Myths in the Market: What Really Influences Property Values

“The real estate market is crashing.”

If you’ve been watching the news lately (or browsing social media), it’s quite likely that you’ve already encountered headlines all but shouting the above narrative.

And you know what? It almost makes sense when you look at the justification for these claims:

Inflation is soaring, interest rates are rising, and most homebuyers can borrow less than they could twelve months ago.

But if we’re adopting this doom-and-gloom narrative around property values, there’s a catch.

We just need to ignore the historical analyses on the effect of interest rates on property prices, disregard the countrywide data on change in home value over the past three years, and try to forget about the current rental vacancy crisis. Just to be safe, we should also bury the widespread shortfall documented and predicted by the National Housing Finance and Investment Corporation’s State of the Nation’s Housing report 21-22.

Also, if we’re to buy into what’s currently being published by a large proportion of the mainstream media, we’ll need to pretend that the various housing crash predictions – due to the closure of international borders, the imminent recession, the end of jobKeeper, and the end of home loan payment deferrals – were never published.

For anyone looking back through time at the reporting on property prices versus the reality, it quickly becomes apparent that there are far more factors at play.

This trend – which is a critical failure when attempting to forecast anything with multiple inputs – is best described as focusing on the almost always negatively skewed “metric of the minute,” as opposed to the full story.

Simply put, the current narrative being touted by the media is being justified by a very small amount of data (inflation and interest rates) while also extrapolating the week-by-week statistics in Sydney and Melbourne to a year-on-year prediction for the entire country.

Don’t get me wrong: inflation is higher than ideal, and interest rates are rising. But those two aspects of the market only represent a small section of data.

So, while property prices may enter a correction during this period of uncertainty, any article or spokesperson claiming a crash of 30% and higher countrywide deserves a high degree of scrutiny.

In order to seek some clarity around this story, we need to take a look at the other factors that influence the value of property.

Beyond Interest and Inflation

Infrastructure

While this might seem like an obvious place to start, the quality of materials, fixtures, and landscaping are some of the primary drivers of a property’s value – and they’re often misinterpreted or entirely overlooked.

It goes without saying that a nicer, newer home will fetch a higher price than an older property that needs renovations, but it’s critical to understand that money spent does not necessarily equal value added.

For example, adding a fresh coat of paint, some new carpets and extending or dividing a larger room to create an extra bedroom might cost the same amount as installing a basic, fibreglass pool. But it’s almost guaranteed that the former efforts will net a far greater increase in value to the majority of buyers.

In my own business, River Realty, we often conduct Property Improvement Plans prior to sale which have so far offered an incredible return for our clients. We use a comprehensive, research-led and case study-backed assessment tool to identify the most financially logical areas of your home to renovate.

This high level of assessment is critical for maximising value, especially in times when materials and labour are in short supply.

Location

This is another one that likely goes without saying, but it’s no longer a linear relationship between distance to the nearest capital city/coastline and price. The location preferences for homeowners are shifting constantly, with the most recent example of this being the pandemic-induced lockdowns.

Condensed apartment-style living was quickly falling in popularity, as more and more people desired space and fresh air.

Similarly, the rapid acceleration of the systems and policy designed to enable work from home (WFH) has seen many Sydneysiders push out to places like Wollongong and the Hunter Valley, as they realise that they can enjoy a much higher quality of life for substantially lower prices while still reaching their Sydney offices one or two days per week with relative ease.

So, whenever you hear or read that property values are falling across the country, pay attention to where the figures are coming from. Extrapolating data from Sydney to the whole of NSW is lazy and misinformative.

Demand

Yet another facet that was made clear throughout the pandemic, and now through the resultant supply chain backlogs, is demand.

From toilet paper and home office equipment to motor vehicles and real estate; when demand outstrips supply, competition very quickly drives up the prices.

So, while interest rates are rising and inflation is placing more pressure on the household budget, the aforementioned current rental vacancy crisis and the State of the Nation’s Housing report 21-22 both point to a long road of housing demand outstripping supply.

While it is true that many households will have less purchasing power in the short term, it’s highly likely that there is still going to be a heavy incentive to purchase real estate in the coming years.

After all, if rents are increasing in tandem with mortgage repayments, the average person is still far better off owning their own home.

Environmentally Conscious Features

Consumers today are growing more and more concerned with the environmental impact of their choices, and this thinking is extending to real estate.

From solar panels and rainwater tanks to sustainably sourced materials used in construction and renovations; people place a high degree of value on the impact of their purchasing choices.

It’s also quite logical to conclude that there is at least some financial rationale for these choices: with the cost of utilities still surging across the globe, there’s a greater demand for homes that are easy to heat and cool, and for those with high-capacity solar systems already installed.

Comparable Sales

At the end of the day, all the theory and rationalisation will only go so far – the true driver of the market is simply what people are willing to pay, and this is far more difficult to predict than the banks, media, and RBA will ever let on.

A perfect example of this is the astronomical price boom during the pandemic: against all warnings of a grim economic outlook and predictions of a housing market crash, individual property sales soared due to increased demand and resultantly higher offers, and these sales then directly influenced those in the surrounding areas.

So, if you’re thinking of selling, it’s always a good idea to start the process as though you were trying to buy your own house: search for similar homes in your area on www.domain.com.au or www.realestate.com.au and analyse both current asking and recent sale prices.

Alternatively, reaching out to a local real estate agent that you can trust can provide you with a wealth of knowledge. With a finger on the pulse of the market, any experienced agent will have firsthand access to a constant stream of data that’s not yet finalised or made public, such as open home numbers, current offers, and an intuitive assessment of the general supply and demand of the local market.

A Dose of Logic

Whether you’re looking to get into, out of, or further ahead in the property game, it’s imperative to consider all the available data when making assessments on the state of the market.

Plus, unless you’re looking to renovate and flip a property in a short timeframe, the fact of the matter is that the above factors are often far more relevant to not only the long-term monetary value of a property, but also the liveability and rent return.

When you’re making any decision around property, there are of course no crystal balls and no guarantees. But the next best thing is good-quality information, and there’s plenty of it out there for those who know where to look.

Interested to learn more? Click here to read some of River Realty’s recent updates on the market, and here to get in touch with my professional, trusted, and highly sought-after team.