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This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Hello, hello.
This is Arjun here, property nerd, and I'm here joined by Lee. How are you, Lee? Good. Very well today. How are you?
Very, very well, thanks. And we've got some exciting info to go through today. So we won't be going through a lot of the usual finance updates because today's episode is jam-packed, especially considering the times. And what's on the mind for many is definitely how Australia's housing fundamentals are positioned. So, Lee, would you be able to go through a little bit more about what's on today?
Well, firstly, InvestorKit has released their new white paper, and they do this every month. Every month you're releasing a new white paper. So to find that, you can, if you want to read through it as we talk about it today, that's what we're going to cover off as the most recent release, which you can find on investikit. com. au.
I think it's forward slash white paper. And this one that's just been released is regarding Australia's housing fundamentals and a market pressure review on eight capital cities and 25 most populated regional cities. So yeah, so essentially you guys are doing this every half year. And obviously this is dedicated to what I've just mentioned, the housing fundamentals. And so I guess the difference between the data that you're using to maybe a lot of other data out there is you're using a mix of greater and SA3 regions.
And so I guess you do get a picture of the complexity of Australia's property market and monitor the market cycles of each region opposed to just the greater areas that you hear in the media most of the time. Yeah, so this report was definitely about making sure we, A, had a really good review of the fundamentals, but also had to review them and their impacts on market pressure. So this is now going, hey, this is what's happening macro-wise in Australia, but what's really happening across the more smaller regions. And by smaller, I don't mean small cities. I mean, the capital cities as well as the 25 SA3 regions based on some population.
So there's a lot of decent sized cities. So kind of that sort of 40,000, 35,000 plus in population, your bigger 25 cities across Australia plus your eight capitals. So it was a really good deep dive in terms of the housing fundamentals. And that's really what this is about because when you think about it, over the last two years, Australia's property markets, they've experienced a huge boom. And a lot of these regions across Australia, almost all regions have actually performed exceptionally.
So what's really on the mind of many right now is you've got inflation pressures, it's costs for households, you've got rising interest rates by the RBA. And as you know, in your world, Lee, a reduction in borrowing capacities. And so nationally, what we're seeing right now across Australia is that signs of a cooling market on the demand side in particular, but many are going to feel that's kind of natural anyway, especially considering the levels of growth that we've had can't keep sustaining it. So now this is creating a lot of confusion for buyers and confusion for sellers, especially as many media outlets are kind of saying, hey, Sydney's falling at an annualized 20, 22% and Melbourne's falling at an annualized 15%. Not really happy, go lucky figures.
These are figures that are showing a decent decline. So the key here is to go, okay, how do we unpack these fundamentals better? And this is what today's all about. Cool. So I guess you're talking about Australia housing fundamentals.
What are housing fundamentals that you guys look at? Yeah, great. So with fundamentals, we had 25 in total and we divided these across three core categories of underlying demand, supply and confidence. Now within underlying demand, we broke this down into four parts, people movement, things like population and migration, these sorts of things. We had economic activity.
These are all about jobs, infrastructure pipeline and more. And then we went into things like finance. The movement of money is a key part to both supply and demand, but finances was a core part in this whole equation. The last piece of underlying demand was affordability, Lee. So affordability is a core part to going, hey, buyers' capabilities of paying and desire to pay in certain areas.
So that was the first category of housing fundamentals. The second category was supply. And this is current supply as well as incoming supply. So we're looking at how much stock is really for sale in Australia, as well as how much building approvals are there for stock to come into the picture. And then the last and final category of fundamental was confidence.
And over here, we're looking across things like sentiment, certain government intervention and policies, and also looking at the media cycle, which is something that I feel is quite unique to us because we've created a bit of a data piece here called our media sentiment tracker. And this is actually not just looking at consumer sentiment. We decided to track positive versus negative versus balanced releases of news amongst the top players like the AFR, news. com, ABC, things like that, and try to apportion how much percentage of news that they released in total fell under positive, negative, or balanced. So this is such a cool data set that we played around with.
But yeah, Lee, that's the core fundamentals that we looked at. Cool. And so I guess, how do you actually gather all this information? Where do you source this information from? How do people know this is critical stuff that they're looking at?
Well, this was all over, right? We were looking at census, we're looking at RBA chart packs, ANZ's housing sentiment and affordability reports, Westpac sentiment. We looked at SQM research. We looked at infrastructure from Cordell Connect. And we even looked at all those news channels that we reported on.
