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Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer.

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Sean Aylmer: In the first few months of the pandemic, almost every

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Sean Aylmer: single forecaster was predicting a dire outcome for the property market,

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Sean Aylmer: including declines in house prices of up to 20 per cent.

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Sean Aylmer: I don't think anybody expected them to go the other way,

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Sean Aylmer: and definitely not by as much as they have. Property

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Sean Aylmer: prices across the country have now surged more than 16

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Sean Aylmer: per cent over the past 12 months, the fastest annual

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Sean Aylmer: growth in 17 years. The market has even defied recent lockdowns,

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Sean Aylmer: with valuations slowing but still increasing across all capital cities

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Sean Aylmer: in the past month. I'm quoting the CoreLogic data as well.

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Sean Aylmer: It's the best in the market and as we often

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Sean Aylmer: do hear at Fear and Greed, I thought we'd go straight

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Sean Aylmer: to the source. Tim Lawless is Head of Research at

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Sean Aylmer: CoreLogic Asia-Pacific and my guest this morning. Tim, welcome back.

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Tim Lawless: Hi, Sean. Thanks for inviting me on your show.

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Sean Aylmer: How long have you been looking at property prices, Tim?

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Tim Lawless: It makes me a little bit anxious to say, to be honest,

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Tim Lawless: it's about 20 years now, I think. But I've been

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Tim Lawless: at CoreLogic since 2007. Prior to that, I was at Colliers and PRD (PRD Real Estate). And,

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Tim Lawless: funnily enough, before that I was actually it's at RP Data,

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Tim Lawless: which eventually evolved into CoreLogic.

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Sean Aylmer: Yeah. So in that 20 years, have you ever seen

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Sean Aylmer: as big a surprise or turnaround in house prices as

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Sean Aylmer: the last 12 or 18 months?

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Tim Lawless: No, I think this really tops it. You know, there's been

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Tim Lawless: some spectacular growth cycles across Australia, say back in 2001

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Tim Lawless: through to 2004. We saw the GFC where values fell pretty quickly.

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Tim Lawless: We saw all the macro-prudential and the credit restraints through

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Tim Lawless: 2017-2019 where the market was going down. But I think

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Tim Lawless: the most recent 18 months or so has been the

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Tim Lawless: most uncertain and most surprising by some margin.

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Sean Aylmer: Why do you think everyone was so pessimistic to begin

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Sean Aylmer: with and then got it so wrong?

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Tim Lawless: Yeah, I think we have to look back at the

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Tim Lawless: mindset of everybody back in, say, March and April of 2020.

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Tim Lawless: Back then, this was, COVID was something very new. It

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Tim Lawless: was something that was very scary. And nobody really knew how

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Tim Lawless: Australia was going to fare during this global pandemic. And

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Tim Lawless: I think everybody assumed the worst. But quite quickly it became

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Tim Lawless: apparent that we were keeping a lid on the virus pretty well,

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Tim Lawless: at least compared to other countries. Probably, also, no one really,

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Tim Lawless: I guess, thought through the amount of fiscal support there

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Tim Lawless: was going to be coming through the system that actually

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Tim Lawless: supported the economy and really got us out of the

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Tim Lawless: doldrums quite quickly. And, of course, it's really that boost

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Tim Lawless: economically that got sentiment quite high and got the housing

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Tim Lawless: market back into a very strong growth trajectory.

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Sean Aylmer: Okay, so what are the key factors? Sentiment, but what

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Sean Aylmer: was driving that?

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Tim Lawless: Yeah, well, obviously interest rates were a really big part

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Tim Lawless: of this. So monetary policy is probably at the basis

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Tim Lawless: of the foundations of this really strong rebound. And we

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Tim Lawless: know from very low interest rates that really spurred demand.

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Tim Lawless: So any time we're looking at housing markets, we always

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Tim Lawless: look at the supply and the demand side factors. So

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Tim Lawless: from a demand side, very much about very low interest

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Tim Lawless: rates and then improving confidence as the economy improved. On

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Tim Lawless: any of the sentiment readings, we saw consumer sentiment get

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Tim Lawless: back above average levels by late last year and track to

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Tim Lawless: well above pre-COVID levels through earlier this year. Sentiment has

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Tim Lawless: come back down a little bit since then because of

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Tim Lawless: all these spot lockdowns. But that surge in confidence was a

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Tim Lawless: big part of bringing demand back into the marketplace as well.

