Why property bargain hunters can hang tight... this downturn is only starting

0:00Hello and welcome to the Australian's Money Puzzle Podcast. I'm James Curley, welcome aboard everybody. I have to say that one of my favorite property guests is Cameron Cushion. I know him a long time. He was in the research team at what is network REE as well, so I really state our company. I think, yeah, we was in what is how become Kotazzi. They keep changing their names. A permanent presence you might say and enduring presence as an independent commentator now, which is ideal, I think, for the show, which we're always looking for. Someone that is fully thrust in the market, but stands just a little bit outside and they can give a fresh independent view. How are you, Cameron? I'm really well, James. Thanks for having me on again. I hope I didn't wind you up too much there in my preamble. Just enough. Just enough. Good, good. So I know, I've just been watching in the, been all around the country of course, and you're talking to property groups all the time. So this is the guy really

1:03does have his finger on the post folks. I thought when I sent you some notes and we tick tack about what we might talk about, I thought we might just explain to the casual listener, why we are? Because that's what everyone wants to know. Where are we on this downturn? How does it compare to previous downturns? What happens next? Everyone of course wondering and asking when did prices when did we reach the bottom? Let's see, we can give a fair answer to that. As I understand the last two cycles, downward cycles, they were 8% picked to trough and that was 2022 and 2017. Is that right? Nationwide? That's correct. And I guess the two factors in both of those downturns were a little bit different. In 2022, it was largely coming out of the pandemic. Interest rates were increased very aggressively. 2017 was more about restricting access to credit because we had the Royal Commission going on and that led to that downturn in the housing market we saw at that time. So this one, it's hard to explain, isn't it in a single sentence? What forces it would do? It seemed to me that

2:06the outstanding issue is the continued elevation of interest rates and it's not over yet, but you tell me. Before we talk about the particulars of this drop, what it might mean, how it might look against other drops, what are the explanation so far of the softness in house prices? I think there's a few. So firstly, if we look at the two big markets of Sydney and Melbourne and they really drive the national outcomes, the Melbourne housing market has been weak for five years. It's actually seen no price growth over that period of time. It's been a function of really low consumer sentiment or by a willingness in that market and a very high volume of stock available for sale in Melbourne. You've also had, you've still had strong net overseas migration to Melbourne and Victoria. We've had a lot of people leaving Victoria. Now, a lot of people from Interstate not arriving in Victoria who would have previously. Now, Melbourne is actually really quite affordable now, but

3:06the challenge still is that there's a lot of properties on the market. Sydney has also gone into a downturn and the fall in prices in Sydney started before the federal budget. Again, similar to Melbourne, one of the big drivers of the weakness in the Sydney housing market has been, there's been a very high level of stock available for sale and affordability in that market is extremely stretched. We were also seeing before the federal budget, obviously, we got three interest rate increases early this year and we were seeing the rate of growth in prices in those other markets starting to slow. But then the federal budget came and there were obviously significant changes to the capital gains tax discount and negative giri. We've largely seen investors who were about 40% of mortgage demand pull out of the market. They try to figure out how they proceed from here, but those changes have really damaged sentiment and it's led to the falls brought to me. Now most capital

4:07cities have seen prices decline over the last sort of two to three months. We're seeing that the number of buyers turning up to open homes is significantly lower. Obviously, now we've got the prospect and interest rates are probably likely to rise at least one more time, if not a second time. I think that's creating a lot of trepidation for people that want to buy or want to invest in the housing market right now. We have the issue that the interest rate rises both local and global. We have local factors which could push up our interest rates and they're on the table and it looks likely that they would be as you say at least one more and then globally, driven by the US, it would look like the next move will be open as well. This is not good for the property investor. All right, so if the last two cycles then those downturns, one was we mentioned two, two, two and one was two seventeen and they went peak to 12th 8%. It would seem we don't have to be an expert to know that it would seem this time around. They were very particular

5:09factors the last time. This looks like a combination almost like a perfect storm of factors and those factors are yet to play out. Do you think we see a drop of more than 8% peak to trough this time? I think definitely. If you look at the Cotality Daily Index, it's already fallen 5% from its peak at a national level and over the last couple of months we've seen the rate of decline accelerating. The other thing we've also seen is that the previous months, the declines that were initially showed have been revised significantly lower. We're constantly seeing the actual magnitude of these drops revising. I think we will see prices fall by more than 8%. I think ultimately prices probably fall pullback somewhere between 10 and 15%. We probably don't start to see a recovery in the housing market until interest rates are reduced. At this point, as we mentioned, it looks like interest rates will rise at least once, maybe twice. I don't think at the

