Based on higher interest rates and declining household disposable income – down -6% in 2023 according to ABS data – Australia’s residential property market probably should have fallen by about 5-7% last year.

Ironically, the market defied the Reserve Bank (RBA) and some economists’ expectations and went up by the same corresponding amount – so what actually happened?

Hogan believes a resilient economy, coupled with access to credit from the banks has interacted with what he calls ‘FOMO on steroids’ to create a substantial overvaluation in the market, with some markets clearly worse off than others.

“In 2023 we saw a surge in migration, plus concern about a fundamental under-supply of property across the country and this has driven a lot of investors and some owner-occupiers to just get into the market because they’re worried – that in one to two years time – there won’t be any properties available and prices will be ridiculous,” Hogan told this masthead during an exclusive interview.

“Normal FOMO is a willingness to pay – say an extra $40,000 now, but FOMO on steroids is a combination of paying a lot more and also not being able to get the property you want due to undersupply.”

Business as usual for lending

Despite higher interest rates and increased borrowing costs [for banks], Hogan hasn’t witnessed a noticeable shift in the willingness of banks and non-bank players to offer new money into the market.

“This of course leaves the market vulnerable to a correction should circumstances go against it, but until there’s some sort of shock to the market this [loan activity] isn’t changing,” says Hogan.

“The cost of capital – aka the interest rate level – has clearly had an impact, but the market has absorbed it well.”

X-factor for the market

While Hogan expects more [mortgage] distress to surface in the early part of 2024, he says the key inflection point is whether interest rates have to go up further. At this stage, the market seems to be more preoccupied with when rates will come down rather than any incremental increases.

“Whether or not interest rates have to go up further is the real X-factor for the market, but I don’t expect the CPI numbers we’re going to get this week and at the end of the month for the quarter to be that concerning for the RBA,” says Hogan.

The RBA isn’t expected to raise rates in February.

However, Hogan says the real risk for the market is that by the time we get to the (RBA’s) May meeting; the economy is showing resilience, and inflation isn’t coming down as quick as expected – and the RBA ends up having to hike.

“That could be a real shock and the likelihood of this increases if the housing market holds up well in February and March, which I think it will,” notes Hogan.

If they don’t tighten further, I don’t think they’re cutting this year, but they may sneak one in at the end of the year if the economy and inflation in particular is well behaved.

Momentum waning

In 2024 Hogan expects to see the continued loss of momentum in price gains, which really peaked in the middle of last year and since then prices have been going up at a gradually slower pace.

He reminds investors and owner occupiers alike that from a long-term fundamental viewpoint, the [residential property] market is overvalued by 20-25%, which is why he doubts prices will continue going up again this year.

Given how overpriced residential properties are, Hogan believes a good outcome for 2024 would be sustained prices at current levels.

One curve ball confronting the market, adds Hogan, is an improvement in data over the first three to four months with the RBA realising in May that rates aren’t high enough.

But assuming (the RBA) ends up tightening in the middle of the year, he says they could still turn things around by November/December.

“If they’re tightening in the middle of the year and taking the cash rate above 5% – that’s the main issue for the market,” says Hogan.

“If they don’t tighten further, I don’t think they’re cutting this year, but they may sneak one in at the end of the year if the economy and inflation in particular is well behaved.”

The market is now somewhat detached from macroeconomic fundamentals and it’s been an unusual economic environment with lots of changes in the way the economy operates.

This speculative bubble is different

Hogan has spent most of his career arguing why the Australian property market has, contrary to market fears, not been over inflated – during the GFC or even in 2017. But he believes prevailing market conditions are now different.

While extraordinarily low-interest rates and no inflation gave central banks the comfort of pumping money in, we’ve got inflation back. Hogan says that’s tantamount to the economy saying ‘Hey, hey wait on a minute, you need some discipline around monetary and fiscal policy’.

He’s now witnessing more risk and hints of a speculative bubble emerging.

While people can pop the champagne corks on the notion that inflation is going away, Hogan reminds the market that Australian inflation is still 4-5% and U.S. inflation is still 3-3.5% and their targets are well below that.

“The market is now somewhat detached from macroeconomic fundamentals and it’s been an unusual economic environment with lots of changes in the way the economy operates,” he says.

“Baby boomers retiring is a major element, and you can clearly see they’re starting to sell down investment properties, with Gen X’s and millennials buying them up – so there’s a real churn in the investment market.”