So the data was deep. It was a really good deep dive across all those core fundamentals that we looked at. And I guess, moving on from just how we looked into it was the actual results. And this is what I think many people will be really interested to hear. Of the 25 fundamentals that we reviewed, Lee, this time last year when the property was in full swing of a huge boom, 22 of 25 fundamentals were either strong or very strong.
So that's a huge number. And when you look at now, Australia's fundamental movements have been 18 are either strong or very strong. So what do we first see there is a bit of a reduction from that 22 down to 18. But secondly, it's interesting to see even amongst the very weak commentary on housing markets in Australia and the price declines that we're seeing, 18 fundamentals out of 25 are still very strong today. Cool.
That's an important piece, right? Because that shows that with 18 of 25 fundamentals strong, what pressures we might be feeling... Still over half. Yeah. I mean, on the good side.
That's it. Instead of all this doom and gloom of what people are trying to, I guess, depict in the media. Yeah, that's it, right? Which is the part you've obviously covered off in the report, which I liked because, yeah, I mean, it's not depicted that way, that it's positive right now. And look, it's not positive in the outcome because that's a fair point you raised, right?
I mean, the outcome is still that conditions are weaker and declining in some cities. But hey, the key here is to understand where Australia's fundamentals are, because when you understand them, you might have a sense of feeling of how quickly this may pass us by. So that's a good understanding of kind of where the overarching fundamentals are of Australia and how things are tracking at this moment. So Arjun, 25 total fundamentals, and you've just mentioned we've come down from 22 strong to 18. So I guess what are the seven weak ones you are currently seeing across Australia right now?
So with seven weak ones, firstly, that's not a lot, right? 22 out of 18 down to 18, and 18 of 25 is still a very strong level of fundamentals across Australia. But seven out of the 25 that were either weak or slightly weak, let's start with the first subtitle or subcategory from underlying demand, and that was people movement. As we all know, borders shut over the recent years, and they've had their patchy open up and close. But secondly, borders across the countries that are across this world aren't all in synergy.
We don't all have the same rules. We aren't all traveling the way we used to travel. It's not as easy and consistent, and the rules just differ. So that's definitely still one thing that's behind. Also, with regards to travel, one thing that's very clear to see is that visa backlogs and the numbers of people actually coming through are still not where we need to be or where they once were for Australia's glory days.
So annual net migration or net overseas migration, we rate it as the first fundamental that is on the weak category for Australia. And as you know, sort of 30th June ending, it was really one of the lowest we've seen since World War I. Looking at where we are now, look, we do feel a potential bounce back is there. So I do see this fundamental coming back to its glory days in Australia. It's just that for now, it is a weak fundamental.
In line with that is actually international visitors. International visitors are actually down 65%. And in May 2022, the short-term visitors from 2019 was down that 65%. So that's a big decline. But again, a large bounce back soon is imminently.
So I think when it comes to these first two fundamentals, they are weak in Australia, international visitors and overseas They may actually just be applying that cash rate increase to the product that you've taken on if it's variable, hence it's going to change what your pre-approval or borrowing capacity was. So it's not helpful in that sense. However, there are a healthy amount of borrowers that are still able to borrow. It's just really those multi-property owners with multiple loans that these changes are going to be impacting more. Yeah, I think on those portfolio builders, it does show up there a little bit more because they've got not only the existing loans that are variable that go through that change, but also the new loan that they're going for.
On that note, Lee, with borrowing capacity, I believe me and you were doing these calcs and we saw that for every sort of half a percent in change of interest rates, the borrowing capacity shifted by around, I think it was 5% to 7%. And so with that 5% to 7% in change, that's important to note. Now, one thing that we did notice is that there was not a huge shift of people that now could not borrow because there was always a solution, different banks and different things. It was more so just the max limits for people changing a little. And this has created in our business as well as what we're seeing in the buyer's agency space here that people are attracted during these times to those more affordable purchase prices.
And that's also why we are seeing that remain quite insulated when it comes to that demand side. But again, people don't go out there all the time and just maximize and use every cent of their borrowing capacity. There's usually different tiers of banks and different rental incomes that you can get. But right now, that is obviously a big change and it represents to the tune of 20% or 15% to 20% based on the rate changes so far. So naturally, when that level occurs, it's impossible to say that markets are unaffected.
