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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, the co-host of Property Nerds, head of research at InvestorKit, and I'm joined by the lovely Leigh. Hello, and I'm the director of Hills Finance. Well, we've got a very different and exciting episode for today. And as you know, with Leigh and I, we just like to get cracking and jump straight into it. And with today's episode, we've actually got a special guest.
Now, I will hand over the mic soon to Leigh to jump into who our guest is, a bit more about them, but I've got some news. They are a fellow nerd, and I'm sure they love the compliment of being a nerd, which is what we, you know, accept and acknowledge too for ourselves. Nerd is the new black, you know. That's it. Nerd is the new black.
That's it. So with regards to today's episode, we're going to go into a bit more about our finance trends and some exciting releases, but also hand over to our guest who we've got on the show today. So Leigh, I know finance has been seeing a little bit of an up and down in some recent months, but still at some crazy levels. What's been happening on the finance front? Yep.
So ABS lending indicators released for February 2022. Total housing finance has actually fell by 3. 7%, and that's by $32. 2 billion. However, that was 12.
6% higher compared to one year ago. So still better than last year in numbers, but a little bit of a drop. Last month, I think, you know, with February, we were sitting at 18% higher than a year ago. Now it's at 12%. So it's actually slowly falling, but yes.
Still at some very high levels though, right? I mean, huge levels. And what's been happening on the owner-occupier versus investor front? Yeah. So owner-occupier housing finance fell 4.
7% to $21. 5 billion, and that was 1% lower compared to a year ago. So it was, however, 55% higher than pre-COVID levels in February 2020. So that's a moment to pause and still think like how much demand there is out there, right? 55% higher than pre-COVID levels, right?
So it's a huge amount. What about investors? What are they up to? So investor housing finance also fell 1. 8%.
This is the first fall since October 2020, and it has remained close to the record high since the previous month. So no clear falls other than just this recent one for investor finance, but still some very strong numbers. So Lee, on the refinance front, I know that there's some interesting trends that you're seeing there. What's happening there with refinances alongside, I guess, interest rates and what you're seeing amongst the banks? So refinances were on a little bit of a downwards trend since the fixed rates were going up, and then Rose had started rising again, and it has rose again since January by another $1 billion higher than obviously a month ago.
And so now our refinances are basically in a line with November 2021 that was taking place then for refinances. Now with refinances, Lee, what's interesting is you and I have been keeping track of what we are seeing in the interest rate front, and it's like irrespective of what the RBA is doing, which is nothing for now, they've been holding tight, we've been seeing a big divide on variable versus fixed rates. Massive. What are you seeing out there? Crazy.
I mean, so CBA is obviously the biggest bank in Australia, and they've just recently increased their fixed rates again for a fourth time this year. And so that's gone up by another 0. 5% for the owner-occupiers paying P&I, and then all the way up by 0. 9%, nearly a whole 1% for some investors. So there's a major gap now between fixed and variable rates.
On average with the three-year fixed rates, between the lowest variable rate, we're now looking at a 1. 86% difference, variable being that much lower than the fixed rate. So variable is obviously much lower. We are seeing some great pricing for the variable rates that are very, very competitive across the majors and some second-tier lenders also. And there's a lot of under-the-table pricing here and there, so just FYI, that's my little tip at the moment.
That's what we're seeing. Yeah, I think the fixed versus variable decline, I mean, the gap that's widening, I'm seeing some interesting behaviors from people off the back of seeing that gap. Some people are still taking up this huge fixed rate and going, well, I think it could go more. And then other people are going, well, I want to make sure I stay variable because there's such a big gap. I don't want to pay for that gap upfront.
Are you also seeing two types of customers like that show up as well? That's right. They're saying, I want to take the hit now because what if down the track I stay on variable and then I decide it's still going up and up and up, I fix at that point, well, then you're going to be fixing in higher again if it keeps going on the current trend. However, the people that fixed in pre, you know, two years ago when they were really low fixed rates, you know, like owner-occupier fixed rates with ones, they're going to have a bit of a shock when they come off those shortly. Yeah, I think that's the thing that's starting to show signs of change.
And that's where, you know, before the last, what, three, four years, everything was all about the fixed rates. But now I think a lot more people consider their variables, who's pricing, move around, consider moving around a bit more and really be tight to those variable rates. Now, Lee, on the topic of rates, and that's something that actually leads to an exciting release from our end. We have recently developed our latest market research paper, and that is on the Australia's economic powerhouse cities. Now, with Australia's economic powerhouse cities, that plays such an important role in today's market.
