AARON PATRICK: Why Brisbane could be ground zero for horror year in property

If Australia is about to enter a property apocalypse, ground zero could be Brisbane suburbs such as Ascot.

On Saturday, an airy four-bedroom house with a swimming pool and garage at 33 Abbott Street in the wealthy suburb did not receive a single bid at an auction, contributing to a dismal 30 per cent clearance rate across Queensland. The house has now been listed for $3.4 million.

Auction sales were at pandemic-era lows in all capital cities, as buyers were spooked off by new restrictions on negative gearing and increases in capital gains tax.

While the Budget changes are designed to slow the pace of property growth, not reduce them, experts such as Shane Oliver believe the consequences could be far more serious.

On Monday he warned this could be the end of the third “super cycle upswing” of the past century. Even if the AMP’s chief economist’s prediction does not come to pass, Australians’ single greatest source of wealth is at a precarious moment.

“Houses in Australia are way overvalued,” he told The Nightly. “There is a limit to how much house prices can rise compared to people’s incomes. There are a lot of things stacking up to make it more difficult for property.”

Four reasons

There are four main reasons property prices might start falling: interest rates are still going up, the tax changes are already driving investors away, prices are far above historical averages, and there is huge political pressure to lower immigration. Mr Oliver warns these factors pose “a bit of a perfect storm” for property, although admits that he puts the likelihood of his prediction coming true at 60 per cent over the next few years.

One simple way to gauge property values is the prices-to-rent ratio, which is another way of expressing the yield, or percentage return from rent. Mr Oliver has compared these ratios to their long-term averages, and calculated that Brisbane houses are 57 per cent overpriced — the highest in the country.

The sunshine state became more popular during and after the pandemic, triggering price rises that have now made Brisbane particularly vulnerable to a housing correction. In the relative expense hierarchy, Brisbane houses are followed by Sydney houses, at 42 per cent over priced, Adelaide at 40 per cent, and Brisbane apartments at 33 per cent, according to Mr Oliver.

Over history, property prices have varied from being really cheap to very expensive, compared to the cost of rent. Timing these shifts can deliver windfall gains.

Perhaps the most famous historical example began on 8 June, 1942, when Japanese submarine I-24 surfaced off the coast of Sydney and bombarded the suburbs of Rose Bay, Bellevue Hill, Woollahra and Bondi. Although most of the shells didn’t detonate and no-one died, the attack triggered a panic in the Eastern suburbs that sent prices plunging.

Stories persist today of hardy entrepreneurs who bought the dip and enjoyed windfall gains after Sydneysiders realised the Japanese Navy wasn’t coming back.

Two markets

Today, Australia is experiencing another property shock in different ways. Prices are falling in Sydney, Melbourne, Canberra and Hobart. But Brisbane, Adelaide, Perth and Darwin set records in May, according to property research firm Cotality.

Even in recessions, property prices can be slow to fall. That’s because sellers often prefer to wait for conditions to improve rather than realise losses. At the moment, buyers are holding back, sending auction rates plunging but having a mixed impact on prices.

“There’s been lower buyer numbers over the last month but not price falls,” Brisbane real estate agent Matthew Hunt said on Monday. “I think buyers are probably being a little selective.”

Another of the city’s agents, Clinton Viertel, has been amazed by the torrent of debate unleashed by the plan to raise taxes on investors. “I have never seen as much as commentary regarding a budget release before,” he said.

One of the Budget’s primary effects is to remove investors from the second-hand house and apartment market. Over the longer term, immigration may have a bigger impact on property prices.

Since the unanticipated influx of people after the pandemic, the housing shortfall has risen to between 200,000 and 300,000 homes, according to AMP. The result is a rental shortage that has driven up rents and made life miserable for many people who don’t own a home.

Polls and prices

About 180,000 homes are built each year, making immigration crucial for balancing supply and demand. Which is why political opinion polls may provide a guide for property prices.

A poll on Sunday put One Nation ahead of the Labor Party and the Coalition, an indication that voters want lower immigration, which would hurt property prices. The Government forecasts immigration will fall to 225,000 a year. Attempting to tap into voter anger, the Coalition aims for about 165,000. One Nation’s target is 130,000 a year.

The stronger One Nation and the Coalition appear, the greater pressure there will be on the government, which is slipping in polls, to cut immigration.

Most Australians, used to steadily rising prices, may have a shock coming. Much will depend on inflation, international events and unpredictable human behaviour.

“Several more rate hikes, a sharply rising trend in unemployment and a big drying up in investor demand could result in much bigger price falls than 5 per cent,” Mr Oliver told clients today. “On the flip side a quick resumption of rate cuts, a quick resolution of the oil supply shock and a subdued investor response could drive stronger property prices next year.”