They are affected by that change. But it's also important to remember that the cash rate we're on here is what we were on just a couple of years ago. So it's not that far from that point. So that is fundamental three and four. So we've just gone through overseas migration, international visitors, cash rate, borrowing capacity, and now price to income ratio.
So it's no new story that Australia's national dwelling value to income ratio in the March ending quarter is at 8. 5. Now, this is weak. It's not a clear correlator to price drops or lack of price growth just because the income ratio is high because the ratio of price and income has so many other factors for it to make a difference on borrowing capacity or capability because price to income is a top line measurement. People still have varying mortgage sizes.
People still have varying interest rates, loan terms. So price to income ratio alone is not enough to kind of swing things, but it is an important piece to note because pre-pandemic, our price to income ratio is worth 6. 8. And that's why this movement of borrowing capacity and interest rates, yes, we are back to that pre-pandemic cash rate. So that's why it shouldn't scare off many people.
But it's also important to note that the pre-pandemic price to income ratio was 6. 8. Now it's 8. 5. So yes, we're at similar cash flow levels of costs of money from RBA, but we are having higher housing costs in comparison to pre-pandemic, which is where that net effect will be slightly on the negative.
And this is where at the property nodes here and at InvestorKit, we're doing our best to make sure we give you balanced opinions on housing markets like we are today, things that consider the weak parts and the strong parts. So yeah, Lee, that's the next part there in terms of the weaker fundamental. If we move over to weaker fundamental number six, it's consumer sentiment index. Now that is at 83. 8.
And as of July 2022, that is. But this is the lowest since the pandemic. Oh, okay. And the pandemic, if it's the lowest since then, obviously it's a clear sign that it is a fairly low amount. And that's why we've rated this fundamental as weak in this report.
So this was the sixth fundamental out of the ones we've gone through, and we rated this one as weak. And again, it's another behavioral changer. People during lower sentiment periods are obviously impacted by the little bit of what do I do? Not so sure. Is now the best time?
And I'm positive that many amongst their local conversations are seeing this too. So that's the sixth fundamental. As for the last one, Lee, media cycle. Yes. So you've not been seeing the happiest or the nicest property media cycles of late or media articles of late, have you?
No. I mean, like the general sentiment is a negative on the larger media, you know, your big news providers or whatever. Generally, it's the doom and gloom, right, that we're hearing. Yeah. So this is where we wanted to make sure that, hey, look, as property professionals, I'm sure that we have this inbuilt thought that the media is always negative.
And we also become negative, not in the way we are, but we're negative towards the media. And I didn't want that baseline assumption because that would be quite biased, like every property professional goes, oh, the media this and the media that and the media this. So we wanted to take a look at actual numbers around, hey, what's the media saying? So we created our own data point and we call it the media cycle. And what we did is we took the top three or the three largest, in our opinion, media providers.
Who's that? AFR was one that I mentioned. You know, even ABC was another one that we mentioned that was pretty big. And, you know, the other one was news. com.
au. So there were two more sources, I believe, but these three were the clear standouts that we took into account. Now, when looking at them, of these articles that were produced, 39. 6% are negative. And so...
And how did you, like, weigh that? I'm just interested. Yeah, this was a hard one. This is all manual, right? So we did this over a 90-day cycle to make a look at, okay, if we look at all the articles...
The same 90 days, yeah. Yeah, if we took it all 90 days and we tried to track all the articles released by them to do with property, how can we score this in the positive bucket, neutral bucket, or negative? We actually literally read these articles. It took us forever. And so the key here was that we also used some, you know, keyword analysis too, but in that reading part, that was trying to categorize, hey, is this flowing towards a positive, neutral, or negative?
- 6% are negative. Now, that was the biggest out of the, you know, the three categories here, but they weren't too far. Like, media is actually... That's not as bad as I thought it would have been.
39%, I thought it would have been like 60%. No, that's true, right? So we sometimes often say the mainstream this and the mainstream that, and we got to make sure we're not, you know, just on them the whole time, but it was still considered a weak amount, right? To have four out of every 10 articles as pretty shocking and doomsday and disaster. Yes, it doesn't look like the majority, but then you slip in, you know, two or three neutral and then two or three positive.
Four is a decent amount. And so we had that as a weak rating when it came to overall media cycle. So media cycle, consumer sentiment, price to income, borrowing capacity, cash rate, international visitors, and migration. And these were across that confidence, underlying demand, people movement, finances category. So seven out of 25.
