We are in the second half of 2019 and wondering what would be the economic condition going forward. Especially if you are a property owner or thinking of getting into the property market, the past two years have been fierce with sheer drops in property prices. However, we are seeing now that, property values in Sydney and Melbourne appear to be slowly on the rise again while most other capitals continue to struggle.
The latest CoreLogic Home Value Index (HVI) reported a small increase in residential property values in both Sydney and Melbourne over June, the first monthly increase for Sydney in two years and since the November 2017 peak for Melbourne.
Hobart also saw a slight improvement in June, while all the other capital cities went downward. The monthly drop of 0.2% across the Australian national market was the smallest month-to-month decline since March 2018.
Even though the property market started to move in the right direction, it is unlikely that we would see any rapid recovery within the next 12- 18 months. Despite the turn of the tide, it would be prudent to remember the fact that, the property prices fell by more than 9% over the 2018-2019 financial year in Sydney, Melbourne, Perth, and Darwin. Hobart and Canberra were the only two cities to experience somewhat growth in property value in the last 12 months.
The Australian property market downturn was deliberate to a certain degree by the APRA (Australian Prudential Regulatory Authority) due to various international factors and household debt level. APRA argued that the banking sector was weak due to over-leveraged loan writing for quite several years, which also fuelled the steep property price growth. APRA wanted banks to increase the borrower HEM (household expense method, monthly expense based on family size and income) threshold for loan serviceability in addition to a higher stress test where serviceability would be calculated at an interest rate of above 7% pa. It also pushed for a reduction in interest-only loans for investment purposes.
Recently APRA has advised the banks to use stress test of only 2.5% above the offered interest rate. The pressure to limit credit is also relaxed for the banks so that, it is easier to borrow for a home loan.
RBA (Reserve Bank Australia) also lowered their base interest rate to encourage borrowing. We are likely to see even further rate cuts despite being it historically low. The government has also taken some initiatives to encourage borrowing and prop up the housing market.
In light of all the recent reassurance for borrowing, we are unlikely to see any sudden increase in consumer confidence and property prices.
The following four key factors have to improve for us to see any real shift in the right direction.
1. Trade war: The current trade war between the USA and China would impact the demand for Australian mining resources from iron ore to natural gas. The mining sector contribution to the Australian economy has been stagnant since the last mining boom which ended in 2012. There hasn’t been any significant major new investment since China’s demand for Australian Iron ore declined. It would be inadequate to drive the consumer confidence for the next 12-18 months if the mining sector doesn’t experience the previous level of demand and activity.
2. Economic growth rate: The western world, in general, has been experiencing softer economic growth for almost the last half a decade. Australian economic growth has been in the vicinity of 2%-3% for the last 3-4 years.
According to Stephen Walters, the chief economist at the Australian Institute of Company Directors, one reason for unexpectedly sluggish growth in the economy is that the nation’s potential growth rate – its speed limit – has fallen to such an extent, the economy cannot grow as quickly as before without generating inflation. Lower potential growth means compressed living standards and, most likely, a higher level of unemployment. With population growth capped by an ageing population, only faster productivity gains can lift potential growth quickly.
3. Employment rates: According to the Australian Bureau of Statistics (ABS), the unemployment rate dipped to 4.9% in February this year which was the lowest level since June 2011. Since February it has gone back up to 5.2% prompting the RBA to warrant further rate cuts. If we see a continued trend in the higher unemployment rate, the RBA might lower the interest rate even further during late August.
4. Share market performance: At the time of writing this article, the Australian share market has finally beaten its record high set nearly 12 years ago, before the global financial crisis. Experts are suggesting that the investors are looking past the short-term uncertainties around the economy and focusing on lower interest rates instead of as a reason for this record high (The ASX 200 jumped to its highest-ever level 6,875.5 points on 30th July 2019).
Investors are also expecting that the US Federal Reserve will cut interest rates further which would lower funding costs for Australia’s lenders, particularly the big four banks.
Some suggesting the very recent iron ore price increase and the share market performance could be a leading indicator for renewed demand in the mining sector. Coupled with the lower cost of funding might finally boost overall economic growth and finally consumer confidence. Now, few spanners are still at work such as the US-China trade war. Successful negotiation and following good gestures might improve the overall economic condition of both the US and China and essentially for Australia as our economy is heavily reliant on both the economies.
One thing is for sure as RBA Governor Glenn Stevens once said, the next economic peak or recession will happen, it’s the timing that is uncertain. However, it is safe to say, we might see a stronger growth in Australian property prices specially Sydney within the next 12-18 months.
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