Here’s 3 minutes of good news property reading, and then you can get on with your weekend.
Lots happened this week…let’s recap…
The national housing market peaked to its strongest point in the past three years, according to a report by Australian Property Monitors.
Melbourne house prices surged 3.6% in the March quarter to a median of $538,922; Sydney house prices rose 1.6% to $673,681; Brisbane property 0.5% to $438,857; & Perth 1.3% to $562,152; while Adelaide & Canberra fell 1.3% & 0.4%.
However, as the title suggests, property cycles – the RBA is forecasting slower growth than over the previous 30 years & an end to the rapid upward trend in housing prices.
We concur & have been informing investors of such at our presentations & in reports for some time.
Our projection for capital city growth over the next three years is just about half of that seen in the recent past – 3% to 5% per year for 2013-2015 (slightly higher for Brisbane, Darwin & Sydney) versus the 8.4% annual average seen throughout 2000-2012.
Gross rental yields are driving investors, with overall returns in the capitals showing 4.5% for traditional housing & over 5% for attached product/small-lot homes.
Australians are stashing their cash at record rates, with average household savings having tripled to almost $15,500 since late 2011.
Aussie savings rose during the first quarter of this year, according to an ING survey – at a time when traditionally many experience a cash deficit in the aftermath of the festive season.
Household financial well-being is also on the rise – 70% are comfortable with their savings; more than 90% are comfortable with their mortgage; & a further 44% are ahead in their repayment schedule.
The Consumer Price Index – the main measure of inflation in Australia – In seasonally adjusted terms rose by just 0.1% over the March quarter. The CPI stands 2.5% higher than a year ago.
At present inflation is not an issue, meaning that interest rates can stay lower for longer. Underlying inflation is in the middle of the Reserve Bank’s 2%-3% target band.
The latest data keeps the door open for further rate cuts – yet financial markets see a 40% chance of a rate cut in May.
As we outlined a few posts ago, unless new housing starts (given their large employment multiplier) begin to improve, & sharply, interest rates will have to drop further.
Given the 1.75% fall, so far, in official interest rates, most economists are at a loss as to why the new housing market remains sluggish, as does the overall Australian economy.
Some great work by Michael Knox at RBS Morgans helps explains why.
Australia is currently going through a period of significant fiscal tightening. This has been happening for the last two years & is set to continue. This tightening is in response to Australia’s budget deficit. Some like to think that the blowout in the federal budget was caused by a drop in revenues, but it really was all about government (mis)spending.
According to the IMF, government spending in Australia has risen substantially since 2007 – up 3.3% as a proportion of GDP (which might not sound like much, but it equates to tens of trillions – yes, trillions – of dollars); whilst revenues dropped just 0.1% of GDP. Any Euro area finance minister would give his eye teeth for revenue that was this stable.
There is a widely quoted economic model (Blanchard & Leigh) that shows a strong link between fiscal tightening & the economy (GDP).
No surprise there, but the magnitude of the impact is surprising. This modelling (with Michael Knox’s diligent analysis/reworking) suggests that official interest rates will have to fall 2.33% to compensate for the fiscal consolidation over the last two years alone.
So far, the cash rate has fallen just 1.75%, suggesting a further 0.5% to 0.75% fall in rates in the months/year ahead.
In conclusion, fiscal consolidation, although commendable, is cutting into the Australian economic growth rate (& new housing starts).
Interest rates in Australia have further to fall to make up for it.
Michael is the director of independent property advisory Matusik Property Insights and writes the Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.