Have you noticed that we are on the verge of a new Economic landscape in Australia?
It has been an incredible 12 to 18 months throughout the world and even more interesting Down Under.
With the Election out the way, it has provided local markets with a level of certainty that had been lacking, but what else is happening below the surface?
We recently spent a week on the Gold Coast at our Wealth Retreat and it was a great opportunity to understand what our Economy will look like over the short to medium term.
There were some of Australia’s sharpest economic minds in the room in Dr Andrew Wilson and Pete Wargent.
Here is what was discussed;
Interest Rates
After a recent rate cut the majority of our leading economists suggest that there may potentially be one or two more to come in the back half of 2019.
Furthermore, they also suggest that it could be up to another 5 years before we start to see interest rates rise.So we head into unchartered territory with the cash rate potentially dropping below 1%.
With APRA also loosening the servicing requirements, this may present an opportunity for an extra 9 – 13% borrowing power according to SQM research.
While this may be a positive, it may equally a negative because of our languishing economy , dependant on how you look at it.
Inflation
In case you were not aware, we are in a low inflation environment.
It is clear to see this downward trend over recent decades and it is something you need to understand as an investor.
Both speakers suggested that the Reserve Bank of Australia’s monetary policy may not be having the impact it once used to.
Put simply, decreasing or raising the cash rate has not had the influence it once had.
Ideally, the RBA would like inflation to sit between 2-3% per annum, but we have been well under this range for over 3 years and this will continue.
So we will also be in a low inflation environment for the foreseeable future and as a result capital growth will be lower.
Wages Growth
Another downward sloping graph that highlights that wages growth has also been falling significantly over the last decade.
Economists point to the phasing out of manufacturing in Australia and the seasonal jobs that come with mining and tourism etc as some reasons.
There has also been a drive by bigger companies to embrace technological advances and replace workers with computers or machines.
An interesting statistic suggests that nearly 40% of all current jobs, will not be around over the next few decades.
So, our wages growth will also continue to remain lower.
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What this means for Investors
While interest rate cuts may be a negative for our economy, for investors these rate cuts and potential changes to serviceability may actually be a positive.
It could increase your borrowing capacity around 10% and with lower rates, a reduction of any cash flow gaps or an increase in any surplus.
With money much cheaper, now may be a time to consider the switch to a cheaper Principal and Interest loan to lower your Loan to Value ratio.
With inflation lower, capital growth will be much lower, however growth will be real growth and not over inflated.
To achieve above average growth, you are really going to need to get back to the investment fundamentals that the team at Metropole talk about every day.
The known, proven and trusted locations.
As capital growth will be lower, I would suggest you need to do more than rely on the market to do the heavy lifting for you.
Add Value – consider a renovation or a development to boost equity and cashflow.
While wages growth may be lower overall, you need to become an expert in studying demographics, in particular family incomes.
In areas where jobs are being created and professional and services industries flourish, wages will continue to rise considerably faster than the average.
Take Note – Postcode A is what you should be striving for, as it is well above the average, while Postcode B just tracks the average which will be lower moving forward.
Summary
The Economy has changed and three key elements are going to remain at low levels for at least the next 4 – 5 years.
For this reason, it is even more important to understand the fundamentals of how to grow your asset base.
While a lower interest rate may be of benefit, both inflation and wages growth (in most areas) will remain lower.
So use this time to reset buffers or perhaps pay down some debt.
If you are looking to buy, study areas where wages growth will remain much higher and people are not as effected by these factors.
Don’t rely on the market to do as much of the heavy lifting as it will not, so add value to your assets.
We are now at the base of another economic cycle, understand this and it just may be your best year in property!
So what should you do next?
If you’re looking for independent advice in these changing markets, 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 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.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30