6:10absolute earliest, the Reserve Bank is going to have scope to be cutting interest rates until this time next year. It could end up being a lot longer than that. Until it becomes clear that inflation is moderating and the Reserve Bank is going to have scope to cut interest rates, then I don't see a recovery occurring in this market. For the general listener, they know that the national prices fell 8% in the last two cycles, down cycles. They know you've just said that the national prices have fallen perhaps 5% did you say? What point do you think we passed that we're into fresh territory? What point do you think we passed the 8% drop roughly? It's probably very late this year or early next year. Probably sometime in December or January is when we see those falls eclipse. We could be there by the end of the year. We could be into the opposite of Blue Sky is, but we're into

7:11this sort of beyond this. Maybe routine drops. Exactly. I think this is one of the things. Obviously, the housing market operates in a cycle. I recently had a look, if you go back all the way to 1980 and look at every single month, about 75% of all months of seeing prices rise and only about 25% of all months have seen prices fall. So prices do fall, but they have generally been quite moderate. I think a lot of people forget about the price falls because most of the time prices are rising. As you alluded to, this is a very different situation. We've got tax changes. We've got interest rates that are elevated. We've got inflation at the time. Historically, what's led to a recovery in the market when we've gone into a downturn is that the Reserve Bank has either started cutting interest rates, or it's become very obvious that they're going to cut interest rates soon. I think we're still a lot away from that point at the moment. The only thing I want to ask you, I don't like keep them in my mind, but the first one is that at the end of the year, if we came

8:14into that period where we're beyond where we've been in the last two cycles, how far about would you have to go to see a drop of 15% peak to trough? There's not really quality data before the 1980s, but you'd be looking at that oil crisis back in the 1970s. The last time we saw that sort of form. Have you any sense about the most recent worst one being the early 90s drop was? So the worst one we've seen since the start of the 1980s was actually that 8% fall that we saw in 2017, and then again replicated in 2022. Now, there's been markets, obviously, where the falls have been much larger. We've seen Melbourne in the early 1990s. Prices fell about 15% and took about 15 years to recover. The more recent examples actually, Perth, the fourth global financial crisis, we saw prices in Perth fall by about 15% and shown no growth for about 12 years. So there are individual cities where we've seen examples of that, but at a national level, we haven't seen a large fall like that for quite some time. Okay. This must be the show that both UNR were

9:18careful to get it right and supposed to exaggerate in any fashion, but I'm just trying to get prospective here in terms of what could happen. To what extent do you look overseas, question without notice, do you look overseas and is there any parallel? As I'm thinking out of Canada, for instance, where they met a lot of efforts to cool their house prices in, it brought all too well. Is there a danger of that here? Look, I think it's unlawfully, but I think there's a possibility. A big thing that Canada did was they lifted interest rates much more aggressively than we did. New Zealand did that also. Even though I think we're going to get a couple more interest rate hikes, I don't think that the reserve banks going to be overly aggressive because they do have this dual mandate that they need to try and maintain full employment, which other central banks don't necessarily have. The other big one for both Canada and for New Zealand was Canada's really aggressively cut its rate of migration to that country as well. That's impacted on the housing market. New Zealand didn't do that, but as the New Zealand economy weakened, a lot fewer people went to New Zealand and obviously

10:20a lot of Kiwis found their way to Australia because they can do that. The economy is stronger, their job prospects are a lot stronger as well. Now, there's obviously been some talk about cutting migration, but I don't think anyone's proposing to cut migration anywhere near as aggressively as what we saw in Canada over the past few years. Okay, and then just to finish off on this gloom segment because it is gloomy, and I think you have to be a very confident rational investor to know that you're buying cheap now and you make your profit when you buy. So from an investment point of view, there is a lot to be desired here in that the opposite splendid property investment opportunities across Australia and global basis. When you look at the wider picture of our market, what could imperil this focus? What would make it worse? What would make it worse? I think the thing that would make it worse is if it takes longer for interest rates to be reduced. If we see an increase in forced selling, obviously at the moment,

