Property market predictions for 2014 – Pete Wargent

Look, I’m a sceptic when it comes to the ability to forecast property price movements.

Firstly, because median prices by city are sometimes of questionable value and can smooth diverse trends from across different market sectors, suburbs and property types.

And secondly, because of the huge range of unknown factors which must impact the market.

It doesn’t stop people trying. Over in Blighty, Savills can tell you what price growth to expect in your region in 2018! Now how’s that for a powerful crystal ball?

This chart below tells you most of what you need to know about human ability to forecast the future:

That is to say, even the Reserve Bank’s “army of economists” have only around 90% confidence that we won’t slide into negative growth in the next couple of years. Meanwhile, the 90% confidence interval also comprises a scenario whereby GDP growth almost roars off the top of the chart.

The future is far more unpredictable than most seem to think.

The impacts of wild volatility in currency markets, financial crises, the impact of foreign buyers, superannuation funds and plummeting interest rates may all appear obvious in the rear view mirror, but what lies ahead is inherently difficult to judge…perhaps impossible.

Indeed, in recent times we have seen forecasters failing to forecast the direction of certain city dwelling prices, let alone the quantum.

Of course, it is possible to build models based upon past events, but to pretend that they are highly scientific or can predict and factor in the impacts of, for example, fiscal cliffs, debt ceiling crises, sequesters, outbreaks of war and so on, is misleading.

One thing we can say with some level of confidence is that due to total household debt in Australia being far higher than it has been in cycles past at around 150% of GDP (and levels of inflation significantly lower), over the course of a full market cycle the impact of lower interest rates and their ability to stimulate housing markets must surely be lower that of days gone by.

household

There are two ways to deal with this uncertainty in making property price forecasts (or guesses?).

One is to produce a range of “if…then…” scenarios, thereby covering off a huge range of possible outcomes (“prices could move by between -5% and +20%…”). The other is to bite the bullet and build a range of assumptions and accept that you will probably be wrong on some or all of them, and thus your predictions will be wrong too.

Let’s go with Option 2.

Assumptions for 2014

So, with the proviso that I’ll almost certainly be wrong, let’s start with some assumptions.

Unemployment still seems to be in a moderate uptrend, so I’ll go with the unemployment rate ticking up to 6% through 2014.

GDP growth to trundle along sub-trend at somewhere close to 2.5%.

As for interest rates, economists are split.

NAB think that the next move will be down to 2.25% in mid-2014. Others are more optimistic on the outlook and are looking for a hike to 2.75% in late 2014.

The best we can say is that interest rates are unlikely to apply a substantial handbrake to dwelling prices in 2014 given that the official cash rate is likely to sit somewhere between 2% and 3% which is historically a very low rate.

Source: RBA

This has led some very bullish property price forecasts in 2014.

Dwelling prices look set to increase in 2013 by around 10%, but while it is possible that level of growth could continue with a low cash rate, there are a number of factors which could jam a stick in the spokes, so overall I’m going to tend towards a relatively subdued view.

Reality check

So, another investment property book hits the shelves forecasting that “well located properties should continue to grow at 9% per annum”. Nine percent! No mucking around with all that 7-8% per annum nonsense there!

And I thought I was bullish in years gone by when I suggested that a rational proxy for future dwelling price growth might be the future growth of household incomes.

The speed limit on dwelling prices must ultimately be our ability to service debt.

In my opinion, some Australians need a reality check when it comes to our housing markets.

Below is what is presently happening to wages in Australia, which is to say, growing at 2.7% per annum…and slowing.

While you could build an argument to say that wages growth could be approaching the bottom of a cyclical bounce, there is absolutely no suggestion that incomes are growing at anything like the rate required to support long term property price growth at the levels seen in times past.

The other factor I’d highlight for 2014 is the peak in mining capital investment.

There are some suggestions that the fall in mining capex could be offset to some extent by growth in residential construction (as I read the charts, the relative numbers involved don’t really appear to stack up for this) and for other sectors of the economy being stimulated (a better likelihood of this happening).

We might also be ‘saved’ in 2014 to some extent by cost overruns on some of the mega projects, such as Gorgon where some major cost blowouts are well underway (the bean-counters being drafted in is never a good sign).

However, note that the latest ‘Estimate 3’ for mining capex 2013-14 is some 13.6% lower than its 2012-2013 Estimate 3 predecessor.

In other words, mining capex must fall eventually and this will represent a drag on economic growth, and probably employment too.

expected

Property price predictions
OK, so now onto the real guesswork.

Let’s run through the cities in ascending order of size.

