In today’s episode Louis Strange and Jayden Vecchio are talking about supply, demand, and the fundamentals behind that and how it drives the Australian property market. First up we’re going to be going through demand, how you can identify demand and find the hot spot areas that might meet those categories.
We’ll cover five topics including:
- Interest rates
- Credit availability
- Speculation & Confidence
- Tax benefits
What is demand?
As the name suggests, it’s how many people want property. When you look at the relationship between supply and demand, if you keep supply the same, the more people demand, the higher the prices go up. For example, at an auction, if you’ve got one person bidding, it won’t be very competitive. On the other hand, if you have 100 people bidding, there will be much more of a price increase.
Population side of the demographic – if you have a higher population and not enough housing that will increase demand. Immigration has been a big driver in Sydney and Melbourne increasing demand and price. Looking at the latest statistics, the annual change across Australia is 1.4% and in Victoria at 1.8%, which is indicative of their market and the strong growth there.
Income and employment are also driving factors. The higher the incomes are in an area, the higher the property prices can be (the more affluent the suburb is). When you look at the breakdown of the higher price suburbs, they’re tied to higher incomes.
Australia as a country has a higher income than most of the world – we’re in the top 1%. If you earn greater than $34,000 USD per year, you’re in the top 1%. That’s why Australian property prices are relatively high. So overall, the two drivers are employment rates and income.
Here, it all comes down to affordability. Demand increases property price but as interest rates go down it seems more affordable and you’re taking on a bigger loan. When our parents were buying, it used to be 10 – 17% interest rates. Now we are in the high 3’s. In reverse, their mortgage size was on average $100k so if you break the affordability schedule down if you’re only paying 4% on $500k it’s equivalent to 14% on $100k.
Banks have been deregulated, with new contenders like credit unions who could start providing credit too. The more credit that is available, the more loans that we can get. So there’s more demand. It’s not as easy anymore to get loans, but overall the demand is still fairly high.
Speculation & Confidence
If people have an expectation that property prices will go up, they will then keep buying property and it will fulfil the price. If you are speculating in an area, you will put the price up, which overall creates the increase. Whether it continues comes down to immigration and whether people are still buying along with government incentives.
At the moment if you buy an investment property, the interest on that is tax deductible, which is called negative gearing. Negative gearing does increase the demand, especially for those looking to invest in their second investment.
Capital gains tax (CGT) is when you sell your own primary residence and you don’t have to pay tax on the gains. So if you bought a house for $400k and sold for $800k, you don’t have to pay tax on the $400k profit. That’s why a lot of people move into a property for a year or two while they renovate then sell it and move.
Unlike an investment property, where if you bought it for $400k and sold it for $800K you’d have a gain of $400k, but with the CGT discount if you’ve owned the property for longer than a year you get a 50% reduction on the capital gains (the same in shares), so it goes from $400k to $200k of assessable income.
Then there’s first home owner grant or stamp duty concession (depending on what state you’re in). All of these have either skewed demand or increased it. When Queensland offered a $20k first home buyers grant but only on a new property this meant that developers added an additional $5,000 to their listings, because it won’t net off their affordability and they can make more of a profit.
No demand – Speculation
All the mining towns – property prices change accordingly to demand.
Once work dries up the property prices then crumble.
Key takeaway points
- Demand is a critical factor in the property picture how that plays on prices, capital gains discount and rentals. Its factors are determined by demographic, interest rates, availability of credit, speculation, clearance rates and confidence, and the tax benefits. If any of these things change it can affect the future of demand.
- If you’re looking at buying a property make sure you understand the suburb, average job and demographic.