My Thoughts for Economy and Property in 2023

A lot of people have asked for my thoughts in the economy and property in 2023.

So here it is

Property
Sydney - having come off 10% I feel that Sydney will come off another 5-10%. Sydney households are heavily indebted and they will feel the interest increases the most. Some places in the Eastern suburbsand North Shore have come off 25%. The rental market is now really heating up.

Melbourne - Melbourne has already come off 7-8%...it may do another 3-5%. It is now looking cheaper than parts of Brisbane and a lot cheaper than Sydney. The rental market is really heating up.

Brisbane - has come off 10% and like Sydney another 5-10% is due. A lot of price increase were due to people migrating up North from Sydney/Melbourne. This has now slowed. And there are signs this is slowing and oversea migration favors Melbourne. The rental market has been red hot but there are signs it is slowing primarily due to affordability compared to wages.

Hobart - has come off 10% but I reckon we could see another 5-15% come off Hobart. A lot of price increases were due to COVID and working from home. This has now slowed a lot. The rental market has been red hot but there are signs it is slowing primarily due to affordability compared to wages.

Adelaide - its still growing and expect another 3-5% growth in 2023. The rental market has been red hot it will slow but rents will continue to grow.

Perth - its still growing and expect another 5-10% growth in 2023. The rental market has been red hot and doubt it will slow as wages are high and mining is keeping things moving.

Economy
Interest Rates - this has been a huge surprise. I did not expect it move past 3% but it has. It certainly looks like it will keep going...I am thinking 3.6-3.85% now. Households are already struggling this is going to hurt a lot of people.

Inflation - inflation is now at 7.3%. People have seen things have slowed in US but inflation is sticky. It might not go up 1%...but it may still keep going up before it levels out...this could be till Q3 2023.

Borrowing Capacity - borrowing capacity is now down about 30% for a lot of people. This has a direct impact on the price of housing. ...that is down.

Repossesions - you will see this trend up...this in addition to the cost of living people will default as they fail to keep up mortgage repayments

Mortgage Rates - i reckon mortgages for OO PI will sit on average at 5-5.5% by mid year. IP rates will be over 6% PI. I doubt this will head down till 2024.

Unemployment - cost cutting is already happening and as a result jobs are going. The rate of jobs growth has slowed. I can see unemployment sit at between 4.5-6% by year end.

Fixed Rates Coming Off - Well remember the mortgage cliff ...it is finally here. A lot fixed at 2%...now they will be at 5% plus. A lot will be ok but also a lot bought toys...will get very interesting this year as something like 70% of fixed rates come off this year.

Happy to hear your constructive views.

 

Agree with you @sash

With potentially 5-10% decrease still coming, it may be time to buy a PPOR now. Even if there is a further 10% decline, it’s a risk adjusted decision as there is possibility property price has bottom now and RBA rate will ease up at 3.50% and pause. Market will then look ahead and price in the cuts / wage rises

 

Agreed risk is lowered after the next 1-2 rate rises. People will be already in trouble effective now...March-June looks to be highest pain point....

I doubt rates will drop as fast as they rose.

 

In hindsight, is it because some of us, like the central banks, took the inflation story as being "transitory" and we became complacent?

 

I expected inflation to rise ...but not rates past 3%....

 

Great post & commentary.. it has to be your longest post ever sash!

 

Don't know what will happen, appreciate someone willing to put their views out there.

 

I'll put my opinion out there.

-7.3 Is a number from November 22. It is buoyed by Christmas Spending, notably Black Friday spending.
- Current Inflation is likely noticeably lower than 7.3. I see it being 5% by Q1 2023 with it being close to 3% by end of 2023. I still think a chance of a pause as the RBA will know the 7.3 number is likely lower in real time.
- I don't see Rates going past 3.5 as a maximum. But i believe they will remain in the 3's for most of 2023.
- I see unemployment returning to 4% - 4.5% by end of 2023.
- I see Sydney bottoming out at 15% down, so another 5% on top of what's occurred.

 

Any thoughts on what the regionals will do ?

 

Property in general doesn’t look good. Too many negatives.

Only positive is that unemployment is at record lows. This could be the economy’s saving grace.

