News from the real estate coal face

I have seen a few potential real estate buyers jump back up on the fence of late. Not many but enough for me to notice. Some people have the luxury of choosing their timing for purchasing and others need somewhere to live so just need to get on with it. I think most would agree that apartments are currently better value when compared to housing than say 2 years ago before the crazy house gains of 2021. Let me say something quickly here. If your house on Sydney’s Northern beaches went up 35% last year and drops 10% this year, you are effectively going back to around the beginning of Q4 2021. That is how fast you made 10% in 2021. 

Back in April with the Australian election coming, it made some sense to see a few investors hesitant. Everyone recalled previous elections where people thought it prudent to see if any laws around real estate may change. Even though in this recent election, there was not much to split the parties on beyond first home buyers. That's all over now so where the bloody hell are you? What are you looking at up on the fence?

Anecdotally, the response is ‘interest rates’. That makes sense as this is where you feel the pain each month for the mortgage payment. Both buyers and banks want that mortgage paid so budgeting and stress testing your debt is important and people should be prudent about what they can afford.

So what drives interest rates? According to Aswath Damodaran it is Inflation. His article is fantastic in bringing together the forces at play and what it all means. 

https://aswathdamodaran.blogspot.com/2022/05/in-search-of-steady-state-inflation.html  

In summary from the author:

“In the 1970s, the asset classes that benefited the most from this flight were gold and real estate, and the question is which asset classes will best play this role now, if inflation is here to stay. I do think that securitizing real estate has made it behave more like financial assets, and removed some of its power to hedge against inflation, but there may be segments (such as rental properties, where rent can be raised to match inflation) that retain their inflation fighting magic.”

So: 

If you think inflation is transitory and will quickly spike and fall back to a reasonable level then equities are currently undervalued. 

If you think inflation is here to stay at elevated levels for some years then real estate is a good hedge as you can raise rents on a tenant a lot easier than getting a company you partly own through stocks but do not control, to raise profits. 

So to those on the fence I say of course look at interest rates, but according to Aswath Damodaran you should also be looking at inflation. It may be that real estate is not just a long term growth play but also a hedge play in a sustained high inflation environment should that eventuate.