Will there be another Australia Nationwide Boom? - with Arjun Paliwal

Historically, every state and every city doesn't boom at the exact same time, but COVID showed that it can. What if I told you that the data is lining up for this to potentially happen once again? In this episode, I'm going to give you a peek behind the curtain into the InvestorKit data team's research sharing government incentives and access to credit and capital shifts between markets and what that means for the years ahead. I'm Arjun Paliwal, the CEO of InvestorKit. Let's get into today's episode.

The first thing I want to talk about when it comes to this boom that's ahead of us is that it's not going to be as big as the one we just had in COVID. We track housing fundamentals every single year. In fact, we release a report called the Australian Housing Fundamentals, and that comes out around each new start of the financial year. A bit outdated for me to talk about today, but that particular report has some significance with the fact that at 2021, it was the most fundamentals that came together to highlight strength for the Australian property market. So there are a few things that if they happen, we'll bring those together once again.

So if whilst we're looking at interest rates as one topic, if they start coming lower again and they don't just sit at this neutral and further cuts do happen in 2026, no, it won't be COVID 2021 crisis level lows. I feel like the RBA is always going to need to have some interest rate sitting there in case of future emergencies, but it will get lower than today. That's my prediction anyway. Now, it's not going to be COVID lows of 0. 1% to handle a crisis, but we have to remember interest rates aren't this perfect straight line.

If you zoom out over 20 or 30 years, even in a cutting cycle, we've seen things go up and then come back down again. So there could be moments where interest rates even could potentially go up because they're trying to stamp out inflation. But I just think that'd be the wrong thing to do. Inflation isn't where everyone is thinking it is. Example, electricity is not based on people going out there and wanting to spend more on electricity or having more incomes and actively spending more on electricity.

The things that many people don't recognize is that there are certain buckets of inflation that won't make a difference even if you increase interest rates. They're just hoping that by the increasing of interest rates, it offsets some other areas to balance things out, which isn't a long-term move that actually helps the economy. It hurts the economy. And so as a result, you might then have a deeper cut or a longer cutting cycle when you do eventually get to cut. So we can go back and forth on interest rates, but the difference here is it's still lower now than what it was a couple of years ago.

And that being a key thing, it will play a theme in 2026 because overall markets are heating up already. The first thing to point out is the supply angles and why I bring that back up to interest rates is that if interest rates are slightly lower or a little bit lower and it's compounded with continuously low established supply and new supply, it's just multiple fundamentals coming together to create key elements of that boom period in 2021. But the thing is, firstly, we've got to label what a boom is. People think, and we're spoiled by this, by the way, that a boom is 20 plus percent growth or 10 percent plus growth every single year. I see it as otherwise.

I see a boom as somewhere between 8 to 12 percent plus. And that's been happening every single year in select markets, but it's more likely and more broad over the year ahead, which is why I say a more nationwide boom or nationwide upswing is happening. Why do I say 8 to 12 percent plus is a boom? Well, long term averages of Australian property markets are between 5 and 7 percent. So if you're over that 5 percent by that much of a margin at 8 percent, that's more than 50 percent above the long term average.

So if you're at the 6 percent, obviously these numbers get lower. But if you get to 10 to 12 percent, suddenly again, you're 100 percent higher than the long term average. So these are boom territories. It's just that we've been spoiled over the last few years where certain markets have done 20 or 30 percent and we deem that as a boom. Now, undersupply is very interesting.

Undersupply isn't just what's happening in new builds, but it's happening everywhere right now. And that's the key thing to recognize. And what I mean by everywhere, I'll give you the different areas. Number one is there's a new build undersupply. Number two is there's a rental market undersupply.

Number three is there is an established housing for sale undersupply. So, yes, there are some cities in a far deeper undersupply than others. For example, Perth, Bunbury, Townsville, Rockhampton. These cities have much lower undersupplies than many others. Toowoomba is an example.

But the undersupply even in some of these cities is getting worse. So it's not a case of they're just low and staying low. And that's always been low for the last few years. Some of the supply levels in these markets are getting even worse than they were in the last few years, even though they've been booming. So this notion of now these areas have grown enough and they won't grow anymore.

Well, they're likely to keep growing. Even if the new demand of activity slows, it's just that the supply is so much lower that the pressure will continue, which is actually leading to another thing. People's belief in how long's boom last is completely flawed. Booms don't suddenly stop because some areas grown for five to seven years. That's not the right analysis, because if you take that same analysis, that means from 2011 to 2016, the boom wasn't happening in Brisbane and Adelaide.

Therefore, 2017 to 2021 should be a boom. Well, no, the boom didn't really kick off and start rising until late 2020 into 21. So that means the whole last five years, the next five years analogy isn't as perfect as everyone makes it out to be. Same thing here with Melbourne. Well, Melbourne didn't do so well from 2016 to 2021, had a good COVID year in 21, then come back down 22.