Yeah, it's really cool. If you guys have a look at the report, everything's merited as strong, balanced, or weak. So it's a nice visual to look through when you're looking at these fundamentals. So Arjun, 18 strong is a phenomenal number. Can you take us on a tour through what these 18 are and why they're that strong?
Yes. So this is the part that we want to talk about here today. 18 of 25 fundamentals for Australia's housing market are still extremely well-placed. And these were rated as either strong or very strong. So if we stick on the people movement category, we've got population growth.
That's no surprise to many. Now, population growth, we wanted to take a longer five-year average because it didn't make sense putting population growth as a very weak one alongside net overseas migration. And then all of a sudden saying, hey, that's also a weak fundamental right now because the impacts of population growth aren't in the same year. They're spread across various years because people move from renters to buyers. People move from entry-level jobs to higher jobs.
People move from on their own to bringing across families. So we wanted to look at that five-year average. And that average annual growth rate over the five-year period remains very healthy in Australia. And we do expect it to continue getting to healthy levels, especially as the borders open up as well. So that was the first strong one.
Lee, the second strong one was regional migration. You know, everyone's talked about the- A little bit of migration during the COVID pandemic period. That's right. The tree change, the sea change. This is the hot topics and the words there.
But as we all knew, this is not new to housing in Australia. And this is basically a big supercharger that's happened amongst the pandemic years. The next one is household sizes. So we've seen a little bit of change at home, haven't we? So what was our household like, you especially the catch-up in between other costs.
Household saving ratios, this is the part that the RBA keeps mentioning. 11. 4%, extremely strong household saving ratios as of quarter two 2022. The main thing here is the savings ratios have elevated deposit amounts by 34. 3% in comparison to 2019.
Redraw positions, offset positions, they're extremely strong as well. So Australians are cashed up. In the world of finance, Lee, I know you're seeing a lot of things, so I'll let you take care of the next fundamental. What are you seeing in the new loan commitments? There was $32.
4 billion in new loan commitments as of May 2022. So that's down from the January peak of $33. 2 billion, but it's still hovering at very high levels. So, I mean, it's massive. And you're seeing huge inquiries in your business as well at Hills Finance, right?
Yeah, yeah. Like we were talking about last podcast is, you know, a lot of people are coming off their interest only or very low fixed rates from before all these rate hikes took place. A lot of restructuring and recasting debts back over 30 years, interest only repayments, getting the lowest rate that's out at the moment after all the hikes. So, I mean, and then essentially the investors who have the position to take advantage of the current market are gearing up to do so. So yeah, lots of inquiries.
Definitely. And for anyone on that finance note, Lee touched on something very important. The interest rate changes. Now, it does not mean who you're with is going to be the best person to be with. And it does also mean that you need to get rid of any loyalty tax that you might be paying because not only does an interest rate hike, you know, bring that proactiveness, but we think it's the greatest time to be proactive for multiple reasons.
Accessing equity for buffers, taking advantage of the buying window with reduced demanders to have pre-approvals for investments and refinancing your loans to get the best possible rates and cashbacks. And also your repayments. Yeah, reducing your repayments. When you refinance, because when you recast over 30 years, it will bring that monthly repayment down. Yeah, totally.
And so Lee, how can people get in touch with you when you're thinking of just reaching out from finance inquiries? Best way is hillsfinance. com. au. Click on the request a call back and yeah, we'll give you a call.
Now this leads us on to the next finance matter and this is something that's not yet truly understood in Australia. It's not talked about often enough. The residential loan to value ratio of Australia sits at 21. 1%. Now, could you imagine rocking up to a barbecue and people are talking about portfolio stories and they go, you know, wow, that $10 million portfolio is huge, Arjun and Lee.
How much have you got owing on it? Oh man, we've got $2. 11 million owing on it. How good does that feel from a peace of mind scenario? And Lee, how does that feel?
Well, your equity outweighs your debt. Yeah. Which is fantastic. Massive levels of equity, no high levels of urgency. It means you can go to zero and still be well above any time.
Yeah, I mean, the comfort you get from having a 21. 1%, it's important that investors just ask themselves that. Would you be reacting to the media or the news or what's changing across Australia's housing landscape if you had an equity position of 80% on your housing with 20% or 21. 1% loans? Even if the rate of repayment changes, 21.
