What is prudence? To be prudent means to be…
- discreet or cautious in managing one’s activities; circumspect
- practical and careful in providing for the future
- exercising good judgment or common sense
it comes from the Latin prūdēns meaning far-sighted.
Everything cycles, but around some form of structure.
An economy is driven by both cyclical (temporary, although often repetitive) changes, as well as structural (longer lasting and often more painful) forces.
For mine, putting aside the deadheads we currently have in Canberra, the national lack of confidence is more complicated than reasons like our house prices have stopped growing, or we are worried about Europe or the carbon price. We are changing as consumers and have become conservative once again.
The official stats show a healthy economy, yet many think it is weak and demand a cyclical solution – another handout; a tax cut; or further drops in interest rates.
RBA bald head, Glenn Stevens, laminated as much last week when he grumbled that our current gloomy mood is largely because people are mistaking structural change with cyclical ones. Well, we don’t really like change regardless of what form it takes.
But the real underlying issue here is structural, and cyclical remedies will make very little difference. Just look at what little impact the recent declines in interest rates have had on retail sales or home buying.
Look, too, at the lacklustre influence the recent Queensland housing boost really had on new starts.
Ditto – and despite the housing industry’s loud applause – the likely outcome on new construction in New South Wales with last week’s first home buyer incentives towards new homes. Without greater certainty in the development approval process and an economically feasible solution as to who pays for local infrastructure, the NSW grant for first-time buyers won’t be enough to significantly lift new construction.
Also, most first home buyers will not be able to get finance. Worse still, valuers will discount the bonus off the purchase price, making settlement even harder to complete.
So what is the big structural change?
In short, we have returned to our former prudence.
Household savings dropped dramatically in the 1990s, and in the naughties (yes, spelt correctly) it went negative for a while. Today, our savings rate is close to double digits, yet we felt wealthier when we had absolutely nothing in the bank. Why?
Because the gross value of our assets – for most, their home’s value – more than doubled between mid-1990 and 2007. It was 14 years of a power salute. This happened because we had to outdo the Joneses next door – we moved into better homes; took on more debt to do so; and gearing up was possible due to bank deregulation, lower inflation and cheaper loans.
But the music stopped with the GFC and we – correctly – reversed our actions and got on top of our debts.
Prudence is back in vogue, Baby.
And somehow – yes it is hard to believe – it has a strong and I think lasting appeal.
Home-grown is in, recycling too. Borrow, not buy. Measure many times and don’t even cut. Walk outside, not the gym. Renovate not move.
But such a mindset has a cost. Property sales are down by a third against the past decade; generic dwelling values have fallen a bit – now they won’t keep falling forever – but they won’t also grow like they have done in the past. Nor will sales volumes.
In addition to prudence, we are buying different things. Services, not goods. Maybe we already have many of the goods we really need, but when a society ages it uses more services. This is happening here and is best shown in the health sector where new employment in this industry is up 260,000 since 2008. This is twice as many new jobs as in mining! And sadly, by way of comparison, the construction industry in Australia lost 23,000 jobs in the last three months alone.
Also, there is the digital revolution – it makes everything and everyone much more price sensitive.
So what does this mean to the property market?
- Established housing – unless it has true redevelopment or good renovation potential – will see little to no real price growth for some time i.e. a decade.
- Discretionary markets and products – think Cairns or top-end holiday homes – we see little demand. Prices could continue to slide and being priced under replacement cost (the usual trigger for an upswing) might not trigger a positive response this time around.
- New product will only sell if it appeals to the market’s needs. For renters this means convenience, and for owner-residents it’s flexibility. Spaces need to be practical yet have dual (or more) uses. Wasted space must go.
- Rental return is the key investment performance indicator. Maximising the current tax advantages is second, and capital growth a distant third. For a passive investor – over 90% of investment buyers – new property wins hands down. A minimum holding time is now ten years, maybe longer.
- Apart from being well-located in the urban fabric and designed for the target audience, property winners will be in areas with the best job prospects. Many of these won’t be in the capitals.
- The way property is sold has changed. And especially to investors. Today’s property investor is essentially not actively looking to buy a property. The usual actions which accompany a property purchase – reading newspapers; searching the internet; visiting new projects and/or real estate agencies – aren’t in vogue. Hence the traditional sales methods and advertisements have limited impact on property investors. Under the current market conditions, most property investors become buyers due to independent advice and endorsement. They receive such advice often via the finance industry, and most of this advice is sourced from non-property related enterprises. Today’s property investor is usually a professional or, increasingly, someone in the resource sector. Either way, they have very little time to dedicate to searching out property opportunities. They, however, often seek financial or other related advice.
- Many new projects will not proceed. This will more often than not be reported by the mainstream media as failure, but it truth, it just reflects our more prudent times.
“Rashness belongs to youth; prudence to old age.” Marcus Tullius Cicero
Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 550 new residential developments come to fruition and writes the weekly Matusik Missive. The Matusik Missive is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.
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