Everyone thinks that Melbourne's the next place suddenly. There are some parts of Melbourne that are really recovering well. But to think this whole five year here and a 10 year here and a 10 year there is just perfect. It doesn't work that way. Some markets don't just boom for two to three.

They boom for four, five, six and seven. We need to look at the fundamentals. Are the fundamentals the same or changing? Now, one fundamental does shift naturally when markets continue to boom and they start to self-regulate. That fundamental is affordability and that fundamental is also yields.

So those two fundamentals naturally get worse as markets boom because prices grow faster than rents, yields suppress and prices grow faster than incomes, wages or the new people coming in or the actual ability to buy and borrow, the deposit that you can save. Of course, they change that, which is why this five year and 10 year theory has come about. But if those fundamentals all around it stay stronger, like supply, like maybe the new people in the new buying markets coming in, are the ones that actually don't have the same income or the stats of the affordability that have been there. So these are constantly changing dynamics which allow some cities to boom for longer. Some cities might have more in their cycle to go until something's affordability is tested.

So it's all about considering all things, not just those things in isolation. But the core thing that we're seeing is supply this tight, interest rates in a different position and supply in all categories being tight with new demand waves coming in, which is point number two. But the key is that if the supply crisis remains this way, you can't just sit there and expect prices to not increase. They will continue to increase and at stronger levels because the supply crisis in areas that were once oversupplied in the last couple of years, those areas are starting to tighten. For example, if we look over to the states that New South Wales or Victoria, these areas used to have inventory levels of four to six months over the last few years when interest rates increased, when money was really moving into other markets and the money wasn't moving here.

Sales volumes were quite low. Now many sales volumes in these markets are elevating substantially. And so more sales volume simply means more buying. And if that's happening, then we're starting to see the supply, even though it was higher in some markets, in uniform get tighter in many markets. So when it comes to supply trends as well that are causing some of the strong levels of growth, firstly, you can see two charts in front of me.

The vacancy rates was one is that even though investor participation has increased, rental markets continue to stay very tight in terms of low vacancy rates and new people coming into the country are also putting pressure on these vacancy rates alongside people leaving and moving out of their households, also making smaller households as a result of a family of four becoming two families of two. Suddenly all of these things are creating more pressure on the rental market and more pressure on the rental market can create greater rental yield as rents rise. With greater rental yield, investors are attracted to certain markets and then also renters are looking at ways to get out of the rental market. So all of these things help in terms of price pressure. But I want to point you to one chart here on the left.

This particular chart on the left is showing something very interesting that's happened in recent years. As interest rates were elevated, a lot of money moved towards the more affordable markets in Australia. As investor activity returned, in comparison to the many years of the past. And people wondering why are we doing this? Well, take a consideration of this.

Firstly, you're making up the years of the past that did have the big border shutdowns. But secondly, a lot of people want to call Australia home. And when it comes to the skilled workers or the type of workers we need or the aging population, trust me, seeing other countries across the other parts of the world that have suffered negatively from aging population or had their economy impacted, you need to look at the impacts of that. And that's a side project or a podcast alone that I'm looking forward to covering. But the main thing here is that more and more people coming into the life of Australia in their 20s, 30s and 40s and the amount of people that are aging because of birth rate declining is one factor you should deeply look into.

But putting that aside, the main thing is in the supply analysis, it is deep, it is bad. And at the same time, even in markets where the supply analysis is actually quite healthy, you can actually see some parts of regional Victoria and New South Wales, for example, if we have a look at this statement here in this particular report, in New South Wales and Vic, only around 40% of SA3s in Greater Sydney and Melbourne are currently experiencing inventory declines. However, in regional part, that number has jumped to 80 and 96%. So it shows a clear recovery in trends of regional New South Wales and Victoria and parts of Melbourne. So that's the number of listings relevant to buying activity.

And that means price pressure will continue to increase and grow because of point number one, the supply dynamic. If we move to point number two now, what's happening with government schemes and incentives is very interesting. Now, the governments can play a key part in housing affordability, in housing supply, and also in this case, housing demand. And we've studied this many times over. The way that these schemes come in are short-term policies for short-term benefits.

But those short-term benefits have long-term consequences. And what it is, is through continuous short-term movements on first-term buyers with lower deposits and grants, incentives, stamp duty shifts, all of these things, and price cap shifts as well, all of these things create demand. And it's not the demand that people measure directly to the audience benefiting them. That's where you've got it wrong. What actually happens, and this is where all the stats gurus get this wrong, is that it's not just the demand of the first-term buyers uplifting the market.

It's the demand of others who want to make a move in anticipation of first-term buyers uplifting the market. Investors who didn't think that they were going to buy now want to buy because they think X will happen. And this is where the housing dynamic and housing analysis is not as simple as one plus one equals two. Quite often, one plus one equals three in housing analysis. And the simple reason is because what you think directly makes a difference in one trend is indirectly also having another difference.

