What is next for the property market?
Written and accurate as at: Oct 31, 2018 Current Stats & Facts
What is next for the property market?
Well ultimately your guess would probably be as good as mine. Indeed, we don’t have the luxury Biff had in Back to the Future Part II when his Almanac assured him the ability to perfectly predict the future. We can however hypothesize, which is effectively an educated guess. Whilst I don’t consider myself an expert on property nor am I a licensed real estate agent, I will discuss the economic, legislative and political backdrop and how this may impact property markets which I am sure you will find interesting.
Income
Firstly, let’s talk income. We need to earn it to live and we need to earn it to save so that one day we do not need to earn it to live. According to the Melbourne Institute the average Australian income has only increased by $2,168 since 2009 and the median Australian income by just $84. Yes, that is correct - $84! What’s more depressing is that according to the RBA part-time work is increasing by almost three times that of full-time work so things are not looking any brighter. Let’s just say that the cost of living has risen substantially more than $84 since 2009.
Property Prices
Any guess what property markets in Sydney and Melbourne have done during the same period of “wage growth” since 2009? Well according to CoreLogic, Sydney has increased by a whopping 110% and Melbourne 100%. ‘How is this possible when wages have not increased?’ I hear you ask. Good question!
Debt
In one word, debt. Debt has much to answer for in this equation. Did you know that the most indebted household in the world is Swiss? But before you start putting holes in their cheese laden homes I should inform you on a couple of random facts. The swiss have very low interest rates, in fact at times they have had negative interest rates (I’ll leave this one to another day), and did you know that they never have to pay back the borrowed capital? Ever! Very random and somewhat excuses them from the list all together. So, who is next on the list and have they the same charm as the Swiss? Unfortunately, not, as it is us! Yep, Australia has given up on getting gold in rugby, cricket and swimming and replaced it with the highest debted household in the world. According to trading economics, we currently owe (as a group not me personally, thank goodness) the equivalent to 122.2% of GDP (GDP is simply a measure of economic output).
Banks cost of funding
Now this is where things become interesting. The banks have been very busy satisfying the appetite of Aussie’s desire for debt, in a very big way. Meanwhile the Aussie saver has become as obsolete as the local tiger who once heralded from our most southern territory. According to both APRA and UBS the gap between the saver and borrower is about $350,000,000,000 (with change!) This equates to the amount our banks need to source overseas to satisfy our thirst for credit. Most of this shortfall is sourced from Wall Street which was fine when interest rates were 0%, but now that the US is at 2.25% (and rising rapidly) whilst ours remains unchanged at 1.5% means that the banks are likely to continue to raise interest rates as they have done last month.
Legislation
The Royal Commission, APRA requirements and more importantly the court of public opinion will all force the banks to become more responsible by lending less and with far more rigorous requirements. This coupled with the significant reversion from interest only to principal plus interest means the ability to borrow and repay more will be so much more difficult.
Politics
Finally politics. It is increasingly more likely that Labor will soon be in power. They have a real bee in their bonnet about current capital gains tax and negative gearing laws. One will find it difficult to argue against their sentiment however it could not come at a worse time. They are proposing to halve the capital gains tax concessions from 50% to 25% and limit negative gearing for new homes. I believe grandfathering will be irrelevant because the market is likely to adjust as a whole rather than in isolation.
Sure there are some positives which may support the market including factors such as immigration and population growth however even these are weak. Let’s hope this educated guess is wrong!