Our first report for 2022 and as usual there is a lot of reporting in the media about the real estate market so let’s try and make sense of what is happening.
Typically in February there is a lot of reporting about what happened in the previous calendar year as all the results are collated and presented. Needless to say, it was an incredible year in terms of capital gains in most markets.
The REIV is reporting that the Melbourne metropolitan median house price rose 18.9% over the 2021 calendar year, however that was surpassed by the regional markets which rose by 27%. These figures are medians across the whole of these markets which means that there were areas within those markets where this was substantially exceeded.
It seems so counter intuitive given the Covid back drop but the driving factors fall into three main categories.
The first one is lifestyle change. People had the time during lockdown to consider their life situation and decided to make the change. A lot of people we encountered had always planned to make these changes at a future point but escalated their plans. Moving out of an urban situation to a regional lifestyle never looked so attractive during Covid lockdowns and it was the regional markets that started seeing the activity and capital gains first. The activity in the metropolitan markets then followed, as those witnessing the activity thought that it was also a good time to trade up or down to suit their future needs.
This leads to the second factor – fear of missing out. As much as we like to think of ourselves as individual creatures, we definitely feel more comfortable following the herd. When the herd starts moving and ultimately running in a particular direction, we don’t want to be left behind. If you always wanted a property on the coast and saw prices escalating, the tendency is to engage because as a participant, you have no idea if that escalation of prices will continue or not. At the coalface we found many buyers were actually asset swapping which makes the decision to move easier because they are buying and selling in similar markets. They were either trading up their existing lifestyle property or selling a property in the city (either their main residence or an investment property) and buying on the coast.
The third factor was the fuel that made the whole thing possible – cheap money. If you are borrowing money to make a purchase, your whole decision comes back to the calculations you make on the kitchen table at home and deciding that you can afford the repayments. Hopefully the bank agrees with you but ultimately the level of comfort that you provide to yourself will dictate how much you are happy to spend or do it at all. This in turn leads to valuing a property you are interested in by the repayments you can afford. So when you get into an auction situation you keep bidding until that repayment comfort threshold is reached. The other people bidding at the same auction give you the psychological comfort to keep bidding and the ultimate price is just what it is. Importantly, you have achieved your goal and are generally happy with the repayment affordability. This is directly how cheap money fuels house price growth.
So that leads us to 2022 and what is likely to happen. Predicting the future is always fraught with danger, after all who could ever have predicted the outcomes of 2021. Rather than make firm predictions, let’s look at probabilities.
It’s highly probable that gain in values seen in 2021 will not be repeated in 2022. Simply those rate of gains are not sustainable. Despite the cheap money those repayment thresholds for many will have been reached relative to the current prices.
Supporting this probability is the fact that FOMO (Fear of Missing Out) is dissipating in the market due to the increased stock levels that came into the metropolitan markets, squeezed between the end of lockdowns in late 2021 and Christmas. When there is plenty to choose from your fear of missing out eases. These are overarching psychological factors that can affect the whole herd mentality.
The question on many people’s minds at present is “Will prices drop?”
There is no simple answer to this as it will come back to the supply and demand of the area that you are in or interested in. If supply (properties for sale) builds up and the number of buyers thin out, then it’s possible. Currently in our service areas, that is not the case. Supply remains tight and buyer enquiry is still significant. FOMO has eased but genuine buyers are still pursuing their goals while the marginal buyers tend to use this as a face-saving opportunity to stop looking, siting the possibility of an interest rate rise or the stock market or the election or the weather etc.
The most probable outcome is that we will see more balanced property markets in 2022 with area specific results subject to their supply and demand. This is actually a positive for the sustainability of the market. The other factors supporting this is that there will be distractions. When you are sitting in lockdown with no events to distract you, you have plenty of time to consider moving and improving your situation. This year we will have an election, we will be off to the footy, the kids are going to school, school sports and travel options are opening up etc. In other words, there will simply be less time to focus on property and more time to focus on the normality of life.
If we can ever be of any assistance in any real estate matter please don’t hesitate to call.