Why residential rental income is about to move higher (again)
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Hello and welcome to The Australian's Money Puzzle Podcast. I'm James Kirby. Welcome aboard, everybody. I'm talking today to my special guest, Louis Christopher, who is especially in the Sydney studio. What a pleasure to have him in the studio. How are you, Louis? Great to be with you once again, James, and your audience. It's nice to be in the same room with you. We don't actually get to do that very often. in the show because we're building a studio in Melbourne, folks, which will be terrific in the near future. For the moment, it's in Sydney. We get to sit face to face. Now, Louis has been on the show before. You've often heard him on various aspects of the property market. But I want to really bring something to your attention today.
One of the major banks, Macquarie Bank, actually put out a report saying that the outlook for the property market, which they thought, this is calendar 2026, would be about 6% or so, originally 6 or 7. Last year it was 9. Everybody was sort of of the view that that would be where it would go. Now, Louis, Christopher, who we're going to talk to in a moment, a month ago downgraded his outlook quite sharply for the local market and in particular for Sydney and Melbourne. Macquarie Bank today, for what it's worth, a considerably bigger organisation, I suppose, than SQM Research because it's a global investment bank, has said 2.5% is what we're going to get in the market this year. So, Louis, Tell me, I take it that Macquarie is a few weeks behind you.
So if they are, where are you now? What's your outlook now, having revised a month ago? Does it look any better or worse than then?
It looks in line, very much in line. With our revised forecast, James, for each capital city, and I think it's important to note that we're not concerned for every capital city that's out there. We're still relatively bullish on some capital cities that have a greater exposure to resources, commodities, et cetera, such as Perth. But you're right, for Sydney and Melbourne, we have become more bearish on it. Yeah. So our revised forecast for Sydney would be that housing prices this year will fall somewhere between minus 2% to minus 6%. And at this stage, I would suggest it's starting to look like more minus 6% rather than minus 2%. And for Melbourne, falls of up to about minus 4%. But there's still a chance for Melbourne it could still come in relatively steady at, say, minus 1%.
But these are the two cities that we have greater concerns about compared to other capital cities around the country right now.
Why? Why the reversal?
Interest rates, in short. And those concerns actually started mounting before the Iranian war broke out, but they've certainly become more aggrieved since the war has broken out for obvious reasons. So our original forecast, which we released last year, assumed that there would not be an interest rate rise in 2026. The outlook at the time was that potentially, if anything, we might see a cut.
That was the talk at the time.
That was the talk.
It seems like a long time ago.
It seems a long time ago. But things started changing just before Christmas time, if you recall. We started to get higher monthly rates on the CPI. And so a rate rise did occur, of course, in February. So regardless of the war, we were on the path of making a note to the market, our clients, that, hey, we need to revise our forecast here. And so we did that at the beginning of March.
What unexpected trends are reshaping the property market?
And so as you may recall, and your listeners may recall, we put out various scenarios when we do this. You put out the kind of Good, bad and ugly scenarios. We like to put out the top four, what we think are the most likely scenarios out there. And so, yeah, like last year for 26, we didn't think rates were going to go up. It wasn't in our top four models, but... with the outbreak of the war, with the RBA already leaning towards lifting rates, we had to change all that. And that naturally has ramifications. And going all the way back to your question about Sydney and Melbourne, these are two cities where, given the relative affordability of them,
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