If you’re interested in property investment you regularly hear the term “growth” bandied about. But…what is “growth”?
You’ve probably read Australia is forecast to have growth over the next year.
That’s great! But what does that actually mean?
Well, the biggest number of all in economics is GDP – the Gross Domestic Product, which, as the name suggests is the measure of all of a country’s income.
The forecasters expect China to continue its blistering rate of growth.
The great news for Australia, despite the forecasts of relatively modest growth levels, is that Australia has not had a recessionary period for more than two decades. A recession is usually defined as two successive quarters of negative growth.
Over time as a nation we have consistently been becoming wealthier and average household income has far outpaced inflation over a long period of time.
What GDP actually includes
The measurement of Australia’s GDP includes its total income and its total spending including all goods and services.
Of course, the number can never be completely accurate for some transactions officially never take place! For example, a drug dealer won’t be declaring his or her sales to the Australian Taxation Office.
GDP also attempts to avoid double-counting. The example of a car is often used: when calculating GDP we don’t want to include the components of the car as well as the final sales price of the vehicle. What we really want to know is the GDP on a value-add basis.
So a GDP figure will never be perfect, but it’s the best we have got. And it is the trend in GDP, the percentage movements from year to year, which interests economists: are we growing, stagnating or going backwards?
It is worth taking note in the financial press of whether the figure quoted is real of nominal GDP, for real GDP growth is a measurement which strips out inflation.
The individual segments of GDP
The four segments of GDP are:
- Government spending
- Net exports
Countries might expect to see government spending accounting for less than 20% of its GDP, but a number of European countries have national health services which are funded by governments and thus the percentage can be much higher (which is bringing its own problems in European in the form of unsustainable government debt levels).
In countries such as the US total spending can be more than 100% of GDP which on the face of it seems impossible, but is in fact possible due to goods being imported from overseas.
One major trend that we have seen in Australia is a phenomenal boom in mining capital investment. Over the next year or two we are expecting to see mining investment begin to fall as the construction stage of the major resources projects peaks and we shift towards the production phase.
A major challenge for Australia is what will fill the hole left by the incredible boom in mining investment. It is hoped that investment in housing and construction will fill some of the hole but that doesn’t seem to have really taken much effect as yet.
A consequence of this is that we are likely to see a prolonged period of low interest rates as the Reserve Bank aims to stimulate the other sectors of the economy to plug the mining investment gap.
There are some other limitations to the GDP measurement. One is that in does not take account of the level of inequality of a country so GDP may be growing but whether or not the wealth flows down to the population with great inequality is not considered.
What next for our investment markets?
It might seem unusual given the amount of anxiety around at present but there is a consensus that now is likely to be a good time for owners of stocks. Britain, the US and Australia all saw positive returns in 2012 and this is forecast my most commentators to continue (at least, once the debt ceiling crisis is negotiated).
Why is this?
One reason is that interest rates are so low that savings accounts, particularly in the US and in the UK, are yielding minimal or negative real returns.
Thus increasingly investors are forced to consider other alternatives. Company shares are often yielding dividends which are far in excess of the return of fixed-income investments at present which is seeing a move to the risk or growth asset classes.
There also is some fear that bonds could be well overvalued at present on a global level, and as and when interest rates are ratcheted up there could be a major correction. This might seem esoteric to you but if you don’t self-manage your superannuation do you know where your super fund manager has invested your pension?
As for property markets, historically lower interest rates have shown a strong correlation with price appreciation.
The major banks have clawed back a fair chunk of the recently-delivered interest rate cuts in order to cover funding costs but mortgage rates have steadily dropped with the cash rate to historically very cheap levels.
The Governor of the Reserve Bank in Australia has warned Australians that a return to very strong property price growth would be imprudent, which is a sure sign that there is concern that low interest rates could fuel a return to growth. Most forecasting houses are predicting a return to moderate property price growth in 2013.
Property price growth needs population growth and growing wealth
Through 2010 and 2011 I was lucky enough to be able to travel 26,000km around Australia and then to a couple of dozen countries across the world, which proved extremely interesting as I was able to compare dozens of real estate markets.
What is evident is that for property prices to grow, a country often needs to see population growth and to be growing its wealth.
I went to see the famous Sphinx and the pyramids, one of the 7 ancient wonders of the world. The city of Cairo was quite amazing, it now comprising around a quarter of Egypt’s population with around 15 million inhabitants. But the population growth has not triggered great property price growth because the country has been through a revolution and the economy is in disarray.
When I finally made it to London after 15 months on the road, I was surprised to see that house prices in London are higher than they have ever been. What of the great crash everyone has been harping on about?
Strangely, although property prices in the UK notionally fell sharply through the financial crisis, London has pushed on to ever greater heights.
Demographic shifts have seen more Brits and immigrants moving to the south-east of England which is in the process of causing a drastic housing shortage in that part of the country.
And while Britain seems to be struggling in terms of its economy, the pain has not been felt evenly. Developed countries used to be known for their industrial output and manufacturing, but today it is the intellectual expertise in areas such as financial services which are creating wealth. London’s growth into becoming Europe’s premier financial centre is Britain’s main success story of recent decades.
In Australia we do live in a lucky country.
Not only do we have a population which is set to boom over the next few decades, our Government also presides over an economy which is benefiting from a mining boom. And also cities such as Melbourne and Sydney are becoming major financial centres.
Sure, we’ll face some challenges, but then if you look back through the financial press over the decades you will discover that in fact, this is always and everywhere the case.
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