Who would have believed that an ancient sedimentary rock formed millions of years ago would have a significant impact on the property market in Australia?
Interest rates have been all the talk of late as we hit the lowest levels since the 60s, and even though the Reserve Bank kept rates on hold earlier this month, mainly from fear of stoking an already heated Sydney property market, there is more downward pressure expected.
So, what is the correlation between this ancient rock and our property market?
Australia is a mineral rich country and we have minerals that the world needs to expand and grow their economies.
Our large miners in this country grew off the back of the urbanisation of China, India and other rapidly developing countries.
Iron ore is a mineral that these countries need to maintain their levels of growth, however what happens when China’s growth slows?
Experts say that Chinese steel production has peaked and will fall by more than 25 per cent over the next decade and a half, a drop that would undermine Australia’s entire iron ore industry.
The Iron Ore price has dropped from $US120 a tonne to $US47 a tonne in 12 months, it’s sitting at just over one third of the price of 12 months ago.
You could imagine the challenges faced if you were running a business and the price of your product dropped by nearly two thirds!
With such a decline the smaller miners are struggling to survive and larger miners are finding it difficult to maintain shareholders returns at an acceptable level.
They are cutting costs, selling assets and shelving projects which impact a wider range of associated industries.
On Morgan Stanley’s calculations, the 17 per cent fall in iron ore prices in March 2015 sliced about $8 billion off Australia’s export receipts.
That translates into about 0.5 per cent of Gross Domestic Product (GDP).
That is another big chunk out of an already faltering economy.
Morgan Stanley’s current view about the Australian economy is about the gloomiest in the market with a GDP forecast of 1.9 per cent, compared to the consensus figure of 2.5 per cent and the RBA’s 2.25 per cent.
It will be interesting to see what the latest round of GDP revisions deliver in light of the collapse of the nation’s biggest export item.
There is no doubt that the reserve bank continues to talk about the fact that they want to see a softer Australian dollar.
Lowering interest rates is one mechanism.
They want to see something closer to 70 cents or less and that would obviously benefit all commodity producers including Iron Ore, because generally they sell their commodities in US dollars, so from that perspective they may see some margin expansion and they may see more of a viable business and continue to ship larger tonnes.
But how does this impact on my property investment?
As previously discussed there’s no doubt that interest rates are one of the things which the Reserve Bank is looking at to manage the Aussie Dollar and with this they are mindful that Australia is a country presently transitioning from a big mining-based economy as well as suffering from the impact of the loss of development of mining infrastructure projects.
They are also mindful that we need to stimulate other parts of our economy and so they are looking at trying to assist with further interest rate cuts.
There’s nothing really that politicians can do to control iron ore prices, this is all about supply and demand in the market, but what they can control though is how much they spend in the Budget and where they can look to maybe recover some of this revenue in other forms.
Lower Interest rates means more first home buyers and investors are able to enter the property market, this in turn increases the demand for property and with the current lack of supply, places upward pressure on prices.
Couple this with the increasing demand by offshore property investors who see Australia as a relatively stable environment and safe place to invest, then we see even more pressure on housing prices.
Andrew Wilson, Senior Economist with Domain Group says it certainly is an extraordinary housing market in Sydney at the moment.
Over the last month we’ve clearly seen records broken in terms of the auction market.
Auction market activity is a clear and reliable indicator of overall market activity, and we’ve seen record clearance rates, clearance rates actually moving above 85 per cent, which are totally unprecedented in the Sydney market.
Markets such as Adelaide, Brisbane, Hobart and Canberra are in sort of a catch-up mode because they were later to come to this growth cycle, whereas markets such as Melbourne and Perth who were early into the cycle, are now starting to flatten out a bit although the Melbourne market looks to be now having a second wind.
For the existing holders of investment property, lower interest rates means better cash flows and returns on their investment.
It also means they have more disposable income enabling them to either invest further, pay down debts quicker,or more income to improve their personal lifestyle.
So, this ancient sedimentary rock formed over millions of years, lying deep beneath the Pilbara Region of North Western Australia has surfaced in 2015 to have a significant impact on Property investors.