Navigating the current economic landscape and its impact on the property market

It’s a fairly simple formula. Housing affordability drives demand. That demand drives developers and builders to take the risk to build new homes, and that provides stock.

The lynchpin to that circular economy, according to Payton Capital co-head Craig Schloeffel, is lower interest rates, which in turn, will boost confidence – something he believes has been a “big missing piece to the puzzle over the last couple of months, particularly”.

“We think that [lower] interest rates will be a big turning point for this country," he said. 

“We've seen around the world indications that interest rates are starting to come off. And falling interest rates do many things. It spurs demand, of course, but within the Australian market and particularly residential property, it provides an affordability lever and a confidence lever”.

Throw into the mix a moderation in costs for builders, which surged post-Covid, and things are starting to line up positively, Schloeffel said. 

In the following episode of The Pitch, Schloeffel further unpacks the economic tailwinds for the property markets and, in turn, real estate private credit, as well as the opportunity set for Payton Capital. 

Edited Transcript

Chris Conway: What are the most important economic trends you are seeing? And how are they impacting your opportunity set right now?

Craig Schloeffel: We're in a really interesting time economically. And everyone's looking at interest rates at the moment, as you can understand, and saying, "Will they drop? If they will, when will they? What's the next move?" And we're no different.

Interest rates at the moment are the topic on everyone's mind. And all of the key indicators that dictate interest rates are telling us that we're likely to see the next move down.

Chris Conway: Craig, if we do see interest rate cuts, or more specifically, when we see them, do you think the cycle will be a shallow cycle or a deep cycle?

Craig Schloeffel: Look, I'm not an economist by trade. So it's a good question and a hard one for me to answer with certainty.

But what I would say is that a lot of the indicators that we're seeing: reductions in consumer spending, we're seeing wage price growth moderate. We're seeing inflation fall towards the target band. We expect that to provide a really good bounce for the Australian economy.

And with that interest rate cut when we do see it, I think we're going to see consumer confidence return, which has been a big missing piece to the puzzle over the last couple of months, particularly.

Chris Conway: How is that likely to impact the property market?

Craig Schloeffel: We're still seeing a massive shortfall in the number of homes that we need in this country. Interest rates are a key driver for homes, as we know, because they relate to many things: but affordability is number one. So as interest rates come down, we expect more affordability in the market, and affordability drives demand.

And of course, demand drives developers and builders to take the risk to do the building, and that provides stock. So it becomes a bit of a circular argument, which we need to see fire up.

Chris Conway: Craig, what's the biggest swing factor when it comes to the property market? And what are the range of outcomes that we could see?

Craig Schloeffel: Talking about residential property here, because it's the biggest piece of the market. Builders are still a big question mark for many people. And we've seen a lot of press over the last couple of years around builders going insolvent and leaving people in the lurch.

But I think that as we've seen costs moderate, as we've seen more people move into trades, and of course population growth, I think that we'll start to see some confidence come back to builders.

Chris Conway: Craig, just one off the cuff here. In terms of the builders and the developers that Payton deals with, have they given you any sense that those rising costs that we saw post-COVID are starting to level off? And does that provide some encouragement?

Craig Schloeffel: Yeah, they have. So, the builders and developers that we work with are saying that they're seeing costs moderate; I'm not going to say "come off." And it really comes back to how fast are they rising and what risk is in the building for A) a builder putting a fixed price contract together, and B) a developer starting a project and seeing costs rise in front of them.

And what we're hearing on the ground is on both of those fronts, we're seeing a moderation, and therefore less risk in the market for both developers and builders.

Chris Conway: Craig, in a recent update you wrote that we may be nearing a significant turning point in the economic cycle. What leads you to that thinking? And what do you think happens next?

Craig Schloeffel: I'll preface, again, I'm not an economist. But we think that interest rates will be a big turning point for this country. We've seen around the world indications that interest rates are starting to come off. And falling interest rates do many things. It spurs on demand of course, but within the Australian market and particularly residential property, it provides an affordability lever and a confidence lever.

And for many people, that allows them to deal with the cost of living increase that we've had, and therefore protects them and allows them to stay in properties that they've purchased.

Chris Conway: Craig, should we get that interest rate cut that we're all hoping for, how will that impact the way that you're investing?

Craig Schloeffel: It won't dramatically change the way we're investing. What I think it'll do is put a lot more confidence back into the building sector and some modest price rises across the country.

We've seen over the last couple of years some fantastic price appreciation across some markets. I think with the exception of Victoria, every market has moved forward. But what we have seen in that first-home buyer market is a real falloff in terms of affordability, and therefore, confidence.

And so I think when and if we see that interest rate cut, I think it'll spur on development. And that's going to go a long way to addressing the housing shortfall that we have. Because without those sales, i.e. affordability, builders can't get the finance. And without the finance, we don't have development.

So you've got this circular economy that we need to spur up. And the first catalyst for that, for our mind, is falling interest rates.

Chris Conway: So Craig, how does that unfold as an investment thesis for Payton?

Craig Schloeffel: Obviously, an increase in activity in the building market is going to bring many more opportunities for our investors. A lot of it at the start I think will be driven out of the retail market. But we're also seeing a lot of activity across the industrial market, across the retail market, across the healthcare market.

So, I think a falling interest rate environment will bring many more opportunities forward.

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