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Tim Lawless: And then on the supply side, while we've had this

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Tim Lawless: huge surge in demand, we've had an absolute lack of supply.

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Tim Lawless: There hasn't been a lot of vendor activity or at

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Tim Lawless: least vendor activity has been about normal, put it that way.

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Tim Lawless: So we're seeing about a normal amount of new stock

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Tim Lawless: coming on the market at a time when buyer activity

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Tim Lawless: is about 40 per cent above average. So it's really

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Tim Lawless: that mismatch between how much available supply was in the

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Tim Lawless: market and how much demand had been boosted. And that

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Tim Lawless: created a lot of urgency amongst buyers. We hear that

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Tim Lawless: term FOMO all the time, the fear of missing out,

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Tim Lawless: which was really quite, I think, palpable, particularly at the

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Tim Lawless: height of the market back in March earlier this year.

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Tim Lawless: And that sense of urgency was another factor, really pushing

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Tim Lawless: up prices as quickly as what we've seen over the

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Tim Lawless: past 12 months. As you say, up up a little

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Tim Lawless: bit more than 16 per cent over the past year.

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Sean Aylmer: Now, valuations have increased across the country. If we take

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Sean Aylmer: the capital cities, though, it's the East Coast has done

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Sean Aylmer: a lot better than the West Coast.

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Tim Lawless: Yeah, absolutely. And even outside of the East Coast, we've

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Tim Lawless: seen some of the smaller capital cities outperforming the larger

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Tim Lawless: ones as well. So at one end of the spectrum,

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Tim Lawless: we've seen markets like Darwin. You know, surprisingly enough, Darwin

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Tim Lawless: is the best performing capital city over the past 12

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Tim Lawless: months and housing values there are up 23.4 per cent

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Tim Lawless: over the 12 months to July. And of course, that

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Tim Lawless: comes after a really long sustained downturn in Darwin and

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Tim Lawless: Perth between the middle of 2014 and the middle of 2019.

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Tim Lawless: Then you got Canberra, housing values in Canberra, up about 21 per cent.

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Tim Lawless: In Hobart, up about 22 per cent as well. So the

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Tim Lawless: smaller cities have done very well. They've probably done a

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Tim Lawless: pretty good job of keeping a lid on the virus.

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Tim Lawless: But across the majors, absolutely this is the story about Sydney again.

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Tim Lawless: Sydney housing values are up 18 per cent over the

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Tim Lawless: year compared to Melbourne, which is only up 10 per cent.

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Tim Lawless: So the reason we're seeing such a big difference between

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Tim Lawless: Sydney and Melbourne probably comes back to a couple of things.

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Tim Lawless: I think Melbourne's obviously had a tougher run through COVID with

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Tim Lawless: more lockdowns and disruption. Though Melbourne's also got a much

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Tim Lawless: weaker apartment market, which is really dragging on the overall

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Tim Lawless: annual figures. Apartment values in Melbourne are up a little

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Tim Lawless: bit less than six per cent, whereas in Sydney they're up

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Tim Lawless: nearly eight per cent in Sydney. So not as much of

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Tim Lawless: a drag on the headline growth rates. In Brisbane we've

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Tim Lawless: also seen a very strong performance, values there are up about

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Tim Lawless: 16 per cent over the past 12 months. And Brisbane

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Tim Lawless: seems to be holding its growth rate much more firmly than, say,

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Tim Lawless: Sydney or Melbourne, where we have seen the market losing

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Tim Lawless: a little bit of steam since the end of March.

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Sean Aylmer: And then Perth hasn't done so well either.

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Tim Lawless: No, Perth's a bit surprising. And we've seen housing values

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Tim Lawless: in Perth rise by nearly 11 per cent over the

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Tim Lawless: past 12 months. So I think in the context of things,

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Tim Lawless: that's still an extremely strong result. We've seen housing values

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Tim Lawless: rise by nearly 11 per cent back into double digits, which

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Tim Lawless: is remarkable for Perth, considering a couple of years ago

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Tim Lawless: it was still in the midst of a long-running downturn.

