The sentiment around property prices continues to fall by the day, but in stark contrast, the fundamentals of the economy appear to be holding up incredibly well.
Since the RBA started hiking the official cash rate in May, both property prices and consumer sentiment have both started to taper off. However, aside from the higher costs of living, there are a number key data points that suggest home buyers still have money in the bank and that the wages should keep growing.
Currently, the savings ratio is sitting at a very healthy 11.4%. That means consumers have good buffers in place and are not dipping into those savings to help pay off higher mortgage costs just yet.
At the moment, the debt to property value ratio is 22%. That means that while the overall level of mortgages has increased over recent years, debts relative to values are in a secure area.
There’s likely going to be a lot of upward pressure on house prices as international migration returns. The Federal government has announced that they are looking to ramp up migration to over 200,000 per year to fill the labour shortage which could see both rental and buyer demand increase.
Along with more migration, the Federal government is also looking to expand spending on infrastructure. Currently, there’s a rolling pipeline of $120 billion in projects that will help underpin jobs and wages.
Despite the weak sentiment and concerns around higher interest rates, the jobs situation remains strong. We’re currently experiencing the lowest unemployment rate in history and worker shortages are keeping upward pressure on wages.
Similarly, the number of businesses looking for workers remains elevated and if anything the only downside is that the lack of workers might be hurting the growth trajectory of some businesses.
With all the labour shortages, we’re seeing upward pressure on wages. While it still might be lagging inflation, the tightest labour market in decades should see more wage growth ahead.
While there are a number of positives that should help prop up the economy and property prices, there will certainly be some areas that bare the brunt of weaker sentiment and higher interest rates. In particular, the locations where supply is back to pre-Covid levels, especially in parts of Sydney, are already weighing on prices.
Elsewhere, there are many markets that are still growing, with the biggest impact being the rate of growth which is slowing due to weaker overall sentiment.
I don’t think we’re going to see a market crash like many are predicting, but more importantly, there are still opportunities out there for savvy investors to identify markets that are likely to see further upside.