Property will perform well as a safe haven as global tensions rise

Australian property will perform strongly as a safe haven asset.

Flight to quality

Globally financial markets are becoming somewhat spooked by a number of risks, such as rising inflation from the food and energy crisis, an ensuing possible increase in interest rates, and very concerning geopolitical uncertainties.

In the U.S. markets the NASDAQ is already 17½ per cent off its highs, the Russell 2000 Index is off 20 per cent, and the S&P 500 is into correction territory, down 10 per cent from the highs.

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Stock market volatility suggests that investors are increasingly skittish about high stock market valuations and the uncertain outlook. There have been some forecasts about geopolitical uncertainties being a negative for Australian property, but we are seeing that playing out quite differently on the ground.

Indeed, housing finance is still running at record levels, and credit growth for investors is now on the rise.

Housing finance is still running at record levels, and credit growth for investors is now on the rise.
Figure 1 – Housing finance by month

Average loan sizes for new borrowers are also running at record highs, with very few signs of concern from borrowers about the outlook for interest rates.

Average loan sizes for new borrowers are also running at record highs, with very few signs of concern from borrowers about the outlook for interest rates.
Figure 2 – Average new mortgage size

Yes, there is some more caution around, especially for B- and C-grade properties, but we’re actually seeing rents accelerate around the country now. And while interest rates will rise at some point, the official cash rate is still 0.10 per cent, and it’s still possible for investors to borrow from under 3 per cent mortgage rates.

With achievable yields of 4 per cent on some residential property, or higher in some markets, and rents likely to surge in 2022 due to tightening rental vacancies as the borders reopen, this still makes for an attractive equation for property investors with a 10-year outlook.

Patience on interest rates

The Reserve Bank of Australia will remain patient in its approach to hiking interest rates. Reserve Bank communication has consistently stressed that the goal is to see the return of full employment, and the RBA will be patient in this regard.

Thanks to a surge in refinancing, the average mortgage rate across all outstanding loans fell to record lows over the course of 2021, so there remains plenty of capacity in the market for a robust performance in property.

As for the impact of geopolitical uncertainties, our research shows that Australian property has rarely been significantly impacted, even throughout some of the most dramatic events in recent modern history such as 9/11, the Gulf War conflicts, or the Asian Crisis. Even if interest rates are forthcoming down the track, they will likely only be delivered in a very considered and gradual manner.

Australian property has rarely been significantly impacted, even throughout some of the most dramatic events in recent modern history

Tightening supply

A shortage of supply will characterise the property market over the years ahead. Rental vacancy rates at the national level are already at the lowest levels in over 15 years, even before immigration ramps up again.

Rising materials and trades costs will also limit the supply response. We’ve already seen the sizeable developer Probuild heading for administration, leaving thousands of incomplete apartments under development, and there are likely to be further insolvencies in the sector ahead.

There’s never only one cockroach, as the saying goes. With many projects built on fixed-price contracts, the pressures on the construction and development sector – where profit margins are typically quite thin – have been rising. Building approvals are already trending lower now as the HomeBuilder stimulus wears off.

Building approvals are already trending lower now as the HomeBuilder stimulus wears off.

Figure 3 – Detached house approvals by capital city

The question we find ourselves asking as the borders reopen is: where is everyone going to live? Internationally there are concerns and tensions, and there will be a flight to quality in 2022. Property is often seen as a safe haven choice in Australia, and this time will be no different.

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