I’m going to omit Darwin, however. I’ve lived in Darwin previously. I didn’t understand the seasonal property markets then and nor do I pretend to now. Volatile, supremely expensive and unpredictable.

Hobart is a small city with a population of a little over 200,000.

I would normally find it difficult to post or make a positive case for Tasmania given that the population growth is much flatter than the Bass Strait and that until last month the unemployment rate had been well above 8%. However, the unemployment rate has fallen to 7.9% and SQM’s vendor sentiment implies that asking prices may have stopped falling.[sam id=40 codes=’true’]

Perhaps more important than this, the State Government appears hellbent upon forcing the property markets northwards with its proposed introduction of an incredible $30,000 first homebuilders grant.

Since I don’t try to argue with market distortions (and indeed, such grants for new building may themselves distort median data) of this nature, I’ll go with -1% to 2% growth for Hobart.

The Australian Institute forecast that more than 5,000 planned job cuts in Canberra will send the city and the ACT into recession. Canberra is only a small city of around 360,000 population, and jobs cuts will hurt property markets.

Amazing how times change. Only in March of this year, in spite of sky high prices in Canberra, Residex mused: “I leave you with a question to ponder – given the position Canberra is in, should we all be immediately moving to buy an investment property there?”

The Residex Canberra theory was based on high pre-tax incomes in the city and the answer from an investor’s perspective is “definitely not”. I don’t recommend investing in small cities with limited employment diversity in any case.

It’s impossible to gauge the likely outcomes precisely, but SQM’s vendor sentiment index suggests that the likely trend is not good. Prices to fall -1% to -4% is my guess.

On average, at least, Adelaide has been a poor-performing property market for the past half decade. With a population of around 1.2 million and relatively sedate population growth in South Australia, it’s not a city I have ever been bullish on for property.

However, unemployment in the state has fallen back to 6.6% and a glance at SQM’s vendor sentiment index suggests that the bottom may now be in.

For the aforementioned reasons, I’m still not going to go overboard on predicting capital growth, but inflation-adjusted prices in Adelaide (and Brisbane) are well below previous peaks and a generational low cash rate will surely have an impact at some point. 0% to 3% growth.

Perth, a city of around 1.6 million, does have low unemployment and very strong population growth, and has had a great run through 2013, recording median dwelling price capital growth of around 9% over the past 12 months.

However, there are some indications from RP Data’s index that this growth has ground to a halt along with levels of mining investment, which may be no bad thing for the city’s longer term prospects.

On the plus side, SQM’s vendor sentiment index still has a moderately positive incline for Perth. 0% to 3% growth.

I haven’t been up to Brisbane for a little while, but the news I have heard from those ‘on the ground’ in the city has been positive, and the market does appear to be moving. Finger in the air guess of 2% to 5% growth.

I should probably be disqualified from guesses on Melbourne prices having previously pondered incorrectly as to whether the market had peaked. I wasn’t the only one.

All I can say in my defense is that, unlike some, at least I don’t charge hard-earned dollars for my guesswork – it all comes for free (and a lot of free information is worth what you pay for it, after all).

One of the problems for the Melbourne property market has been that although vacancy rates in certain types of inner city stock have been high, activity in much of the established stock has remained rampant, fuelled by the low interest rate environment.

I discussed with a colleague on the ground who suggested that low interest rates might see growth continue in the 5% to 8% bracket. I keep coming back to slow (and slowing) wages growth and falling mining capex and so I will have a stab at 2% to 5% growth.

The problem child – Sydney

And finally, the problem child…Sydney.

After years of weak supply in the harbour city, SQM Research put the cat among the pigeons when it forecast in its base case scenario that Sydney would record housing price growth of 15-20% in 2014, and 20-30% should Australia experience a strong economic recovery and interest rate rises by mid 2014.

Being a Sydneysider, I’m a vested interest in the Sydney market, but there has never been reason to doubt SQM’s integrity (they correctly forecast market price falls in 2011, for example) and their forecast is based on some sound price-to-income logic.

Sydney’s housing markets were relatively more expensive in 2003 and early 2004 than they are today and thus there is certainly a chance that prices could continue unabated at the growth levels seen in 2013 until the market hits its next irrational peak.

There is a plenty of new apartment stock due to come online in certain sectors of the Sydney market (inner south, Central Park) but this is unlikely to be enough to halt the present cycle in its tracks in my opinion.

However, 12 months is a long time and a lot might happen to slow the present exuberance. I’ll have a stab at a more subdued 6% to 9% growth.

In fact, all of my numbers are lower than you’ll see forecast elsewhere, and this is based mainly upon a gut feel that Australians will be somewhat disinclined to embrace taking on significantly more household debt from today’s already elevated levels, despite low interest rates.

