Brisbane Property Market Update October 2021 by Alistair Kelsall, Brisbane Buyers Agent. This Brisbane Property Market is an explanation of the drivers behind the current increases in Brisbane property values and why it has not been the right time to invest.
Overview
Firstly as you are probably aware, the increase in property values is not been driven by normal market conditions. i.e Normal and Anticipated property value increases driven by lower interest rates which leads to high demands placed on the local property which therefore results in increases in property values.
The market has been in a Normal and Anticipated Market Phase up until early August 2021. During this time I had been purchasing properties for clients knowing that we were paying the correct amount or less for a property.
In normal conditions, the Brisbane property market is driven by population growth. With low interest rates and COVID 19 to a degree, we experienced a higher number of people from outside Queensland seeking to take advantage of the lower housing costs and relocate predominantly to the South East Queensland region. This would be considered normal market conditions as the market drivers remained the same with the difference being the higher number of buyers from both local and interstate. It is the higher number of buyers that created an increase in pressure on the local housing market which resulted in higher than normal property value increases in the first half of 2021.
Market Change
From August onwards there was a trend of offers being placed on properties far higher than normal market growth in a Normal and Anticipated Market. The trend of higher than normal offers being submitted by potential buyers was driven by 2 factors.
- Low-Interest Rates leading to an above-average normal amount of buyers.
- Potential buyers who have been active in the market for some months whose offers for the property had not been accepted. In a bid of desperation, this led to a new trend of potential buyers submitting offers for properties over and above the anticipated sale price of a property, which resulted in a significant jump in the amount properties were selling for.
This type of market would be considered a bullish market and is driving the increase in property sales figures, not values. This is not a market phase you purchase in when considering an investment property as you are now in a high-risk area and susceptible to a price correction.
The same does not apply to a person seeking a property to live in. If a person is seeking a property to live in and they intend to retain the property for an extended amount of time, then initially paying a higher amount for property does not have a significant impact on the future value of the property. In 5 or 10 years time the property will be valued far more than what they paid for it.
An investor however needs to purchase a property with good returns and capital growth, he or she does not want to higher than normal property prices only to see the values drop in the near future. An investor needs to purchase a property that is moving up in the property price cycle.
Market Conditions Example
As a real-life example of the current property market conditions, I purchased a property in Doolandella Off Market for $575,000. That same week I attended an open home for a similar property in the same street. Same land size, inferior house, inferior location and it sold for $606,000.
The property below was on the market at the same time as I was purchasing the lower property Off-Market. All though 66 Fred Pham Cres is slightly smaller, it is a much higher build quality and is located opposite parklands.
The price of 5 Fred Pham was simply driven up by someone willing to pay a higher amount to secure the property,
Risk Factors
With interest rates at record lows, the borrowing capacity or the amount a lender will allow a person to borrow based upon their income and living expenses has increased dramatically. So any increases to interest rates would see the market slow down, demand on local housing stock decrease which would then lead to a slowing down of the current property value increases. The RBA has made it clear that they do not foresee a rise in interest rates for at least the next couple of years. So interest rate movements would be considered low risk.
As an interest rate change is very unlikely, the government has announced changes to the way lenders calculate your borrowing capacity. When a lender calculates your borrowing capacity, they take into account all your current living expenses and they add a buffer to the current interest rate and calculate how much a person can afford to borrow at the current variable interest rate plus a servicing factor of say 2%. The concept is that if interest rates rise over the next 2 year period, the lender has made an allowance for this and the borrowers should still be able to meet their low repayments. Any changes made to the servicing rate affect your borrowing capacity and this is what the government is instructing the lenders to do.
The effect of the increase on the servicing calculations to a persons borrowing capacity will be to decrease the amount of money they can lend. This will therefore reduce the number of buyers in the market place which will see property values return to their normal or slightly lower than the rate of growth.
Right Time To Buy
The right time to buy is when the number of potential buyers drops to an acceptable level. This will start to happen right now as any changes to the lending policy will create a level of fear in the community and slow the market down. The real effect will be in the next 30 days and I will continue to monitor the market.
Summary
To summarise, for the first part of this year we were in a steadily rising market. In the last half of this year, we have been in a bullish market driven by people desperate to secure a home and willing to submit higher than market value offers on properties. in November when the increased servicing rates are applied to borrowers we will see a reduction in the number of buyers which will decrease pressure on local housing market stocks which will see the property price cycle return to normal.