Each month the RBA offers its perspective on how Australia Inc. is tracking when it releases its Chart Pack.
I know that charts aren’t everyone’s cup of tea, but I review these each month as part of my regular research.
So here’s a stack of charts and my thoughts on some of the factors that will impact our economy and property markets…
The world economy
Of course Australia doesn’t operate in a vacuum, so it’s important to start with the international context…
While global economic growth is slowing, our major trading partners – in particular China (which is slowing down) and India (which is growing strongly) – are generally outperforming and that’s important for Australia’s economic health.
And while world inflation is low…
Unemployment is falling in the 3 biggest economic regions, meaning their economies are improving:
In short the world’s economy is “behaving itself” and many of the previous concerns of a world recession have faded.
Our economy is also well placed having now grown uninterrupted for a quarter of a century and is growing at around 3%, which is slightly lower than long run averages, but still the envy of many developed nations.
And like the rest of the world, Australia is in a low inflationary environment which is of course one of the reasons the RBA cut interest rates this month as it reconsidered its forecasts for how quickly inflation would likely rise over the coming year or so.
Australian household wealth is strong and after a period of stashing our cash after the GFC, and we’re still saving but not as much.
We’re now spending a little more and that’s good for our economy.
Australian households are amongst the wealthiest in the world, with our assets (primarily in real estate) increasing in value faster than our liabilities.
The graph below shows the interesting effect of our current low interest rate environment.
Despite record high levels of household debt, falling interest rates means that this debt is more affordable than ever with average household debt as a percentage of disposable income being at an affordable level.
Our Housing Markets
As our mining boom slowed down the government facilitated the recent property boom by encouraging the non-mining economic sector, in particular the building industry, to take up the slack.
This has mostly come through the high-rise apartment boom, which now seems to be coming off the boil.
But the housing market is slowing.
After a sustained period of under-supply, the market is now running ahead of demand, partly as a result of slowing population growth.
With regards to house prices the RBA said:
“A range of indicators suggest that conditions in the established housing market have eased this year from very strong conditions over recent years. Housing prices were little changed in the June quarter according to most published measures.”
At the same time loan approvals to both investors and home buyers are falling, in my view not because of lack of interest or enthusiasm for property, but because of our banks stricter serviceability criteria.
Now that’s not a bad thing – when we got to the point where 50% of home buyers were investors, we where heading into dangerous territory.
Two major drivers for our housing markets
Our housing markets are very dependent on consumer confidence.
There is a direct link between consumer confidence and housing turnover and rising prices.
Consumer sentiment has fluctuated widely recently, but now more of us are optimistic than pessimistic and that’s good for property.
Currently we’re creating jobs and the unemployment rate is steadily dropping, but it could be lower considering as it understates the degree of labour market slack due to the large number of part time jobs that have been created with many Australians working fewer hours than they would like, while others have been discouraged from looking at work at all.
This has created a situation where wages growth remains low and unemployment varies considerably between states.
Of course the states with highest job growth and lowest unemployment have the better performing property markets.
The following graph clearly shows how the service sector is where the jobs growth is occurring.
In turn this is where wages growth will occur enabling people to upgrade their homes, pushing up property prices
The Bottom Line:
All in all, our economy is sound and we’re now in a period of low economic growth, low inflation, low wages growth and a low interest rate environment.
By the way…the rest of the world has been operating in this environment since the GFC
We were sheltered from this by an extraordinary mining boom and our economy’s resilience to transition from this has been surprisingly impressive.
Of course there are still risks out there – with slowing Chinese growth posing a significant potential risk for Australia.
With inflation likely to remain low for some time the RBA could drop interest rates again later in the year or early next year if the economy weakens or if unemployment pushes up again.
This means as property investors for the foreseeable future we can’t expect the type of strong capital growth in property prices we experienced recently.
By the way…this doesn’t mean it’s the wrong time to invest in property.
What it does mean is that careful property selection is critical as you can’t count on the market to do the heavy lifting.
It also means a more stable property environment with out the booms and busts.
WHAT DOES THIS MEAN FOR YOU?
Clearly owning property – your own home and investment properties is the way to wealth in Australia
If you’re looking for independent advice about property no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are home buyer or a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
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Also published on Medium.