Why? Because when interest rates rise or as interest rates rise, there's a yin and yang effect we're looking for. We're looking for where are jobs increasing, wages likely to increase, a pipeline of strong infrastructure occurring, because all of these things create opportunity on the opposite side of things. And, you know, I'm also realizing that when doing this activity, there were many cities across the country that, interestingly, had prices still in line with many, many years ago. And many years ago, interest rates weren't the 1% and 2%, they were 4%, 5%, and 6%.
So when people start considering interest rates and their impacts to cities, they're going to vary massively. So please do consider how interest rates may impact a certain investment in certain cities, because if you think of, say, a city like Townsville, just as an example, we've been really analyzing that hard of late. 10 years ago, the prices for houses were still similar to now, maybe a little bit more now, but not massively. And so that means that interest rates 10 years ago were definitely between a 4% and 6%, or 5% and 7% even. And right now, the interest rates are nowhere near that.
So even if there was a climb up, that city was already paying rates and repayments and so forth at those levels. So yeah, do take that interest rate variance and finance variance and check it out from various cities and how they handle it or might handle it differently. And do check out our newest white paper, the Australia's Economic Powerhouse Cities. Where can we find that? InvestorKit.
com. au in the property market research tab under white paper. So check it out. We'll have another episode on that one soon, and we'll do a big, big deep dive on it. But in terms of the episode ahead, we had Simon Kustenmarker.
Did I say it right? I think it's right. He might have to correct you later on, but we'll see. Yeah, so Lee, who's Simon? And why have we got him on as a guest in the show today?
Simon is director and co-founder of the Demographics Group, which is based in Melbourne. And so Simon holds degrees in geography from leading universities in Berlin and Melbourne and has worked for several years as a business consultant with KPMG. In 2017, he co-founded the Demographics Group with his partner Bernard Salt. And so the group provides specialist advice on demographic, consumer and social trends for business. Simon has presented to numerous corporate and industry audiences across Australia and overseas on demographic trends, consumer insights and cultural change in Australia.
And Simon's actually also a columnist at the Australian newspaper and the Daily newspaper as well. And yeah, so yeah, he's a media commentator on demographic and data matters. So fellow nerd. Right up our alley. A fellow nerd indeed.
And Simon, you know, he added a lot of value in this chat that we had with him. And in today's show, we'll definitely, you know, be jumping over to that conversation very soon. But for those wondering, I guess, the first guest, why Simon? And what's really important is property before the data that we go into and before the finance comes people. So, you know, before the trends I see from housing economies and so forth, and Lee gets to see the finance trends, that's her leading place.
Before finance and property trends is led by the people. And by that, I mean, what behaviors, trends, decisions, what's of importance, what can we expect in people movement? These at least somewhat free to choose where they live. So we've seen the people that leave the inner city where people paid a premium to live close to the CBD because they wanted to avoid the long commute. Why bother paying this premium now?
I'd rather go to a lifestyle location that might be in regional Australia. You know, all those beautiful cities along the coast, all those tree change locations inland, they really boomed because people figured, you know what, I can move there and then commute into the office occasionally, which actually splits regional Australian growth into two camps. Not all of regional Australia grew. Those cities within a two hour drive from a major CBD, from a major employment center, those were the boom regions because this enables young millennials to still go back to the office occasionally, once a week, twice a week, max, but they can then have a lifestyle location to live in where they can afford a larger home. And so I think these are the two main drivers of the property shift.
And only one of them, the working from home trend, has actually to do with the pandemic. The millennial shift would have occurred either way, even if we had spared ourselves the trouble of having a pandemic. I like how you've really split that into two, Simon, because so many of us are instantly thinking about, oh, it's just a work from home thing. And we lose sight of the fact that, well, this was always going to happen, this family formation stage. When it comes to that family piece, and this is something we often think about, just us two, being in a capital city, we sometimes are surrounded by many of our family members, whether it be parents, uncles, aunties.
Do you feel anything has come up more so today than it did in the past when it comes to the connectivity of these relationships? Meaning back in the day, one would say that we were all circled quite close to each other and we perhaps did not, it wasn't as accepted to be separating ourselves in different cities. Do you feel more today with obviously technology and other means of staying in touch with our loved ones that it's more acceptable for families to start spreading themselves apart? Because I know us, when we were thinking about it, we have moments where we look at each other and go, the coastline of Bundaberg or the Adelaide, the gardens of Toowoomba, like the hillside, like this would be beautiful moves. And we're like, oh, wait a minute, dad loves the dogs, her mom just moved here.