There will be a mass of conflicting factors such as the role of foreign capital, superannuation funds entering the residential markets and first homebuyers struggling to get aboard. But overall, a slower growth cycle is my best guess.

My best 2013 guesses therefore…

Hobart -1% to 2%

Canberra -1% to -4%

Perth 0% to 3%

Adelaide 0% to 3%

Brisbane 2% to 5%

Melbourne 2% to 5%

Sydney 6% to 9%

To be revisited in 12 months time to work out where I went wrong…

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Property market predictions for 2014 – Pete Wargent' have 9 comments

  1. November 21, 2013 @ 2:44 pm James

    Do you think that with the volume of new SMSFs being set up and the number of them opting for direct property is affecting property prices. The reserve banks seems to think so but many SMSF insiders say no (obviously both have their reasons).

    Would be good to hear an outsiders take on it.

    Reply

    • Pete Wargent

      November 21, 2013 @ 9:29 pm Pete Wargent

      James, Short answer – yes I think so to some extent, but mainly at the low/middle end of the market due to stricter lending criteria in SMSFs and larger deposit requirements. Anecdotal point: I bought a property using my SMSF and the major lenders are apparently taking weeks to get round to applications due to being snowed with applications. We’ll see how it pans out next year…

      Reply

  2. November 22, 2013 @ 5:08 am Mary Brownell

    Hi Pete
    Given that you are an experienced investor in both the Australian and UK markets where would you be predicting ( ie guessing – albeit informed guessing!) that the better opportunity for growth lies in the next year? If one was looking to invest in either say Sydney or London in the next year which one would you pick? With property in Hobart I’m looking for a better return elsewhere.
    Thanks

    Reply

  3. Pete Wargent

    November 22, 2013 @ 7:19 am Pete Wargent

    Hi Mary, with the proviso that there obviously is some guesswork involved, Knight Frank are forecasting 7% growth for London in 2014, and SQM Research has a base case of 15-20% growth for Sydney.

    A lot comes to down to personal financial position and goals, and there are also implications for investing overseas – borrowing rates tend to be different and even with a 25% deposit it is now very, very hard to get mortgages to buy in London from overseas.

    My understanding is that only one lender is now providing such mortgages in the UK. I’ve bought properties in London and in Australia myself recently, and managed to jump through enough hoops to get a UK mortgage (at a cheap interest rate) but I’m an Anglo-Aussie with 2 passports. My understanding is that it can still be done but it is difficult.

    There are other implications for investing overseas too (foreign exchange movements, tax) so as with any investment decision, the best place to start is with your goals and work back to a plan for achieving them.

    Hope that helps a little!

    Reply

  4. November 22, 2013 @ 8:43 am Simon Roberts

    Hi Pete,
    Love reading your thoughts, thanks! I’m wondering if the general Australian market is roughly where it was in around 1999 – Conservative government, Sydney prices taking off and the rest of the country wondering if it was sustainable? I’d be interested to compare the trends of 2000 and 2001 with what happens in the next 12 months in each city. Biggest difference I see is the PTS effect of the GFC on consumer sentiment and the resultant retail sector doldrums. Do you see the retail sector improving?

    Reply

  5. Pete Wargent

    November 22, 2013 @ 9:38 am Pete Wargent

    Hi Simon, well it’s been a slow burn, but we have had 2 years of sliding interest rates since 1 November 2011 and thus falling mortgage repayments for existing owners. Personally, I’m optimistic and yes I do expect that eventually this will begin to be reflected in stronger retail data.

    The September data showed a strong seasonally adjusted bounce, but ABS data tends to be volatile, so a few more months of the same would be heartening to see…

    http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0

    Reply

  6. November 22, 2013 @ 10:26 pm brendan

    hi pete ,

    im looking at buying an investment property in perth at the beginning of next year is it a buyers market and is now a good time to buy property in perth

    thanks

    Reply

  7. November 23, 2013 @ 10:59 am 2014 INVESTMENT TAX

    […] Property market predictions for 2014 – Pete Wargent – Property … […]

    Reply

  8. December 2, 2013 @ 3:55 pm Future Assist SMSF

    You make some good points Pete. Good read.

    First person to I’ve heard with a ‘gut feeling’ about declining level of household debt. We have seen a BIG focus on our clients shifting their attention to cutting consumer debt. Im not sure how this is reflecting upon Au-wide figures, but may have something to do with slumping retail sales figures…? people sucking it up and cutting up those CC’s instead of burning them at the shopping counter!

    Reply


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