Why property price growth will level out over the rest of this year

The internet and newspapers are awash with stories of properties selling for amounts wildly above reserve. Such news can create FOMO and fuel buyer demand. But buyer overexuberance is rarely sustained for long periods of time. My feeling is that price growth will level out this year and I set out the reasons why below.Properties can sell above reserve for many reasonsLast month, a property located in the Eastern suburbs of Sydney (209 Edgecliff Road, Woollahra) sold for $1.5 million more than the reserve. Of course, this is an extreme example, but stories of properties exceeding reserves suggest the market is running away. I’m not suggesting these results aren’t noteworthy. They are. However, we must remind ourselves that multiple factors can contribute towards a property selling for more than its reserve.Firstly, of course, it could be that the demand is so strong for the property that multiple bidders push the price higher. Some of these bidders may be driven by emotion, particularly home buyers. They might fall in love with the property or their ego might kick in because they don’t want to “lose” at the action. Whatever the motivation, “paying more” contributes to high prices.Secondly, the reserve might be too low. Not all vendors are motivated to maximise their sale price – there might be other factors. Also, they might have an unrealistic expectation of current value (too low). Or maybe the selling agent was keen to quote the lowest possible reserve to attract more potential buyers.Finally, interest rates have a big impact on affordability, particularly for higher-value property, as buyers tend to borrow more. Fixed home loan interest rates of less than 2% p.a. make spending “a little more” on a property more affordable than it was 5+ years ago.Remember, prices have been stagnant for 3 yearsMedian house prices in most capital cities haven’t really changed since early 2018. The reason being is it’s been a pretty tumultuous period for the property market.Tightening in credit (borrowing capacity) occurred throughout 2017 and 2018, which reduced the volume of property buyers, particularly investors.In 2018 and 2019, the ALP’s federal election policy of banning of negative gearing and hiking the rate of capital gain tax weighed on property market sentiment.And then in 2020 we had Covid and resultant lockdowns.All these factors have meant that property prices were largely stagnant for the past three years. The long-term average growth rate of property (as depicted in this chart) is around 7.5% p.a. Therefore, arguably, the intrinsic value of property should be approximately 24% higher than 2017/2018 levels (being 3 years of growth). After all, mean reversion is a strong trend that has been present for many decades.A greater number of motivated buyers than sellersIt is possible that someone wanting to buy property over the past few years has been put off by a number of factors including credit tightening, the 2019 federal election and Covid. All of these events resulted in negative predictions for the property market.However, not all buyers can delay their decision forever, particularly if they you need to buy for practical reasons such as changing locations or increasMy new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.