11:22what we've seen for the start of spring is that there hasn't actually been a significant ramp up in listings, which for me actually says that vendors are going, potential vendors are saying, I don't need to sell right now. I'm not going to put my property on the market. Okay. So this highland that has been predicted has it hasn't taken cheap yet? No, it hasn't. It could, especially if we do get some more interest rate hikes and the pressure might come on households. But there's little evidence of that yet. But I think interest rates is the big one. I mean, if you look at the yield curve at the moment, the next 18 months, it doesn't have any interest rate cuts in the yield curve at all. Now there's no guarantee that's right, but I still think that we're quite a distance away from the reserve bank being able to cut rates. And because a lot of people taking out mortgages take on a large sum of money to do that, we are very interest rate sensitive. And I think that's going to impact on the market while we continue to have these high rates of high interest rates. Okay. We'll take a short break folks and we will be back in the moment. We've got to dig in here and tell you basically a lot more about

12:22the next year, what's going on and where it may go from here back in a second. Hello, welcome back to the Australian's Money Puzzle podcast James Kerr be here talking to Cameron Cusher of Cusher Consulting Cameron just finished our farm the picture of the national market. It's I think most people know where we're going to grow at least Sydney and we're leading the drop. I delayed Perth, Brisbane, the middle and they are what happens in the larger cities does tend to happen sooner or later in smaller cities and that would seem to be the case if I'm saying I didn't wrong here, tell me. But I'm just wondering one thing, so far, I think it's a perversion really of economics, the lower part of the market. The first home entry level is actually the strongest part. So the luxury level is really getting hit. The middle level is middling and the entry level cheapest property has the strongest demand. Some of that we would imagine is that

13:23supported by the government's first home deposit, could you tell us a little bit about that and where that crack like everything adds? What do you view? Yeah, so that lower end of the market has been supported by first home buyers as you said. I think the other thing that was supporting that lower end of the market was investors because investors in first home buyers historically compete for that similar kind of stock. Now that there's fewer investors that we have started to see some prices decline at that lower end of the market. And I think we'll continue to see that because I think as the market continues to go into a downturn, the first home buyers will go, we'll start thinking to themselves, why would I jump into the market now? Because if I wait a few months, I'll be able to buy this property cheaper. Equally investors are sitting on the sidelines so you don't have as much demand from that segment of the market. The other thing is the top end of the market has been really weak but I wouldn't be surprised if it's actually ends up being a little bit stronger saying 12 months time and that's mainly because high end

14:23housing or high price housing is tax-free. You buy it, yes you pay stamp duty when you purchase a property but if you hold that property, if you make a renovation to that property, if you hold it and see prices grow, you sell that and there's no capital gains tax. So I wonder if the changes to the capital gains tax and the negative gearing benefits actually see more people pouring money into their principal place of residence rather than an investment property. Because it's CGT exempt. Exactly. I think that's interesting. It's sensitive too at the top end. They certainly are. I mean the top end is probably cheaper than a lot of your listeners would think. So the top end of the market is sort of one and a half million and above. And it totally talking to a lot of people in the really top end of the market is largely unaffected. I mean there's still been some record sales. I know last week there was a record sale in Kotaslow in WA. There's been some really strong sales in those premium markets of Sydney and Melbourne. But that's sort of one one and a half to three million dollar market. That's certainly when more of the weakness is at the

15:25moment. The ultra top end people aren't interest rate sensitive at that level. I wish I was at that level but the real thing is that their home is just an asset of money. Okay. This is what's persevering with just to complete this. And we'd come back to the first one by a second. Second folks. I saw Cameron used to say it's something along the lines of that. What you were really surprised by was not that past prices were falling but that they weren't falling more in what we might call mediocre property investment assets by that. We were referring to they have time property obviously commercial and then they have divisions after that. I obviously middle ranking mediocre level. I'm talking strictly from an investment perspective. They might be currently in that space today. But mediocre property assets such as residential property in the middle suburb that has nothing in particular wrong with it. But nothing particularly good about it's not about the sea. It doesn't have views. There's not by a forest or whatever. That seemed to me as all that you were particularly puzzled by. Yeah well I think what the and of course the tax

