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3 risks for Australia’s property markets

One thing which you glean over a decade of being involved in finance is that the opinions of some should hold far more sway than those of others.

For mine, I listen when the following people in the world of economics speak: Glenn Stevens, Peter Martin, Christopher Joye.

Why? Because when it comes to matters economics they have been delivering insightful, meaningful and entertaining opinion for years.

You can add to that list: Shane Oliver, Chief Economist of AMP. I like Shane Oliver, a personable chap who deals in large doses of common sense.

Today I look at what he has had to say on Australian property market risk.

Three risks identified by Shane Oliver for our property markets

Oliver felt that there was a high risk of a significant property price correction at around the turn of the century, but now deems that risk to have receded somewhat as the markets stabilise. He does, however, note three risks that we should consider:

Risk 1 – Property investors departing the market

Australians love bricks and mortar. The Australian Bureau of Statistics records that more than one million of us own an investment property (though most never own more than one or two). As such a very healthy percentage of properties are owned by investors, Oliver notes a possible risk of poor capital returns leading to an exodus from this sector of the market in search of asset classes which perhaps appear to promise superior performance.

However, Oliver deems the risk to be low at the present time. Transaction costs are markedly higher in property than they are in equities and this necessitates that most property investors are in for the long haul.

Risk 2 – Interest rates running high

The Australian property market is highly sensitive to movements in interest rates, with much of the country’s mortgage debt being variable rate. The tide has turned on the interest rate cycle over the past 12 months, however, with the RBA having shaved – nay, cropped – 125 basis points from the cash rate from 4.75% to 3.50% since November.

Further, the implied yield curve tells us quite clearly that if there is to be another interest rate movement before the festive season it will be a downward one. Correspondingly, 3 year fixed rate mortgages are now exceptionally cheap when measured on a historical basis (refer to news of Westpac dropping their lending rates again).

Risk 3 – Hard landing for China

In my opinion, this is where the real risk lies.

Adverse or severe economic news from China can impact Australia materially, due to our heavy reliance on exporting commodities.

Oliver again deems the risk to be relatively moderate in its likelihood due to China’s low tolerance for unemployment, economic instability and penchant for displays of social unrest – they are going to ‘make this boom work’, is the underlying theme here.

However, we of course need to assess not only the likelihood of an outcome, but also the impact of the adverse outcome should it occur.

The paradox here is that concerns over global economic growth often reflect themselves in low interest rates and improved housing affordability. Sometimes the worse the world gets, the better property can get (provided that unemployment does not run too high).

The way forward

It seems clear from recent data that a a little tentative growth has returned to the property markets. Leading indicators such as auction clearance rates appear encouraging, though Oliver suggests that Australian property values might be range-bound to moderate growth in real terms over the coming years.

Should this concern property investors unduly? It should not.

Property investors should only be seeking out the sectors of the market which are growing.

As ever, we don’t buy a property index, we buy a high-performing property.

At various stages of the cycle this could mean properties located in the outer areas of cities as growth ripples outwards, but not just at the moment. Much of the growth that has been seen of late is in the apartment market which tends to be located more centrally in the capital cities.

Expect this trend to continue over the next decade as medium-density living becomes the new normal for Australians.

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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


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