Which markets are overvalued and undervalued in 2023?

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, this is Arjun here, property nerd number one, and I'm joined by property nerd number two, Leigh Paliwal.

How are you, Lee? I'm good, I'm good, very well. Well, today we're recording on Valentine's Day, and that just shows how much of a nerd we are. Instead of being out with Lee and having some chocolates and roses, which, hey, you never know, they might come later in the day, just saying. But we're out here doing a podcast recording because we love you guys so much with all the support you give us, the views, the shout outs, the reviews, everything.

So we're ready to go for another episode, aren't we? Yeah, and we're recording here in Adelaide. That's true. So one of our favorite cities, we love hanging out here. Yesterday was Glenelg and a bit of the Moseley Beach Club, which is pretty cool.

Reminds you of like your overseas experience because I don't think they have that anywhere else in Australia. Yeah, I didn't realize you're saying there's no other beach clubs in Australia, which I find hard to believe. I find it hard to believe too, but that's what it said at the airport, and we're going to believe what the airport tells us, okay? But beach club, we're not talking about like us being 18 and raving out on Adelaide's beaches. I'm talking about day beds on the beach, coconuts coming your way, all of that nine, 10 minutes from the airport and 15 minutes from the hotel, which is pretty cool.

So yeah, we're here for a bit of a spontaneous trip for our Valentines and also knowing me, I'm going to try and fit out a few drive arounds to some nearby locations, property catch ups. That's just not me. I can't land in a city and not have catch ups with folks on property. But yeah, that's us. And I know from last month to now, Lee, obviously there's been a continued trend in the downwards trajectory of finance, as we know, makes sense for that to happen because borrowing capacities and interest rates.

What's the numbers telling us on finance in terms of ABS's December ending release? Yeah, so that just got launched or released, I should say, earlier this month. So housing finance in December 2022. So the value of new loan commitments for total housing fell by 4. 3%.

And that's down to 23. 4 billion after a 4. 2% fall in November. And this was 29. 3% lower compared to a year ago, which makes sense because we had all the cash rates which commenced starting in May.

And then for owner occupied housing, this fell by 4. 2% to 15. 6 billion. And that was again, 29. 8% lower compared to a year ago.

And then investor housing fell by 4. 4% to 7. 9 billion. And that was 28. 3% lower compared to a year ago.

Those percentages definitely make sense because they're in line with some of the borrowing capacity changes, right? Massive. Obviously, we had the ninth consecutive cash rate announcement for February. And as we're aware, this is nine months in a row. So that's now sitting at a 3.

35% cash rate. And as that increases, the variable rates increase and so on and borrowing capacity decrease. So last month, we're talking about at least a 30% decrease on people's borrowing capacities. That's obviously going to increase a little bit further or decrease, I should say, a little bit further when that gets applied in the next week or by beginning of next week with the lenders. Yeah.

So I think on the finance capacity side, why we keep talking about ABS data on this episode to start is coming back to the old saying that property is a game of finance first, and then you throw some houses around. And with finance data, I think another thing to consider here is that we've recently, as recent as like now, it's online now, you can check it out at investigat. com. au. Our latest blog post, I think it was maybe two blog posts ago, talked about the correlation with finance and property.

Now, if you take finance data and you move it forward six months, and you draw alongside it property price trends for national data sets, so nationally price movements, you will see a very similar trend line. They're pretty much mirroring each other like the exact same. And it just shows that finance controls property price movements on the macro. Very important to understand. Now we know finance is trending down, hence why macro or national prices are trending down.

It does not mean though, that on the micro, certain markets can't still grow or perform, even though national finance trends go down. And the reason why is national finance trends are largely driven by Australians population skew. We have too many of our data sets for finance or too much of the finance data sets make up from our major cities, right? Sydney, Melbourne, Brisbane, Adelaide, Perth, so forth. So as a result, because the data isn't cut down to that local government area from ABS, you won't see that perfect trend marry up with smaller regions across the country.

So take this data with that insight to say, yes, national data should move in line with us. But you're here as an investor tuning into this, or maybe a prospective investor tuning into this, thinking about investing. Make sure you consider that the micro data is not the same with the national finance trends. So important point, but why to give you some context on why we go through housing data at the start with finance, just because that finance leads the way, national prices follow. And from that perspective, it's also important for you to take that micro because these trends that we're talking about don't represent the micro parts of Australia.

So I guess in terms of refinances, Lee, last episode, we talked about a boom in refinances. What's happening on that end? Is that still booming along? It's still continuing. So total housing for external refinancing did fall by 1.

5%, but remained at a 19. 1 billion high and second only to an all time high seen in the previous month. And so in terms of breakup for owner-oc and investor, so for owner-oc housing, it fell by 2. 3%, but remained high at 13 billion. And that was second only to an all time high seen in the previous month also.