And we have these moments that call us back. Do you feel that's now changing though? Because so many others are like, I know mom and dad are here, but I'm gonna still make this move. Well, so the general, if you take the decades long view, that the trend has gone towards moving farther away from family. And remember the share of Australians that are migrants that were born overseas, it has gone up like crazy over the last couple of decades.
So they are by default, more and more Australians whose parents live even a continent away. So that has only intensified. And then the nature of jobs, meaning we have more and more people working in knowledge type jobs. That means you can just choose as a person in your 20s, whether you take a job in Canberra, in Brisbane, in Sydney, in Melbourne, you just switch between cities like it's nothing. And at that point in your career, you don't really bother too much about your parents because you still see them occasionally and you don't have kids yet that really make you rethink your settlement patterns.
And then of course, while you are jet setting through the different capital cities, you tend to find your life partner in one of those cities and the life partner that you find might not be from your hometown, might not be from where your parents are from. So that means that then you have the families that are further apart anyways. What we might be seeing due to the pandemic is that people start to rethink that pattern, that they go, wow, you know what? It's been really annoying to be far away from the grandparents now that we had, we just added the first kid to the family, the grandparents are so far away. Wouldn't it be nice to have them closer at hand?
And so that then creates housing movement opportunities into two directions. The first direction is that people think, ah, maybe the regional town where I grew up, or the affordable location that I grew up in where mom and dad still live, maybe I move close to this so that mom and dad can be close. The other one is the tag along grandparent approach where the grandparents potentially are already in retirement because their kids only start to have kids very late in life. So quite often, once you become a grandparent, you are already retired and you can therefore then move to a nice fancy apartment somewhat close to, not next door, but somewhat close to your grandkids. And I think some people will do that approach.
And so there's movement in that direction happening, but I must admit, I don't think it is a major contributor in terms of how people distribute themselves across the Australian continent. The most important elements are lifestyle and affordability. That's how people choose their housing now. Traditionally, the most important factor was simply vicinity to the CBD. So therefore, before the pandemic, Australian capital cities very much looked like a fried egg where all the jobs are clustered in the egg yolk in the city center.
And in order to avoid the soul-destroying commute, you paid a premium to live as close as possible to the yolk. And so we segregated our cities into rich and poor areas. The poor areas further out, the rich areas close to the egg yolk, close to the CBD, close to the office towers. And that's the Australian cities that we got used to. But now during the pandemic, we almost took a spatula to our Friday and we created a scrambled egg city where we have jobs more evenly distributed because people work from home.
Now people take their jobs to regional Australia. Offices or big employers start to create working near home opportunities where they open up co-working locations or they rent space in co-working locations so that their workforce doesn't need to work from home but can go to a centralized hub in a suburban location. So we are completely rethinking the way that we do work, the settlement patterns, and these changes are here to stay. Yeah, Simon, it's a big part. I mean, when we think about our lifestyle here and I always try and bring it back to us, very selfish of us, but we always bring it back to us and it actually passes along down to the housing trends in a similar way too because one thing when many people think of investing, regional versus capital keeps coming up and we try and educate them around, hey, we just need to treat them all as Australian cities to see what they each offer because when I think about our lifestyle, we live in the Northwest of Sydney and in the Northwest of Sydney, our suburb might have, call it 10 to 20,000 people or five to 10,000 if you exclude a few areas of it, but with our suburb, we work six to eight minutes away.
I have breakfast in this region. I have dinner out with my friends in this region. I go to the movies in the same suburb or next door suburb. We go out for gym and everything like that is in the same few suburbs. Family members down the road.
Unreal, right? Yeah. Yeah, and so when you think about it, it's just like, hold on a minute, like even within this capital city, speech bubbles across the sides of it, we're not really experiencing Sydney for Sydney anyway. So one should really start thinking about all the cities that Australia has to offer from their investing perspective, especially since in a Sydney-based example, the CBD doesn't matter much to us and it didn't even matter much to us pre-COVID. So, I mean, this is interesting right now that so many people coming to that scrambled egg perspective, if they start to take that over to their investment philosophy as well, they realize that city of 100,000 people isn't actually a small city.