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Tim Lawless: But it does look like the Perth marketplace is underperforming

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Tim Lawless: for whatever reasons. Maybe it's vendors are a little bit

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Tim Lawless: more eager to offload this stock there. Listing numbers have been

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Tim Lawless: a little bit higher. They're probably a bit more sensitive

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Tim Lawless: to some of the fragility of the economy and the

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Tim Lawless: lockdowns as well, it seems after going through such an

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Tim Lawless: extended downturn in the housing market. Still 11 per cent

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Tim Lawless: in a year, I think is quite a strong result

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Tim Lawless: for property owners over there.

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Sean Aylmer: Well, I mean, I suppose talking about apartments in Melbourne

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Sean Aylmer: and Sydney, six to eight per cent in any normal year,

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Sean Aylmer: you'd be quite happy with six to eight per cent appreciation.

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Tim Lawless: Yeah, absolutely.

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Sean Aylmer: Yeah. It's fear of missing out. It's the fact that

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Sean Aylmer: everything else is going up so much you feel you're underperforming.

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Tim Lawless: Yeah, that's a really good point, Sean. And if you

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Tim Lawless: look around Melbourne's apartment market, there's some real extremes. At

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Tim Lawless: one end, you've got the inner city high rise precinct

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Tim Lawless: where there's some evidence the values are falling in those markets,

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Tim Lawless: like the CBD of Melbourne itself, Docklands, Southbank. So your

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Tim Lawless: high profile, high-density markets. The reason for that is vacancy

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Tim Lawless: rates in those areas are quite high. There's been this

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Tim Lawless: absence of foreign students, which means that areas aren't very

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Tim Lawless: attractive to investors anymore. Rents have come down in some

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Tim Lawless: of those precincts by about 30 per cent, which makes

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Tim Lawless: them less attractive for yield. And then in Sydney, you

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Tim Lawless: can see that the apartments market's actually quite a bit more resilient.

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Tim Lawless: And I think that probably is reflective of a much

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Tim Lawless: more mature apartment market in Sydney, much worse affordability constraints

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Tim Lawless: as well that seems to reflect more demand back into

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Tim Lawless: the apartment sector relative to Melbourne, at least.

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Sean Aylmer: Stay with me, Tim. We'll be back in a minute.

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Sean Aylmer: My guest this morning is Tim Lawless, Head of Research

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Sean Aylmer: at CoreLogic, Asia Pacific. What about regional Australia? I mean,

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Sean Aylmer: my hometown in Central New South Wales, Orange. Some of

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Sean Aylmer: the house prices there are going through the roof. Regional Australia's

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Sean Aylmer: done really well.

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Tim Lawless: Yeah, regional Australia has really had its heyday although the

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Tim Lawless: gap between the capital cities and the regional performances is

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Tim Lawless: now starting to narrow. Through the second half of last year, absolutely,

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Tim Lawless: it was a story of the regional markets outperforming the

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Tim Lawless: capital cities. But over the first seven months of this year,

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Tim Lawless: we've seen regional Australia increase in value by about 14.5 per cent.

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Tim Lawless: Capital cities up about 14 per cent. So not much

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Tim Lawless: difference at all. But again, there are some pretty extreme

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Tim Lawless: examples around regional Australia. You've got markets like Byron Bay

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Tim Lawless: and Noosa, the Central Coast in New South Wales, the

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Tim Lawless: Gold Coast. All those markets have seen values rise by

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Tim Lawless: around 22-25 per cent over the past 12 months. So

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Tim Lawless: it does seem to be this underlying more of a

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Tim Lawless: lifestyle trend that's driving a lot of these areas, not

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Tim Lawless: necessarily just coastal markets, but also areas like the Southern

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Tim Lawless: Highlands just outside of Sydney and some of the agricultural markets

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Tim Lawless: as well. You mentioned Orange or there's also Dubbo, Wagga, Albury.

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Tim Lawless: All these markets have seen a break in the drought,

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Tim Lawless: they've seen agricultural yields improve, which is also helping to

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Tim Lawless: support a rebound in those more rural markets.

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Sean Aylmer: So that's where we are today, Tim. But what we all

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Sean Aylmer: want to know is where will we be tomorrow or

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Sean Aylmer: at least in five years time?