And then for investor housing, this rose slightly by 0. 4% to 6. 1 billion, which I found quite interesting because obviously, I think that's a common trend that we're seeing in Hills finances, essentially, obviously a lot of refinance inquiries, but those clients that can take access to any equities and reviewing of investor finance to go again as well. So yeah, it all lines up with what we're seeing as well. Yeah.

And on that note, Lee, there is obviously a lot of competition when there's refinance heights because refinance is good news for someone, the winning bank, but bad news for someone. So I guess you're noticing a lot of cashbacks thrown out there. What's the best way people can, I guess, reach out to you just so they can get a good understanding of their finances, have this reviewed? Because obviously, if there's a refinance boom happening in Australia, there must be a reason for people to refinance. Yeah.

I mean, a lot of people are coming off their fixed rates. So even just their current variable rates, they've hiked up a lot and they haven't had them reviewed by the current lender at all. So if you want to reach out to us, best way is on hillsfinance. com. au forward slash contact.

There's a contact form, fill that out and someone in the team will reach out to you. We can go through your finance options. So yeah, it is a good time to review that, especially like in general, even before all these cash rate increases, the general sense is that you should review your loans every two years anyways. So now that we've had nine consecutive months of cash rate increases, if you have not talked to anyone during that period, you really need to. Yeah.

And on that note, two years also, if you take it back from today, it was the start of the property boom that nationally occurred, right? Or a little bit into it, to be honest. So most people would be sitting on some very healthy equity, even after some declines. Don't be fooled by how much you're seeing all the news of the declines. There's the net positive in Australia at large across most, if not all cities, which does mean that having a chat to the team at Hills Finance and speaking to Lee means that you might not only save money on rates and structure things to appropriately navigate through rising rate territory, but actually also be able to structure buffers, structure equity and expand a portfolio, or at least feel really good about where you are and how your long-term is going.

Or maintain your current portfolio with buffers. Yeah, exactly. So now, obviously you guys at InvestorKit, you guys are releasing a new white paper every month, which is awesome. Nice free content that everyone gets access to. If you aren't aware of that, guys, you can go to investigate.

com. au forward slash white papers, where you see the new release pop out each month. And this month you guys have released overvalued or undervalued. That's the name of it. So an analysis of Australia's eight capital cities and 25 most populated regional cities.

So that's what I can see. This is actually a refresh of a report that you guys did in 2021. So obviously it must have been a really important topic or interesting topic for investors. Why do you think that is? So I think when we looked at the of that dual income household's income for the mortgage repayments, that would be fair value.

So hey, you've got a 100k earner, net income, they're then paying $30,000 to mortgages a year based on the median price of that city, right? So that is to us fair value. And that's all things aligning. And so does that come, like, how do you select the 30% though? Like, how does that become a selection that you use?

Yeah, so 30%, some argue 33. And if you're in other countries of the world, you may argue 37 to 40. It's essentially a global benchmark that's developed on what's considered affordable, right? Imagine you've got three buckets. One is living expenses.

One is the shelter, your home, which could be rented or mortgaged. And then the other is leisure and or savings. And so the idea here is that if one third and just under has gone towards your shelter, then you've still got two thirds of your net income to go towards saving, living, leisure. And so that's where that fair value is reached. But if you go to different countries in different parts of the world, like, you know, you go to parts like Singapore, some may say, hey, 40% is pretty normal here because their rent is quite expensive in a very undersupplied area.

Some may say 33% is the sweet spot, not 30. So that's why there's so many variables, but we simply selected that for this assessment. Now, to give you where we got the inspiration from, there was, I think it was Professor Leishman or Rossini, I think in Adelaide, funnily enough, we're here. And they released this data set and insight on their own sort of review of Adelaide. And we were inspired by it, made a few tweaks into it and released our own variation inspired by those two at UniSA.

And so I feel like this measure definitely has some credibility behind it, but also is an isolated measure. So we can't say this rules or trumps everything to do with property and it's now an overvalued city, do not invest there. Because to be honest, there's been some cities that have been overvalued since their inception, like Sydney, and yet they've had phenomenal capital growth for that 20 year period. So you cannot be thinking that, hey, if it's overvalued, it's not worth it. The truth is, if it's overvalued, maybe a city is meant to be expensive.

Like Sydney is one of the top global cities in the world, right? Like, you know, the top jobs. Top five, I think. Yeah, livability, jobs, you know, aspirational living. It's an aspirational place to live in.

And some may argue that, and that's okay. There's other beautiful cities too that they can plant flag in. But the truth is, it's not meant to be cheap. It never has been. So I think from that perspective, that's just some thoughts on the measure.

But the main rate here is that we've truly decoupled in Australia from a price to income ratio. It just makes no sense because people aren't buying properties with cash. Like the price to income is irrelevant. I think the mortgage repayment to income is far more relevant. And this is just one of those measures.

