John McGrath – Time to buy midway through correction | McGrath
Time to buy midway through correction

John McGrath – Time to buy midway through correction

John McGrath
John McGrath
14/06/2022 | 3 MIN READ

In Sydney and Melbourne, I think we’re already halfway through this market correction.

Prices are probably down 5%-8% from the peak in October and we might have a few more per cent to go through the next six to 12 months. Remember this decline is coming off a 35%-40% increase in the past few years.

But it’s good news for buyers, especially those that have been in the market for a year or so and have missed out on homes due to competition. The situation now is if you buy this year, you can be confident of getting a 5%-10% discount on last year’s prices.

As expected last week, the Reserve Bank raised interest rates for the second consecutive month. This is going to keep happening for a while to combat rising inflation.

Inflation is having a real impact on construction at the moment. Recent data from the Australian Bureau of Statistics shows the cost of building a new home in Australia has hit a record high.

Buyers who are building are, on average, paying about $75,000 extra for their new homes because of global supply issues with raw materials like timber, and a labour shortage, which are both pushing up costs.

Anyway, I’m expecting interest rates to rise by 1.25%-1.75% over the next 18 months. That will allow for a period of consolidation in the market after such big price gains.

Late last year, the previous cycle was overheating and we need a breather now to slow down the sustained price escalation.

But I think the whole country will have a soft landing off the back of this correction. Most Aussies are still well ahead in terms of their investments and mortgages. They were smart enough to put savings amassed during lockdown into their offset accounts or straight onto their loans to reduce interest payments.

The average interest rate in Australia over the long term is 7%. Just 15 years ago, that was the norm. And while any increase in mortgage payments ahead will impact affordability, in the long term we think we’ll settle at rates still well below historical averages.

Last month, it was great to spend some time on the Gold Coast for the Australasian Real Estate Conference (AREC22). It’s incredible to think how many people from the southern states have relocated to South-East Queensland over the past two years.

There’s been a major shift in the East Coast population from south to north, and this time around it’s not just retirees, it’s also millennial families.

They’re going up to Queensland because they can work from home, and they want to enjoy a more relaxed, coastal lifestyle, warmer weather and they can buy or rent a much more affordable home.

That move is such a win-win opportunity for young families, and I think it’s a trend that will continue supporting price growth in South-East Queensland for a while.

Let’s compare the big coastal capitals for a moment. Since January, the median house price in Brisbane has increased by 9.4% to $885,633, while Sydney has dropped -0.6% to $1,403,964 and Melbourne -0.8% to $992,474, according to latest CoreLogic data.

The pace of growth in Brisbane has been slowing for months, but prices are still going up.

I think Queensland has a lot of positives going for it. Compared to Victoria and NSW, it is still relatively affordable…and the Olympics are going to have a positive impact.

We’ve seen a pause in immigration and investment from overseas, but we will see that recommencing, and South East Queensland with what’s happening going forward, will also get a larger slice of that.

I believe that one dollar invested in Queensland real estate will be better than anywhere else in Australia.