Everyone's asking me where prices are going. Here's my honest answer.

Mal’s response to the current house pricing and interest rate reports:

I’ve had this question more in the last fortnight than in the previous six months. Prices [side note folks, they are not ‘prices’ they are medians, but you ask about ‘prices’ so I am using that phrase, as much as it clearly frustrates me … now back to the main program…] … ‘Prices‘ are down 1.2% in October. Down about eight per cent across the capitals in seven months, reported as the fastest fall in forty years (depending on what it is you are measuring of course, one for another time). Then, on Tuesday, the Reserve Bank put the cash rate up anyway, to 4.85%, on a six to three split.

So: where are ‘prices’ going?

I’m not going to tell you. I called the housing crisis in 2013. I called price rises as a result of Covid in May 2020 against all the economists and ‘experts’. I have made many accurate long and medium term calls, all which have proven correct for more than 15 years based on the data. But I don’t call quarterly price movements, because nobody can, and because the number everyone’s watching isn’t the one that decides how you do.

Here’s what I’d watch instead: What a falling median actually measures.

A median is the middle sale in a list. That’s all it is.

When buyers get stretched, activity shifts towards cheaper homes, and the middle of the list drops even if not one house changed in value. A good share of what gets reported as a crash is a change in what’s selling. Yes, there could be falls in the lower end of the market too, usually very short lived, but it’s also about ‘where’. 

Because all those numbers get bundled. Australia has more than 2,000 distinct property sub-markets, each with its own buyers, stock and cycle. Rolling them into one national figure is diagnosing a whole hospital from one patient’s temperature, which is the part worth sitting with. 

If the national number fell, some markets fell much harder and some rose. The middle (or an average for that matter) tells you nothing about either. Every time I hear someone say “the market is down,” they’ve just told me they don’t know which market they’re talking about.

Two numbers are moving in opposite directions

Prices are softening. Rents aren’t.

Rents are up 40.6% over five years. Vacancy is sitting at 1.6% nationally, with every capital under two per cent. Renting households are handing over 33.1% of gross income, a record.

For anyone looking at property as an income asset, that’s the first time in years those two lines have moved in your favour at the same time. Softer entry prices against rising rents means gross yields are improving.

I’ll be straight about the other side of it. Debt costs are up too, and at 4.85% they’re up a long way. So an improving gross yield doesn’t automatically mean better cash flow in your hands. Whether it nets out depends on your leverage, your structure and your tax position, and for some people right now it doesn’t.

But the relationship has changed direction, and that’s worth understanding rather than ignoring because the headline said “falls.”

The number almost nobody mentions

If you’re buying, the question was never the price. It’s what you can borrow.

Everyone watches the cash rate. Almost nobody watches the second interest rate.

Lenders have to assess you three percentage points above the rate you’d actually pay. That buffer was set at 3% in October 2021, when the cash rate was 0.10%. It’s still 3% today with the cash rate at 4.85%. You’re being tested at close to ten per cent on a loan you’d service at around six.

It hasn’t moved in five years, through the fastest hiking cycle in Australian history and the easing that briefly followed. There’s no public debate about it (we need to fix this, urgently). And for most borrowers it decides more than anything the Reserve Bank did on Tuesday.

Where it returns to.

Capital growth is a long-run story. Over any period that matters, it comes down to one thing: will more people need homes in that location than the location can supply?

On that question, the evidence is moving one way.

In August, approvals for apartments and townhouses fell 21.2%, while detached approvals rose 3.7%. From our own analysis, detached homes convert from approval to delivery at roughly 95%. Apartments and townhouses sit closer to 60%. So the approvals falling hardest are the ones least likely to have become homes anyway.

Building costs have stepped up and stayed up. They move with each shock and hold at the new level while prices can run in cycles. When prices soften and costs don’t, fewer projects stack up and fewer homes get started.

Which means every month this drags on, the shortage underneath it gets worse rather than better. That’s uncomfortable if you’re renting, and it’s the single most important thing to understand if you’re deciding where a market comes back to.

One more thing worth weighing. Bank forecasts beyond six months have a poor track record and they lean negative. During COVID they were grim, as touched on above, we said at the time it would be better than people thought. Go and check what was predicted against what happened, then decide whose view to weight.

So what would I actually do?

Stop watching the national number. It can’t tell you anything about a specific property in a specific suburb.

Look at the one market you are actually buying in, not the aggregation of two thousand. Where are people moving, what’s being built there, and what’s the rent doing right now.

Then work out your own borrowing position under a buffer nobody’s discussing, because that’s what will decide whether you can act at all. Two households on the same income can get very different answers depending on structure.

That last one isn’t something you can read off a headline, and it’s the bit I’d want to know before deciding to wait. Because real wealth is made when others hesitate. Real opportunity is genuinely out there.

If you want to go through it, the coaches here do exactly that, and there’s no cost to having the conversation.

And if you want the whole picture of how the country ended up here, I’ve put it all in one place. Sixteen exhibits, every figure sourced, free, no paywall. theclarityreport.com.au

Mal