’t care as long as it achieves free publicity.

Recently the Newscorp network – which publishes The Australian, the Herald Sun, the Daily Telegraph and the Courier-Mail in Brisbane - published one of these lists under the headline “Queensland dominates nation’s top suburbs for buyers”.

This purported to be a list of the top 10 suburbs in Australia for buyer demand, based on what the statistics say.

Here’s the problem. If a location is a small town or suburb, or a new suburb, and there are very few sales in the year, then the median price data and the capital growth figures will be unreliable.

Indeed, often an absolute nonsense. 

For example, you can’t have a credible median price in a location with only 8 or 10 sales in the year. A few sales at the bottom end of the market or at the top end of the scale will greatly distort the figures.

Ethical researchers know this and would never publish data on places with fewer than, say, 30 sales in the past year because the figures will be distorted and unreliable.

But, as I said, neither the research companies nor the journalists give a damn – as long as it creates a clickbait headline. 

I’ve had instances where I’ve explained to journalists who called about their list before publishing it, that the locations were bogus and it would be embarrassing to them professionally to publish nonsense – but they’re gone ahead the printed the list and the article anyway.

As I said, they just don’t care that what they’re presenting to you, the consumer, is rubbish.

So that recent top 10 list of the nation’s top places for buyers? How many of the 10 locations had fewer than 30 sales in the past year?

The answer is that 9 of the 10 had sales samples too small to be considered valid entries.

That’s why most of the locations on this top 10 national list of great places to buy are places that most of us have never heard of.

What would you think if I told you that the best places in Australia to buy were Catai, Matcham, Sheldon, Woronora, Chandler and Holgate.

Where? I hear you say.

Some of these places are so small and insignificant that they recorded only 10 or 12 house sales in the entire year. 

They say that “if you torture statistics enough, they’ll tell you anything you want to hear” – and that’s certainly true in this instance.

If you don’t care about accuracy or credibility or about helping people, then you’ll be happy to use bogus statistics to tell a story that simply isn’t true.

It’s a stark example of “reader beware”, ahead of “buyer beware”.

 

A number of commentators and analysts have labelled 2023 as an “extraordinary” year in real estate.

One called 2023 “the year that surprised everyone”.

Who are these people? They’re the economists (like the ones who work for the big banks and for organisations like CoreLogic and AMP Capital) who got it wrong with their forecasts on what property prices would do this year.

And rather than admit their mistake – and indeed their ongoing incompetence in this area – they have tried to write it off as an aberration, an outlier, a year that nobody expected.

And in that regard the economists are wrong, yet again.

Many of the specialist real estate analysts – like the team at Hotspotting – DID foresee the year that occurred in 2023 and correctly predicted that we would see moderate to strong price growth in most, but not all, markets across Australia.

The year that unfolded was pretty much exactly what Hotspotting forecast at the start of 2023.

Our broadcasts and writings in late 2022 and early 2023 predicted a year of price growth, but not a boom year. 

One example was the annual real estate featured published by Money Magazine in February each year, written by Hotspotting managing director Terry Ryder.

Here’s what I wrote in that feature at the start of 2023:

No one is forecasting rises like we saw in 2021, when the national average was an increase above 25%. Rather, most analysts are suggesting moderate growth. That’s certainly how we see it at Hotspotting.

The failed forecasters working for the big banks, CoreLogic and elsewhere got it wrong and told us prices would fall at least 15% - because they fundamentally do not understand residential real estate.

They believe interest rates are the over-riding factor.

Here’s what the economists at CoreLogic wrote recently: “It’s pretty extraordinary to see values get to a new record high despite further uplifts in the rate-hiking cycle.”

The reality is that there was nothing surprising or extraordinary about the results of 2023. 

Real estate showed its usual resilience because there were bigger factors in play than interest rates, notably an oversupply of demand and an undersupply of properties for sale and for rent.

It’s not rocket science. You could teach this to primary school children – but I seriously doubt you could ever teach it to an economist.

Overseas migrants coming into Australia have NOT caused the rental shortage crisis, as some have claimed, but they are certainly adding to the problem.

The latest population data from the ABS suggests Australia in FY2023 experienced its biggest one-year jump in population, fuelled by a record 518,100 new migrants calling the country home.

And that has prompted warnings that the nation’s rental market will remain under pressure for years.

The population swelled by 624,100 in 2022-23 – that’s around 1,700 people a day - with 80 per cent of the extra residents occurring in the eastern states – despite the fact the WA had the highest percentage growth during the year.

According to the ABS, Victoria’s population grew 181,000 to 6.8 million, while NSW added 172,600 to 8.3 million.

Most migrants to Australia moved to four states: NSW took in 174,000, Victoria added 154,000, Queensland gained 84,000 while WA accepted 61,600.

The ABS noted temporary visa holders such as international students were the main contributor to the high net migration level.

Migration accounted for 83 per cent of total population growth through the year as natural increase – births minus deaths – continued to fall, with the short-lived COVID-19 baby boom well and truly over. 

WA had the highest percentage growth, up 3.1%, followed by Victoria 2.7% and Queensland 2.6%. 

Those with growth well below that 2.4% national average were Tasmania (up just 0.3%) and the Northern Territory (up 0.9%).

The Federal Government says it is overhauling its migration strategy to address key skills shortages across the economy, while at the same time reducing the number of temporary workers in the country to ease population and housing pressures.

The rental shortage crisis has been building steadily for the past eight years and has not been caused by this recent upsurge in migration.

But high levels of new residents from overseas are certainly adding to the problem, for which the nation’s politicians have no solutions – although the remedies are starkly obvious.

Are you struggling to navigate the unpredictable real estate market?

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