It's the same as your suburb that you spend time and work, live, eat, play like we are here in Sydney. And any, so of course, there is no such thing as the Sydney housing market. There are plenty of small pockets that this is operating in. And if you look at this for a small regional housing market, it can be within a city, it can be just a traditional regional town, even a bit of growth can create massive increases in price. That's a scarcity principle.
It's quite simple. We've seen this all across regional Victoria or regional Australia really, where there wasn't much growth happening before that in the regions. New South Wales is somewhat of an exception. I think the biggest exception would probably be Queensland, where you have Gold Coast and Sunshine Coast technically being considered regional Australia, but they are of course part of the broader Southeast Queensland conurbation, one single connective urban tissue that is essentially. But the regional towns, they saw just a bit of growth.
And because they weren't planning for growth, that means there wasn't much additional land or houses available. So even a tiny bit of additional growth made prices go through the roof. So if you just happened to own a property that was underperforming there or wasn't worth much there, you just lucked out because you just happened to be one of the few owners of such a property. So that's the scarcity principle that always works. And of course, people need to just think about how the big mass that is the Australian population, how they slowly redistribute themselves across the Australian continent.
And this is happening based on life stage. It's very predictable. Every generation goes through the same kind of life stages in the housing cycle. The only difference with the millennials is that they procrastinated a lot and that they started their housing, buying, investing journey a decade later than We mustn't make the mistake in Australia to overestimate how much people think about Australia. People don't follow Australia closely.
It isn't that important. So the real measure whether we manage the pandemic well or not, people will not look at the potential, you know, state-to-state squabbles that we had or something. People don't care about this. People will measure the success of the country in terms of the pandemic based on two numbers. The first number measures deaths per one million residents.
We're doing extremely well here. You were, I think, something like 50 times more likely to die of COVID in the US than you were in Australia. So that's a great success. And then people will look at the vaccination rate, which will give an indication of, you know, how bad a pandemic could potentially be in the future. And that's about it.
You already are seeing this, you know, if you just open your random news pages around the world, is that we now essentially decided that COVID is over. It's still there. It's higher than ever, but it's a milder form. But now there is a more pressing, you know, news topic out there with the Ukraine-Russia war. So all of a sudden, I think people will not take too many pandemic decisions, you know, with them when they make a housing decision.
That won't play too much of a role. And to the level where it does play a role, it only favors us because we are a country with a high vaccination rate and with a low death rate. I think that's in the long term. That's kind of the summary of what I think there. How many migrants will we let into the country?
Hopefully as many as possible. We have a very low unemployment rate, which isn't necessarily a good thing. Remember that in some of the growth areas like a Geelong in Victoria, we have an unemployment rate of two and a half percent. This is a catastrophe. We mustn't want this.
We want an unemployment rate of around four and a half, five percent. That means that businesses that want to grow, that they have a large enough labor pool. We are currently stifling growth by not having enough skilled workers available. That's the current problem that holds us back in our economic recovery. It also makes sure that the one thing that all of these state budgets and the federal budgets wisely wrote into the little policies are very big infrastructure projects.
It's smart. It's really good. That's exactly what you want when you go through an economic recovery phase. Build infrastructure, creates jobs, puts money into people's pockets, creates a tool, roads, rails, hospitals that create further wealth into the future. Great idea.
The only problem is that at the moment, there's absolutely no way we can build all the stuff that we are willing to pay for simply because we don't have the adequate workforce here. So we do need to quickly amp up our workforce through migration. We also need to amp up our workforce by making TAFE education that creates all the tradies and all the manufacturing workers that we need now that we reshore more manufacturing. That's part of the global trend is we will reshore manufacturing. So therefore, you want to bet on all manufacturing cities because the existing manufacturing hubs and suburbs within the capital cities, they will see growth because they will get more companies in.
So there'll be growth opportunities there. Quickly, almost lost my train of thought. That's what's happening in terms of migration there. The mix of migrants you mentioned as well in your question, I think will pretty much stay the same, meaning largely Southeast Asian, meaning largely Indian, meaning largely Chinese. This is just the waves that's coming.
I think Australia might well take in as many Ukrainian refugees as they came simply because we need skilled workers. It doesn't matter much at this stage because if you look at the first, or not the first, the migration waves after the Second World War of Greek and Italian migrants, these were low-skilled migrants that had a tough time after the war in their European countries where unemployment was really high. And so they really sent their unemployed people to Australia and to America where we had jobs for them. And so that was really helpful. And that then shaped also the Australian homes.
