Not all property is created equal

A cursory read of the real estate headlines in Australia would have you believe that all property across our great nation is the same.

Well, we don’t live in some Orwellian dystopia where everything is uniform. There is nuance in the property market and Qualitas’ Andrew Schwartz knows this.

People often ask, “tell me about the property market”, as if it’s one entire market across all asset classes.

You’ve really got to break it down into a lot of sub-segments of the market, from industrial, to commercial, to residential.

In this Expert Insights interview, a long way from the blunt force trauma that is other property market commentary, Schwartz gives his take on:

• The current macro environment and outlook

• The unique elements of the Australian property market

• Houses vs apartments

• How residential property can provide shelter from inflation

Please note: This interview took place on Monday 6 March 2023. The RBA has since raised interest rates for a 10th consecutive month, as Schwartz discussed. 

Edited Transcript

What is your view on the current macro environment and outlook?

Andrew: We've been seeing for the last 12 months or so, consecutive interest rate rises, so we are now up to nine consecutive rises. There's a meeting tomorrow with the Reserve Bank, and there's a reasonable probability we'll see 10 rises come out of that. They're very focused on inflation, it's really the core issue that they're trying to tackle by increasing interest rates and really trying to take that consumption demand out of the economy. For me, that's the dominating theme at the moment.

What is unique about the Australian residential market compared to overseas markets?

The uniqueness of Australia is its population growth.

Unlike a lot of other countries around the world, Australia really attracts skilled migration. A lot of other countries have refugee migration because of their geopolitical circumstance, but for Australia, it's much more about that skilled migration. It's happening at a time where we're relatively short supply in residential at this current point in time.

And there's a lag effect in the economy, in construction, in particular, to bring new supply into the market. Coming out of COVID, I think that just the imbalance between supply and demand is really underpinning that residential market and that's quite particular to Australia, particularly as a result of the population growth I was talking about.

Is the outlook different for houses vs apartments?

I think they can differ. And now people often ask you, "Oh, tell me about the property market," as if it's one entire market across all asset classes. I actually think you've got to really break it down into lots of sub-segments of the market, from industrial to commercial to residential. Even within residential to talk about whether it's houses or apartments, you talk about major cities or regional areas, you really need to get quite specific.

If you look at the statistics, house prices have generally run a lot harder than what apartment prices have run. From pre-COVID to January 2023, house prices rose by 20%, whereas apartments rose by 9%. So, you can see that the disparity between the two values was a lot more in favour of established housing than it was apartments.

I'd say one of my other observations at the moment, generally about apartments, is that there's a real increasing demand that's supporting them by way of the fact that millennials, as an example, have increased their occupancy of apartments either through ownership or rental agreements. That comes out in some of the ABS census statistics, comparing 2021 numbers to 2006. You've got a lot of the over 65-year-olds who are choosing to live in apartments as they seek to downsize, and perhaps some are underfunded in superannuation, so looking to take money out of their houses and downsize into apartments.

And you've also got net overseas migrations back. You've got students who are coming back to Australia and their first port of call is apartment living.

You've got these reasons why people want to live in apartments at this particular point in time but it happened also at a moment of time where, as I said earlier, values of houses rose much more substantially than the values of apartments measured over the last three years.

Why is the residential property market a shelter from inflation?

It provides a potential shelter because of two fundamental reasons.

The first one is the fact that replacement costs increase with inflation. 

Whether that be hard construction costs, financing costs, land values, wages increasing, the cost of building, whether it be apartments or houses, is going up in an inflationary environment.

The second reason is the rental increases that we're now seeing through some of the major capital cities. 

And that's really caused by the shortage of supply that I was talking about earlier. But you are starting to see those 8%, 9%, 10% rental rates, which are phenomenal, really in a backdrop of the inflation that we've got that really keeps pace with inflation. For an investor when measured over a long period of time, and you say the cost of replacing it is going up, the cost of the income that I receive from owning an apartment or a house, because rentals are jumping above inflation rates, tends to make it a good hedge against inflation, all things being equal.

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