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We may have been dealing with a bear market for the past few years, but a Goldilocks zone could be right around the corner for Australia’s property sector.
Speaking at The Urban Developer and MaxCap industry lunch in Sydney recently, MaxCap head of research Bruce Wan said the win-win market conditions would help catalyse many projects that had languished in the doldrums of late.
“We’re expecting more rate cuts to come in 2025. What’s priced in is four rate cuts to the end of next year,” Wan said. “And that’s going to be quite transformative for the most rates-sensitive sectors of the economy.
“Our market cycles swing literally by those interest rates. So what was really hurting the sector with high interest rates for the past couple of years is going to turn and be a lot more accommodative and supportive as well.”
Wan said the undercurrent of pessimism would shift quickly with interest rate cuts, for the people buying the housing and the people building it.
“With a cash rate of something closer to 3.5 per cent, that will create much more of a ‘goldilocks zone’,” Wan said.
“There will be something for the [financier] in terms of lending out the money but there will also be something for the borrower in terms of making the development stack up a little more easily.
“So it’s less of a transfer of wealth from borrowers to lenders, some of that is coming back a little bit. And where we end up in 2025, particularly towards the back end of 2025, will be a far more balanced state of events in terms of what you need to borrow and what you’re paying the lenders to get the deals up and running as well.”
But there was still a way to go, Wan warned.
“A lot of the indicators are flashing red at the moment,” he said. “The economy is really struggling at the moment. Growth is at about 1.1 per cent, we are close to going backwards in a recession.
“If it wasn’t for the migration boom that we’re seeing right now, if we look at GDP per capita, we’re definitely going backwards. GDP is growing at about 1 per cent, and GDP per capita is -1.5 per cent, so really struggling.”
Migration has already pulled back in the past six months and, if it continues, we risk a “self-inflicted wound in terms of slowing the economy too much”.
“The big risk is if we do a massive pullback in population growth in tightening up borders a lot of the strong housing demand and the resilience of the economy may fade away,” Wan said.
But the fundamentals underpinning housing supply are still providing strong tailwinds for the asset class, which Wan said was likely to outperform many commercial sectors.
“Housing demand is still outrunning housing supply by a long margin,” he said. “Even if we see migration halve over the next two to three years, we’ll still see excess housing demand as well. So all of those things have been very supportive of holding up housing prices, even when we saw rising mortgage rates.
“But looking forward, falling mortgage rates and existing demand, both of those things will be holding up housing prices, so selling prices should be better supported in 2025, because of those tailwinds coming through as well.
“Every housing cycle in Australia for the last 40 years, the trigger has always been rate cuts and it is very powerful.”
But delivering the housing with a limited building capacity is another challenge, something Sydney and Gold Coast developer Allen Sammut is grappling with.
Sammut said the delays in planning and construction were seriously impacting the internal rate of return and had to be factored into feasibilities. This, he said, was adding to housing supply constraints and affordability of product.
“The time factor involved in getting anything delivered at the moment. The cost of construction is absurd, money is expensive, but I’ve borrowed at 19 per cent, I’ve been doing this for 41 years, so it’s not that scary–but the time factor is what is hitting us the most.
“Building is taking longer, the system that’s in place, the red tape, the portal system, the cost of all of that just makes the housing crisis worse … if you want to fix this up you have to speed up the process.
“That’s the biggest factor that will bring affordability back into the market. I can’t see anything at the moment that is feasible coming across my table.”
MaxCap Group chief investment officer Bill McWilliams has an intimate view of the challenges around feasibilities.
“There’s some landbanks on our books that the developer thought would be activated two years ago but it still hasn’t been activated and that hurts. There’s holding costs, there’s land tax costs,” McWilliams said.
“Feasibilities that didn’t work two years ago, they’re probably still not working today.”
But McWilliams says there are green shoots forming.