And yeah, we created the overvalue, undervalue using it. Awesome, that makes sense. And so obviously there's eight capital cities and 25 regional cities that you've selected. Can you give a summary of these that you use in the report and how they came out, whether they were overvalued or undervalued? Yeah, good call.

So the eight capital cities and the 25 regions, obviously there's been a lot of change from income, price growth, and of course, interest rates, the big elephant in the room, right? So now with regards to the capital cities, last year we had a few more undervalued than before. So Brisbane, Adelaide, Perth, and Darwin. So we had four of eight undervalued and I think Hobart to some extent as well. But then what we saw is interest rates increase, these changes in price through the price growth, and now really it's just Perth and Darwin that stand as undervalued.

Their incomes have traditionally been higher in terms of their median incomes used. Adelaide is close to the mark of undervalued, but a little bit on the overvalued side. However, overall, Perth and Darwin remain there. We switch over to the regions. Out of the 25 regions, we had 18 last time we produced this report as undervalued, but since then, a lot of interest rate increases and also a lot of price growth.

And from there, the number now is nine of 25. So looking at that, what people should consider is that the interest rates are definitely going to have an impact to the income versus repayments, which then make other downwards movements or impacts, flow on impacts. But with regards to the other thing you can look at this and say is that there's still nine of 25 major region cities across Australia that are undervalued. And just to shout out a few, we had Rockhampton, Mackay, Bunbury, Townsville, Bundaberg, Cairns, Shepparton, Toowoomba, and Wagga Wagga. And so these are undervalued even if interest rates are at 5.

5, which they are now for many, some higher, some lower. But that just shows you that these cities remain undervalued even in higher interest rate periods. So obviously they'll get more tested. Therefore, if it's undervalued, it's a great time to buy in those areas? Yeah, I think you can look at it in a few ways.

Undervalued means that the local incomes aren't super stretched in this current environment whilst managing the current house price and repayments that they're paying. And so I think that simply means that, hey, it's pretty solid in terms of its foundation from a repayment to income. It isn't an isolated growth driver saying now prices shall grow just because things are affordable. No, affordability is one part. There has to be so many other parts to it.

But it plays a key part of what we call price sensitivity, meaning if there was a lot of drivers for it and you have an undervalued market, then double whammy, we should be seeing some healthy price growths in the near future. But in terms of if the fundamentals are strong and there is some overvalue, it does not mean that the place declines because other fundamentals are quite strong. So we have to look at it holistically. But overall, yes, they do represent opportunity being undervalued because guess what? Whilst that is not an isolated measure, last year, Lee, we looked at the hindsight of producing the report and saying, hey, we produced this report.

So can we see how those undervalued went? And there was a clear trend that overvalued locations did either perform less or declined a little bit more in comparison to undervalued locations under the stress of nine interest rate rises. So it plays a role in price sensitivity, but not an isolated growth driver. So how does this affect a client if they're looking to buy an investment property in the market today and going forward? Yeah, going forward, this will help you to understand, okay, well, I see relative affordability in this area.

So it should add comfort to your analysis and it should add comfort to the ability of locals to remain competitive. So if you're an investor, there should still be some local competition, assuming those other supply and demand factors are well-placed. What it should also do is that if you're looking at areas from a perspective of your cashflow returns, you've got to imagine that if a place is quite overvalued, it also might not be stacking up from a healthy cashflow perspective because typically incomes and repayments are not stacking up as well. And so it's just more so being aware that the cashflow in certain locations, as well as how comfortable locals are for holding those mortgages. Remember, it doesn't represent everyone because there are going to be people above the median for income, below the median, but it's just a good starting point from an investor to add to the checklist.

So if I'm an investor, which we are, every checklist should consider a location's overall undervalue. Is it a checklist to cross off and say, I'm not buying here because? Well, no, I raised the point that Sydney's been undervalued for many years and it's had some years of overvalue, but for most parts of it, it's been overvalued, yet it's performed because there are other fundamentals to consider. But what I would do is be aware. And so if you have this as part of your checklist, that will help.

It's interesting. So there's like six of those locations that you called out that are all in Queensland. So it really makes sense in terms of like a lot of people have been shifting to Queensland, investing in Queensland due to the affordability. Yeah, okay, cool. On that note, that's a really good point you raised, Lee, because see, imagine you're having the old barbecue conversation with Max, right?

I don't know why we all love our barbecues and barbecue conversations. I know why we love barbecues, but I don't know why we love using it as a property example. I like it because when I cook the meats and I go, hey, I thought I'd give the missus a day off, right? And then I realized, hold on a minute, she helped me with cutting the salad. She brought it all out.

She prepped all the marination and turned the oven on. She put the garlic bread in. She literally did 90% of it.