[Podcast] The Big Picture – economic and property trends you must understand – June 2022, with Pete Wargent

As we sit here today, inflation is the highest it’s been for years, interest rates are rising and people are wondering how high they will go. 

Plenty of tech stocks are down by up to 50%, the war in Ukraine continues, and supply chains are broken, the pandemic is lingering, China is in lockdown, we have a new government, and on and on.

Somehow it feels like there’s more economic uncertainty than there has been in years.

Even though that’s probably not the case.

But what does all this mean for Australia’s economy and our property markets?

Since these don’t operate in isolation, each month I take time out to have a look at the big picture, the macroeconomic factors affecting not just Australia, but the world economy in these Big Picture Podcasts with Pete Wargent, in our attempt to give you a little more clarity on what’s ahead.

June’s big picture

Despite the challenges we’re experiencing, we shouldn’t forget how well our economy is doing:

• Annual economic growth is 3.3%.
• Unemployment is 3.9%.
• Interest rates are still historically low.
• Our stock market is down 4.69% year-to-date, while the US market is off a big 14.3%.
• Retail trade was up by 9.6% a year ago to a record $33.9 billion.
• Planned business investment was the strongest in a decade!
• Skilled vacancies rose by 8% in April to a record (16-year) high of 311,100.

The simple facts are that we are in the box seat to grow well economically moving forward.

The Australian economy

• The ABS revealed that GDP increased by a moderate 0.8% over the March quarter - well below the 3.3% increase reported over the previous December quarter.
• The GDP data also revealed that household savings levels are continuing to fall with the savings ratio over the March quarter at 11.4%.

On the other hand, our trade surplus is rising

• The trade surplus increased from $0.8bn to $10.5bn in April.
• Exports rose 1% or $ 0.5bn in April. Services exports rose $0.5bn (9.6%) to $5.3bn. That’s the highest level since December 2020, but still 40% below pre-pandemic levels.
• Imports have fallen back over the past two months after having increased sharply in February, but importantly the level of imports still remains 25% higher than a year ago.

We still have the lowest unemployment levels seen in half a century

Will our new government listen to the business lobby that is calling for the return of strong immigration to fill our job vacancies?

• Job ads at new record highs in May.
• It’s likely that the new government will look to increase the number of skilled migrant workers to address labour shortages, and residency may be offered to temporary visa holders to boost permanent settlement.
• Another area that may face an overhaul is the offering of residency to international students.
• Australia has been seen as a popular, wealthy, and safe destination for migrants over recent decades, and despite cost-of-living challenges, the new government should comfortably be able to fill an increased migration program.

Let’s have a quick chat about inflation

• We know that our RBA has a target range translation of 2 to 3%, on average in overtime. For most of the past 10 years, the carpet has been missed on the downside.
• Now inflation has returned on the upside, and while too much inflation can be a problem important remember that the jump in inflation is partly the unintended consequence of success.
• As restrictions have eased, households and businesses have been keen to spend some of their accumulated savings, at a time when goods production has been disrupted, especially by the anti-COVID measures in China.
• A central concept in monetary policy is the neutral real rate of interest: that is, the interest rate adjusted for inflation at which monetary policy is neither expansionary nor contractionary.
• Over the past twenty years the neutral real rate is believed to have fallen to close to zero, or possibly even less, meaning that if inflation is 2-3%, the neutral actual rate should be 2-3%.

We’ve moved into the next stage of the property cycle.

Our property markets had a lot to contend with so far this year.

A pandemic, floods, Geopolitical problems, rising interest rates, and a federal election just to name a few. 

• The housing correction is underway with property prices falling slightly in Sydney and Melbourne.
• Since peaking in January, Sydney housing values are down -1.5%, but remain 22.7% above pre-COVID levels.
• The markets are fragmented - the top end of the property market is slowing down, but this is not unusual.
• Auction clearance rates falling – a good in-time and forward indicator.
• Another good forward indicator is finance approvals – they fell in April.

On the other hand, we’re experiencing a rental crisis with falling vacancy rates and strongly rising rents

• This will only get worse without borders opening.
• Many proposed apartment complexes on the drawing board that may have helped alleviate the rental crisis will not proceed at present because of problems related to rising building costs, supply chain issues, and finance approvals.
• House rents have risen by over 10% in Adelaide, Canberra, and Brisbane and just under 10% in Sydney and Hobart.

New Zealanders are coming back to Australia in droves.

What’s going on?

• “Higher real incomes in Australia, and surprisingly now lower housing costs – at least outside of the two major Australian capital cities – are set to be two of the key drawcards.”

The homeownership rate could rise again even back to 70%.

Why?

• Australia’s homeownership hit record highs in 1961 when 70% of us owned our own homes.
• With more and more first home buyers coming back into the market since 2020, homeownership rates should be rising again.

Links and Resources:

Michael Yardney

Metropole’s Strategic Property Plan – to help both beginning and experienced investors

Get a bundle of free reports and eBooks – www.PodcastBonus.com.au

Pete Wargent’s new Podcast

Pete Wargent’s blog

Some of our favourite quotes from the show:

“I would have thought we could also be the energy support of a lot of countries, but it doesn’t sound like we’re making a lot of gas and fuel anyway.” – Michael Yardney

“I can see it’s going to take some time for migration to alleviate these widespread labour shortages.” –Michael Yardney

“For the property market to crash like some people are suggesting, you actually have to have sellers who have to sell, and there’s no one there to buy.” – Michael Yardney

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