16:29changes haven't actually started yet. But they are going to start from middle of next year. Although your negative hearings adjusted a little bit and things have been grandfathered on the side of negative hearing. But for me I think what these tax changes do is make income more important now for an investment necessarily than capital growth because the rent rather than the price of depreciation. Is that what you mean? Exactly right. From an investment perspective things like inner city apartments that are low priced but have strong rental yields actually become a little bit more attractive under this market. Out of suburban housing although it's not really that cheap anymore but that you can get better yields in those out of suburban housing. Those middle ring houses where prices have appreciated so much over the last few years. Rental demand possibly isn't quite as strong. Your gross rental yields are probably in most of the major cities sitting at a sort of three three and a half percent which is a net rental yield of probably two percent or even lower than that. I'm surprised that demand for that hasn't reduced by a greater amount. And purely because

17:35the people that would buy that as an owner occupied property are struggling with higher interest rates and are probably thinking if I wait this out the price of that will come down. And an investor it's not stacking up as strongly for an investor anymore. Yeah yeah so kind of an area of concern being that middle ring as you see not the totally over so well because there's good yields there not the inner because they have separate dynamics but the middle ring suburb which has gone up a lot of the price and it's showing that these are terribly low and someone's searching those for again rentally they're not going to get us in that ring. Just quickly one other thing the only thing we're done is if it's a really large block and it's got the potential to be a knockdown rebuild where you build two properties or a duplex then they actually become quite attractive because one of the ways to get negative gearing or capital gain or the capital gain stacks this count is to create additional supply. They can't do that through a granny flat but if you can knock down a large block once I get an 800 square meter block and build two or three properties then that's the type of investment people will be looking for. Yeah yeah because they're new and

18:38then they can be negative if you give for their first for the first owner at least. Yeah always out of the owner to be precise keep that in mind folks. Okay just to finish off then what about the first one by higher level I didn't really let you take up on that basically would it crack like everything else or either factors that would hold it up. Look I think it's probably hold up a little bit better. We saw the latest lending data there was a big pullback in investors there was actually a bit of a pullback in first home buyer volumes as well but not to the same magnitude. Look I think a lot of people want to buy a home and some first home buyers will see this as their opportunity to enter the market. Yeah. But I think increasingly they're going to be a bit more hesitant to jump in because that as we said prices are falling so they will feel like okay I like this property but if I wait six months something better might come on the market and it's probably going to be cheaper or this property might still be on the market in six months time and I'll be able to negotiate a bit of price on that. So I think some first home buyers will jump in they'll say look I'm going to own this property for 10 years it's a good property it's the price I'm comfortable

19:39with but I think others will wait and try and get that best deal they can possibly find. No I suppose the first home buyer does have that greater advantage than they don't have to set out. Oh no. So they really can pick their timing unlike the person who's trading us such where they have to get everything has to fall into place. Okay I have some questions I've kept for camera and stay with us back in a moment. Hello welcome back to the Australian's Money Puzzle podcast James we're going to be talking to Cameron Cusher. Cameron I meant to ask you in the second segment one of the things that has current courses the collapse of this Bethlehem B.A.K.H. L.A. housing group in Sydney leaving thousands and thousands of homes on built it's in administration that the moment is struggling not to go into liquidation and it's also a cent shock waves for the first time really in a serious way from the private credit sector such as it is the private credit sector that's

20:41exposed to housing which is a lot more here than it is in other markets so I want to talk to you just about that basically your impression of that housing collapse housing developer collapse Bethlehem and names like Latrobe etc who are in the ring there on the private credit side in this Sahaga. What does it mean do you think foreign investors in in residential property Australia is significant would it be a landmark to be learned something from it is it the first of many? So I think obviously the development side of housing is really challenging at the moment. Bethlehem were doing quite affordable housing in western Sydney. Yeah that's the iron out. Yeah but some of the reporting has been that other developers have said they have no idea how they delivered the housing as cheaply as they were so maybe that's actually the crux of their problem they cut their margins so much I wouldn't be surprised if in this cycle we see other property developers getting trouble because construction costs are up about 40% over the past five years they're starting

21:44to climb again higher interest rates mean that their borrowing costs go up again and the other big thing is it's going to get harder to sell brand new properties because the premium for a brand new property over an existing property that gap's going to widen as as established prices fall. I think it's probably a landmark in that it's the first big one we've had in a while and I think the other big one is private credit it's something that used to be really non-mainstream but it's become much more widely used over recent years because the commercial banks have basically shut the door on a lot of developers and said we're not going to finance this so I think it's certainly something to keep a very close eye on look I don't want I don't want any developer or any business to collapse but the combination of higher construction costs higher interest rates unsure there's other developers out there under pressure at the moment did we see that much in the last two cycles that those 8% drops to 17 to 22 not anywhere near it's like if you have a look at the insolvency data over the last few years the construction sector has seen very high rates

