What’s ahead for our property markets in 2020?
Is this the end of interest rate cuts?
This new year has commenced with more than its fair share of turbulence – how will the Corona Virus, the tragic bushfires, overseas geopolitical tension affect our property markets?
We started the new decade fuelled with optimism and then fell back to earth with tensions overseas in the Middle East, the outbreak of the coronavirus and the tragic Australian bushfires.
By now we’re far enough into 2020 to get an idea of what’s happening in our property markets.
So in this week’s episode of Property Insiders Dr. Andrew Wilson and I discuss what’s happening in the economy and our housing markets around Australia and what’s the data suggests could be ahead for real estate.
Watch as we discuss:
A number of data sets are suggesting property values have continued rising around Australia and the property upturn which started in Sydney and Melbourne in the middle of last year has become more wide spread with housing values rising in January across every capital city.
While median prices are growing strongly, they’re a bit of a lagging indicator reporting past sales.
Auction clearance rates are a more in time indicator of market sentiment and depth and we’ve started the year very strongly.
Home loans surge
While a lot of fuss has been made of the December Home loan figures which confirm the revival of our housing markets, they still remain well below the figures of 12 months ago, particularly for property investors.
Strong growth in home lending continues to reflect the recent general revival in national housing markets although annual totals still remains well below the previous year – particularly for investors.
Latest ABS date reveals that total value of home lending seasonally adjusted increased by 4.9% over December compared to the previous month – the third consecutive monthly increase.
All sectors reported rises in lending over December with owner-occupiers (excluding first home buyers) up 5.3%, first home buyers up 6.2% and investors up by 2.8% over the month.
Compared to 2018 however, lending totals for 2019 remained lower, with overall owner-occupiers down 5.2% and investors still down 19.2% – for a total annual lending decline of 9.2%.
Lending for first home buyers however bucked the trend, increasing by 4.6% over 2019 compared to the previous year.
Is this the end of rate cuts, or are the RBA just holding off?
The Reserve Bank of Australia met in the first week of February for the first time in 2020 and decided to keep interest rates on hold.
Although last year having signalled its intention to continue to ease monetary policy this year, the RBA held off a further interest rate cut because of stronger housing markets, despite new risks to the economy from the coronavirus.
The board noted that previous outbreaks of new viruses had “significant but short-lived negative effects” on economic growth in the economies at the centre of the outbreak.
“A further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market,” the RBA minutes said.
Headline Inflation rising – but still subdued
Headline inflation was up to 0.7% for the quarter, and the annual rate of inflation sits at 1.6%, which is significantly below the 2-3% target range the RBA is aiming at.
Although the annual headline CPI rate has increased over the past 3 quarters, underlying inflation remains flat and low – on both a quarterly and annual basis
More economic headwinds – tragic bushfires and corona virus.
The Australian economy posted its worst performance since the global financial crisis during 2019, hit by drought, weak consumer spending, sluggish business investment and a slowing global economy.
Now ratings agency Moody’s has downgraded its 2020 economic growth forecast for Australia from 2.2 per cent to 1.8 per cent.
It attributes the downgrade to factors such as the impact of the bushfires season and the coronavirus.
Similarly, Morgan Stanley in turn has slashed its growth forecast from 2.1 per cent to 1.9 per cent.
Meanwhile, Moody’s has reduced its growth forecast for China from 5.8 to 5.2 per cent, and it says the global economic impact of the virus is likely to be much worse if it becomes a pandemic.
The big macro stories affecting our economy have come so far this year have been:
- The USA China Trade Pact
With the phase one trade deal now signed this should give some certainty to global trade
The United Kingdom has left the EU, but up till now the UK has not really been a major trading partner with Australia, but it does open up the possibility of great trade with an old friend.
- The Corona Virus
This is clearly a developing story, but Australia banning travel from China, to stop the spread of this virus is already having an impact on our tourism and education industries, both significant sectors of our economy.The coronavirus is creating a second wave of economic disruption in Australia. Whereas the first phase of economic disruption impacted sectors such as casinos, air travel and hotels, the new phase is disrupting supply chains, with many Chinese factories still closed.The RBA minutes stated that the coronavirus will have a bigger impact on the Australian economy than SARS. They said the outbreak presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy.To help counter this hit to the economy, the bank said: “Lower interest rates could speed progress towards the bank’s goals and make it more assured in the face of the current uncertainties.”
- The tragic Australian Bushfires
Lives have been lost, thousands of properties have been destroyed and large parts of our beautiful country have been devastated.
Good news for employment
Unemployment fell at the end of last year to 5.1%.
We added 28,900 jobs, led mostly by part-time jobs in December and over 2019 the Australian economy add 262,500 new jobs.
This is a similar number to 2018, when we created 269,500 new jobs.
But putting things into perspective, in 2017 415,300 jobs were created.
But there is still spare capacity in our labor markets with many people who are in part time jobs being underemployed and the labor force participation rate remains at 66%.
The Reserve Bank wants to see it closer to 4.5 per cent to help lift sluggish wages growth. But a slump in job advertising over the past year and slow economic growth suggest the unemployment rate could go even higher.
Three interest rate cuts and reductions to personal income taxes have failed to lift the mood of consumers, who appear more content in paying down debt and saving rather than spending the increase to household incomes.
Business confidence is also weak as business conditions struggle below average, raising the risk of slowing employment growth and continuous sluggish business investment.
Our Housing Market
Our forecasts for 2020 are that property values will be higher at the end of the year than today with well located Sydney and Melbourne properties worth 10% more than they are today.
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