 

Sydney is already down more than 13% from peak so far with more to come.
Melbourne had the least cap gains and performed the worst in the past 2-3 years with all the lockdowns so don't think prices will fall much further.

Rents are still flat in inner Melb and still below pre-covid from the areas I monitor. I was there a few weeks ago and the CBD is much busier compared to 3-4 months ago. Also noticed Irish backpackers are returning to inner bayside area with hopefully more international students also returning soon. Gold Coast rents are still very strong and expected to go higher this year.

 

Good post mate, tend to agree with much written.
I do feel from speaking with mates in the same scenario as I, looking to upgrade ppor that many will be looking to buy very very soon.

 

id be happy to say 15-18

 

I'm looking to buy this year being a buyers' market. But I'm wondering what the affect will be when people like me come off their fixed loan rate in the next year or 2 that bought during that recent buying spree. Maybe we're only a small pool of people, or maybe it'll lead to a lot of distressed sales. That's my main question mark.

 

They've been stress tested at between 5 and 5.5% P&I typically. Many will roll to retail rates above that and of that pool of borrowers some may be unable to refinance to cheaper rates because serviceability is now assessed at a significantly higher rate. It will take many months after the loans start reverting from Fixed to Variable for any pain to unfold though, and then many additional months before lender intervention forces a sale.I don't think we will really know if there's a big issue until Spring 2023 onwards.... I'd be watching and waiting for 6-9 months .

As has been said over and over and over...it will come down to holding power for the most part. My expectation is that many recent entrants may come under "revert to" pressure , but rather than folding, I would imagine most will try to find a way through. For the first time in 30 years a generation of Australian FHB's may not be able to keep up with keeping up. Their cheap credit lifestyles may need some trimming. They may need to sell the Euro's and downsize to a Korean, or cut out the coffees, eating out , holidays etc... if that's what it takes . If they aren't willing to tighten the belt they may have a problem.

 

i used to be one of those that thought, "there is no way the entitled people of today will be able to handle not "insert luxury/over the top/entitled event",

but i think after a bit of a whinge and a moan, they will just accept it adjust their attitude for the most part, there will always be a small proportion of people who be complaining and being a pest to society and not taking responsbility for their actions

 

What would be some of the trigger factors that would change monetary policy from QT to QE? Is there a lag where the full affects of an IR rise are felt and filtered through the economy say after 3-6 months? Most likely in for alot more pain?

Now that where nearing the peak of interest rate rises, do you think would banks take a look at reducing the assesement rate of 2.5 - 3% on new loans. Might increase investor activity and help the rental crisis we have at the moment? Increase building approvals on new homes and provide more rental stock?

 

We don't know that we are nearing peak. We are hoping Assuming we are, and assuming APRA amends their guidance to permit a reduction in the floating buffer ( the banks don't make this decision, the regulator does), we would still be facing assessment rates higher than when APRA intervened in 2015/16... unless APRA slashed the buffer from 3 to 1, which seems improbable. We really need to see a total of @ 200bpts coming off the effective assessment rate - and that will likely require a series of rate reductions AND a reduction to the assessment rate buffer to start seeing the 30-40% capacity thats just been removed, start to be restored. But even that probably wont be enough to kick start things . It will just arrest the declines and allow some people to avoid a P&I cliff.

Consider this ; even with sub 2% rates and sub 5% assessment rates, we were seeing growth start to peak even before the RBA started to raise rates in March 2022. The floor rate increase from 2.5% to 3% that APRA introduced on NOV 1 2021 had an immediate slowing effect on lending volumes and borrowing capacity and auction clearance rates ... like, instant. If a 50bpts increase to the assessment rate was all it took to place a hand brake on price growth and auction clearance rates BEFORE the RBA started raising rates , that tells me that even the uber generous COVID settings had pretty much seen most borrowers reach their tap out point even by late 2021.

 

Agreed with most of your ideas, @sash

I think we also need to include foreign impact such as oil price, exchange rate, or import inflation. Interesting time ahead, and usually a good time to bet even or odd...

 

Yeah..I got tired of explaining all the time to people...

Selling any more?..I think I am calling it a day on investment property...but ya never know. Time to smell the roses and ride away like a cowboy into the sunset...before I lose my marbles...