22:47of insolvency and that's subcontractors all the way up to property developers but no we haven't had a large collapse like this there was port of Davis homes during the pandemic that we saw go under in Victoria they are a builder rather than a developer yeah and we've seen some others get into a little bit of trouble but no I think this is probably the biggest one we've seen in a while as interesting isn't it okay some list of questions while you're with us Sally says and during the podcast as always I heard someone say on bank reduction of their rates that maybe a reflection of the decrease in the loan applications they know there was she saying that the banks are pulling their deposit rates lower because they have less funding to do on the other side of the book hence they reduce the rate she asked does that sound convincing or is it I imagine it's not a complete explanation but you tell us no look I think possibly I think it's more that the banks just think they can cut their term deposits and people aren't going to kick up too much of a stink of it yeah that's probably the more likely thing but it will be interesting they've

23:51all set in their quarterly updates recently that mortgage applications are down 15 to 20 percent that's obviously not good for the bank overall but it does mean that they have to raise less money if there is a reduction in demand for mortgages yeah yeah so there's a couple of things going on and but as you say maybe the fact that they can do it is actually keeping they can do it and get away with it they get much less trouble for cutting deposits than they do for raising mortgage rates as most people would know by now okay Tom has a broad ranging peace correspondence but he wanted to ask a couple of things he was saying that negative gain for residential housing it has locked out many people and this time this trust strategy is not available now and borrowing or using equity-builder to borrow shares also seems much too hard at 8 percent and higher he says a lot of young Australians are feeling squeezing the squeeze and we should pay more attention to that yes we should pay more attention to it that's something we try and do on the show Tom and say for instance with Cameron this morning I tried to cover all aspects of housing from the top end

24:54to the entry level end but it is something I'm very good aware of with our listeners in that demographic there's many of them and we will do better let me tell you okay that's the promise from me all right peace we are also says we are all familiar with the statement about investment products the past performance is no guarantee a future performance so how then can property forecasters get away with saying that a 4.11% fall in house prices over a quarter will translate into 80% over the next year it sounds like premature extra-pleasure to me thank you peace premature extrapolation I haven't tried that before extrapolation for sure but all forecasters dot day is there anything innately wrong not necessary I mean getting a forecast for right is extremely difficult and most forecasts ultimately end up being wrong I'm not naive enough to think that I'm going to nail this forecast I would think I'd like to think that I will but there's a very good chance that I won't I think the reason that it's getting extrapolated at the moment is that the rate of

25:54decline is actually accelerating and so that's why people are extrapolating what's happened over the last say quarter or last couple of months and then pushing that out to forecast now as you know markets don't move in a straight line and say we get to December we know December is a much quiet period for the housing market you may not see prices fall as much then as we're seeing at the moment but the way the lot of the models work is that they look at the recent performance and then extrapolate that out to give you a decline but an 18% decline in the markets certainly much more than I'm expecting that's not to say it won't happen but that would be quite a large fall and obviously that would happen but it has actually shunted out hasn't it like literally you can literally see it the foreign banks came out first no one was saying 10 the local banks certainly weren't saying 10 you know then that then finally the local banks say 10 and then the foreign banks pushed a little bit further they've less to lose right they don't talk they can just be like a dynamic about this sort of thing and they'll always have outliers but it seems to me that it has shifted it has become more negative the consensus if you like it definitely has I think there's a lot of optimism generally

26:58around that Australian housing market the things thing okay we'll go into a downturn in the market will recover pretty quickly but obviously that's not happening this time and also just the broader economy the way it's performing I think you go back probably three or four months ago people thought maybe there weren't going to be any more interest rate hikes fast forward to today and it looks like there's going to be at least one more if not two more so conditions can it can evolve pretty quickly keep that in mind folks always good to talk to camera particularly good at this point in the site particularly useful thank you very much thanks for having me that was Cameron Cushion Cushion Consulting any more questions keep them rolling the money puzzle at the australian.com.au on any issue you like today's show was produced by Tiffany to Mac talk you soon