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Tim Lawless: That's a much harder question to answer, isn't it Sean? There

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Tim Lawless: is a lot of uncertainty at the moment, of course,

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Tim Lawless: because of the lockdowns and because of COVID, and we

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Tim Lawless: don't know how long these current restrictions are going to

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Tim Lawless: be extending for, particularly in Sydney, which the case numbers

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Tim Lawless: at the moment just seem to be quite high. So

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Tim Lawless: where to from here? I think the short term answer

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Tim Lawless: for that is we are expecting there to be ongoing

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Tim Lawless: upward pressure on housing prices. We do expect values will

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Tim Lawless: continue to rise through the rest of 2021, but probably

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Tim Lawless: not at the same pace as what we've seen through

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Tim Lawless: the first half of the year, simply because of affordability

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Tim Lawless: constraints becoming much more challenging. I think that's probably why

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Tim Lawless: we've already started to see the rate of growth slowing

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Tim Lawless: down is that first home buyers have become much less

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Tim Lawless: active and fewer people can actually afford to raise a

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Tim Lawless: deposit to get into the market. But longer-term, maybe some

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Tim Lawless: of the more significant headwinds outside of affordability could be

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Tim Lawless: things like tighter credit conditions. If we see another round

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Tim Lawless: of macroprudential policies rolled through, we know that would have

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Tim Lawless: a fairly immediate dampening effect on credit availability, which then

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Tim Lawless: flows through to housing activity. And then further down the track,

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Tim Lawless: there is some speculation we could see interest rates rising

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Tim Lawless: a bit earlier than say that the forecast of the RBA (Reserve Bank of Australia),

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Tim Lawless: which is still 2024 the earliest. I think there's a

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Tim Lawless: growing level of expectation that rates could lift earlier than that,

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Tim Lawless: although I think the fact that we'll probably see a

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Tim Lawless: negative GDP result in September could push that out a

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Tim Lawless: bit further. They're probably the two most significant headwinds. But

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Tim Lawless: in the meantime, you've got this uncertainty around COVID. Hopefully,

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Tim Lawless: that starts to dissipate as we get the vaccine rollout

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Tim Lawless: a little bit more effective. And on top of that,

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Tim Lawless: then you've also got a gradual worsening from affordability as well.

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Sean Aylmer: Okay, so what happens when, we will get through this COVID period,

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Sean Aylmer: what happens when the students start coming back, when migration increases?

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Sean Aylmer: Will that put more pressure, particularly on apartment prices?

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Tim Lawless: Well, you'd have to think that open borders would be

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Tim Lawless: a net positive for the housing markets. But generally, what

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Tim Lawless: we've seen from overseas migration is a much more immediate

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Tim Lawless: impact on rental markets rather than home purchasing and housing values.

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Tim Lawless: We can see that really clearly in the markets that

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Tim Lawless: are most exposed to overseas migration, which is Melbourne and

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Tim Lawless: Sydney in that order, particularly the inner city precincts where

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Tim Lawless: foreign students, for example, tend to be a very large

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Tim Lawless: component of tenancies in the apartment sector. So I think

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Tim Lawless: if we did start to get foreign students back, for example,

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Tim Lawless: that should help to shore up some of those inner-city precincts.

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Tim Lawless: But still, there's no guarantee that foreign students will come

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Tim Lawless: back in the same numbers. We know there's a lot

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Tim Lawless: of tension with China, for example, fairly large component of

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Tim Lawless: those foreign students were coming from China. And then on

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Tim Lawless: top of that, I think there will be a lot

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Tim Lawless: of debate around what does our migration policy as a

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Tim Lawless: country look like. It mightn't be the same as what

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Tim Lawless: it was pre-COVID as we see governments and policymakers just

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Tim Lawless: keeping migration relatively low in order to keep labour markets

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Tim Lawless: tighten more quickly, which will help, of course, the RBA

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Tim Lawless: to achieve their inflation target.

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Sean Aylmer: Tim, thank you for talking to Fear and Greed.

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Tim Lawless: Always a pleasure. Thanks, Sean.

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Sean Aylmer: That was Tim Lawless,  Head of Research at CoreLogic Asia-Pacific.

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Sean Aylmer: This is a Fear and Greed Daily Interview. Join me every morning for

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Sean Aylmer: news you need to know. I'm Sean Aylmer. Enjoy your day.