And so you can't just say first-term buyers make up a 10 to 20% of an audience in certain markets. They're only benefiting from this much. Not all of them will take it up. Therefore, the take-up only represents a few hundred thousand in sales volumes, not all of these hundreds of thousands and millions of sales volumes over multiple years. That's an incorrect, that's like such a linear, statistical one plus one equals two way of looking at it.

What you have to look at it is there's a human and emotional element here too, where there's many investors who call us up and go, I think this is going to happen with first-term buyers. I want to now make a move. If that's happening in InvestorKit with investors thinking this, do you think that's going to happen in other buyers agencies and other places and other homes that people are living and thinking about this? Of course. And these price cap changes are not small for some cities.

So they're thinking, well, I better go and buy that million dollar property. I better go buy that eight or 900K property. And when you think about all of this, remember, this is just people on their couch thinking now I better upsize. I better get my downsize sorted. I better go and invest.

Remember that second property we're looking at? We better go make that move. Oh, we should go and get that first home now because now we can or now it's available to us. I want to consider this and maybe I'll go back to renting later on. All of these are human emotions and decisions that go up and they're not just the first-term buyer audience.

They're audience all over Australia of different Aussies and different families thinking about the way the government's intervening, the difference that's being made and how they may benefit or how they may get the opportunity cost if they don't. And sentiment is a big shifter. And it's not just a price cap change or a grant. It's help to buy. It's LMI waivers.

It's all of this stuff. And when it comes to first-term buyers, the banks don't want to lose out. They want to take advantage of this and they want access to credit. So we're seeing a lot of things happen behind the scenes. Things that aren't advertised out to everyone.

Some banks were saying, no, look, it's only if you refinance an application that will give you 1% mortgage buffers instead of 3% mortgage buffers. So we leniently look at your finances when you're moving applications from bank to bank because we know that you're servicing the loan, you're paying for it, and you're good for it. That was the thing that happened when banks had these 3% assessment rates that were hurting borrowing capacity. They allowed for 1% assessment rates, which is essentially if someone's on a 6% interest rate, instead of looking at you with a 9% mortgage, they look at you with a 7% mortgage. And if you can handle that with your calculations, they'll get you the loan.

That was very much tied to refinances only. But some banks, by the way, are actually looking at it from even purchases, are even looking at it from different... This is wild. This is already showing that the banks are trying to find their way back in. And as a result, you're getting more lending.

Banks are also going, well, we're going to look at your self-employed income slightly differently. We'll look at family trusts in different ways. We'll look at self-managed super fund in different ways. We're going to look at all of these things in different ways. And as a result, we're going to give you more money.

Then there are banks now where rents are rising from the many years of the rental crisis. And with rents rising, you're declaring more rental income. Wage growth has been happening in a few areas. And so all of these key things are coming to the mix where people are just getting some more lending. And they're lending more because the ABS indicators show lending is pretty healthy and investor lendings continue to pick up.

Now, yeah, there might be some APRA changes to limit that. But remember, we're not at those levels. So they're placing a 20% cap, but the banks aren't at those levels. And you have to get back to 2021 levels for it to get or exceed it. And if it does, more people today are using brokers than they were using major banks.

So if more people today are using brokers, then they may have a solution to look at other banks that allow them to lend that. So there's a few different things happening when it comes to the access to credit. Banks are doing more LMI, lenders mortgage insurance waivers than ever before. Banks are looking at ways to give 35 and 40 year loan terms to help people with borrowing capacity. Banks are continuing to service on interest only and more people having awareness of interest only in some areas.

So the game of credit is slightly changing and governments are putting a lot of incentives back in. Two key drivers of what causes more widespread booms. Now, this third point I'm going to get into is called the shift in capital between markets. And this is a very interesting one. But before I get into this, you might have seen a few charts come up in the earlier parts of this episode.

There's a link in the description to get that white paper, which is our seven trends white paper for what's to happen in 2026. You can just grab that from the link in the description. It's totally free and you'll get some of the research that I shared on screen today in your inbox. Now, talking about capital and the markets that are shifting, this is where things get interesting. People have this notion that Queensland and WA are done for their growth cycles when the supply data proves otherwise and their growth rates also prove otherwise with forecasts ahead for 2026 that these two states alongside South Australia are still expected to be the top three markets performance.

And that's still likely to be the case. But something's happening. And what's happening is sales volumes are erupting across many parts of Victoria, New South Wales and Tassie starting to show the same. So how is it that you can go from major booms over the last few years in Queensland, SA and WA only to still have boom conditions in Queensland, SA and WA plus New South Wales, Victoria and Tassie recovering? And remember, New South Wales and Victoria recovering is the biggest segment to recover because it's more than 10 million people.

So if you've got over 10 million plus people, like more than half the country or almost half the country coming together and basically going, yeah, let's see this market really shift again. That's all buyer segments. It's not just investors because if it was just investors, that means the capital would move out of WA, SA and Queensland and therefore those markets would not grow, but they still are.