1% gives you a level of peace of mind to go, I don't feel at risk. If I had to sell it, I could sell it. I don't like plan Bs, but you've always got that plan B, don't you? That's right. And this leads us to, do people need to activate plan B?
I don't even think so because bank delinquency rates are at 0. 7% as of April 2022. Now, we do see this increasing a little bit. It would be foolish of us not to say that this does not increase over time with rising costs. It does, but it's the lowest level currently since 2009.
We're talking 13 years and it's the lowest level. Housing is extremely solid in Australia and at 0. 7% bank delinquency rate, you can see why. Now, I want to give some context to people wondering, hey Arjun, what about these rate changes and how quickly, what about inflation that's going crazy? How will this bank delinquency change or what could happen?
It's important to put into context the total values in Australia of dwellings. So there are over 10 million dwellings in this country. And in a given year, you'll see that 500 to 600,000 in transactions, which is the most recent year. So if we look at the households that might have some risk in terms of repayment change, let's take into consideration two years of time from the, or two to three years of time from pre-pandemic interest rates at this level, dropping extremely low and then coming back up again. So you would have had a buying window of at least two years in which people operated at crazy low interest rates, well below where they are today, thinking that was their future.
Now, if you put that together in a 500,000 transaction basis per year, that comes up to be about 1 million dwellings that transact in this low interest rate period. And that is around 10% or 9% of that 10. 7 million in dwellings. So the relative risk to the whole market still only sits in that 10% buyer group of the 10. 7 million dwellings who transacted as new buyers during that time period in extremely low interest rate environments.
The majority of other dwellings would have in proportion seen much higher interest rates already and had exposure to those higher interest rates in the past. So this is something really important to consider that just because interest rates rise, yes, everyone is seeing that blanket impact change, but not everyone's impacted the same way because it's only would have been that 1 million worth of transactions or 1. 2 max that would have seen the two years of sub cash rates of where they are today. That's a key part to recognize. And that's a part where the other thing to throw into the equation is during those two years, all those households saw double digit equity growth.
So even if their repayments are changing rapidly and quickly, if worst case came up, you may see distress sales, but without the distress showing because they're still leaving with profit. So that's the key thing, leaving with profit. But that's the key parts under finance. Now, if we move to the last few positive fundamentals, we've got rental affordability. So 58.
7% of all rental households are still in the majorities, spend less than or equal to 30% of household incomes. And this is balanced. We did not rate this as strong or very strong. We rated this as balanced. We do expect this number to become a weak fundamental, which could take Australia's 18 fundamentals of strength down to 17 only because rents are increasing.
We are in a clear crisis in Australia and the rental fundamentals would be impacted because of how much rents are rising. So that is not weak right now, but we do expect this to be weak from 18 down to 17 in the future. As of right now, though, 58. 7% rental affordability. Moving on to mortgage affordability is the next one.
That's actually still really strong. So, you know, all households, 74% of all households spend less than or equal to 30% of household income on mortgage repayments. This will decrease as a number because interest rates are hiking and they are rising, but we don't expect this number to move to a weak fundamental. We expect it to move from a somewhat strong to a strong or balanced. So this is where we do see it healthy right now, but it will weaken.
If we move over to the world of supply, guess what? There's still not a lot of it. We do have two cities, Sydney and Melbourne, back at their five-year averages, but on a 10-year average, even they're undersupplied. However, if we now look at the whole country, total listings by June 2022 ending data were down 31. 9% compared to pre-COVID levels and down 33.
6% compared to five years ago. So guess what? For those hoping to see a huge crash, we are seeing lower demand, but housing supply is still extremely low. So it is a strong fundamental, low supply. The same thing with rental supply.
Rental supply is extremely lowly and we're at a vacancy rate of 1. 2%. Now you've seen family, friends. This is Australia-wide, right? Exactly.
Very, very low. And the majority of locations that we're seeing sit at that below one. But you've seen many people, family, just go talking to us about stories about how they're getting calls up and rents are just jumping up. Jumping or just friends who are still renting and how hard it is to get into the rental market, the competition right now. So yeah.
That's exactly right. Rents are increasing. And we actually released another white paper and this was one of the most featured in the media for the month of July all across Australian TV and various websites and news publications. And that was on the 20 regions where rents are likely to surge. It was a white paper talking about this rental crisis.
You can grab it on investigate. com. au and that's free to download. So you can check it out there and explore some of the many white papers, including this one, which you can find on the white paper section of investigate. com.
au.