Remember that before the Italians, before the Greeks came to Australia, everyone lived in English-looking houses. And then the Italians, the Greeks, they looked at those houses and go like, what the heck are you doing? You live in a Mediterranean climate and you live in English houses. This is silly. And then the Australians, smart as they were, just said, you know what?
You're actually right. Let's do a bit more indoor-outdoor living. Let's open up the homes a bit. Let's have nice verandas and bigger porches and integrate indoor and outdoor living a bit more. So we are being very much influenced and shaped by the people that come to the country.
I think one fun observation there that I made a while ago when speaking with architects is I think it'd be really smart to start thinking about if you plan a house from anew to not really build it according to Feng Shui principles because that is not the make it or break it factor in a house. But it's like, you know what? If you can get the basics right easily, why not do it that way? And then they told me that currently we're building the Australian homes exactly the wrong way according to Feng Shui principles because what you don't want is that you have the front door opening up through a straight corridor into the back door, veranda door, because that apparently Feng Shui makes sure that wealth goes straight out the door and isn't being kept in the house. I think as well we see the often the northeast facing is very popular amongst us Indians, not just, you know, for various reasons.
So, I mean, that's definitely been a lot of things that we consider as well. I'm often seeing in the far west and northwest more prayer rooms, study room conversion to prayer rooms. I'm seeing a lot more, you know, bigger rooms, bedroom wise as well, because it started getting smaller a lot in certain areas. And then the bedroom started getting a little bit bigger in a few estates that we've seen of late. It's very interesting to see how it's all shaping and shifting things.
Thank you so much for that. Oh, absolutely. And so the shifts in terms of what kind of property is being demanded by the market will change as well. If you look at the investment market over the last decade, it was driving apartments, one and two bedroom dwellings to make sure that all of the millennials, you know, this big generation of the millennials, they just happened over the last decade to be in the renting phase of the life cycle. That's the phase in their 20s when you, you know, you just moved out of the parents' house, then you live in a rental and you really live in this rental in the inner city until you start a family.
But that's a rental. A one or two bedroom dwelling will suffice. And now this big generation is leaving this rental stock behind and they are looking for three to four bedrooms. Not all of the millennials will be able to afford to buy a house. Not at all, actually.
So that means that the market to provide rentals to the millennials that are either still saving up to afford a home, you know, for themselves or just to service the lower income millennial market, that's the three and four bedroom segment right now. And so the one or two bedroom market will be a bit harder to service, at least in the short term, because the next generation that was meant to, because this always happens in a way, you know, and the next generation that moves into the flats that the millennials leave behind is Gen Z. That's a very small generation. And now this already small generation missed out on two years worth of migration where we usually, you know, we throw international migrants and a couple of young skilled migrants onto this heap. So we're missing out on this.
So therefore, I would expect, and we're seeing this already, that the investment market is now also shifting towards larger properties. Simon, talk about the household formation and the millennials. They've been a key part of today. The other thing that we're wanting to understand is the aging population. This has been not just an Australian topic, but a global topic, especially since, you know, the fertility rate changes from, I think it was 2.
6, 2. 7, or something with a two in front 30, 40 years ago, down to the 1. 6, 1. 7 you're talking about now. What risks and benefits does that perhaps bring from a perspective of economy and lifestyle changes across the country?
Yeah, so you're completely right. Australia is aging and Australia is going to continue to age. Remember that the COVID pandemic did not have any impact on the aging population. We first thought that the pandemic might really kill off plenty of old people. We didn't.
We managed the pandemic from a health perspective really well in Australia. So we don't need to make any adjustments to the aging population. So that means Australia's aging is continuing to age at a very high rate. So what do you do with all those aging baby boomers? Where are they?
How much money do they have? When do they hand this money over to the next generation? And what are their housing needs? Well, they largely are now becoming empty nesters. Half of the baby boomers are already of retirement age.
And in 10 years time, every baby boomer will be of retirement age. That doesn't mean that they will all be retired. They'll still be hanging around on company boards. They'll still have talkback radio shows. But overall, in a decade, they're all retired.
But in the meantime, the baby boomers still live largely in middle Australia. These are the middle suburbs, you know, like 5 to 25 kilometers from the CBDs, if you will.
