[Podcast] Is it good news or bad news for property? Big Picture Podcast with Pete Wargent

If you've been following the news lately, you might have noticed that there seem to be a lot of mixed signals about the state of the property market.

While some commentators are warning of a looming property market crash due to rising interest rates, the statistics that came out at the beginning of the month from all the major property research houses suggest that our property markets are looking for a floor.

In today's Big Picture podcast with Pete Wargent, we discuss the outlook for the Australian economy and our property markets and the latest economic figures that came out this week including housing approvals, the monthly CPI figures, and our Q4 GDP figures.

Three years on from the pandemic: is the housing market going ‘back to normal’?

On 11th March 2020, the World Health Organization declared a global pandemic and at the end of March 2020 Melbourne went into its first of five lockdowns.

While this crisis in health had little direct implications for the housing market, there were plenty of responses to the pandemic that did.

Unprecedented expansionary fiscal and monetary policy (and subsequent tightening), heavy border closures (and reopening), and the normalization of remote work amid lockdowns were pandemic byproducts that influenced housing markets.

1. National housing values are 14.8% higher than where they were in March 2020

• Australian home values initially declined at the onset of the pandemic.
• The initial uncertainty around the pandemic, lockdowns, and a sharp decline in economic activity put downward pressure on residential sales and listings volumes, and home values fell.
• We experienced a once-in-a-generation property boom when the value of almost every property in Australia skyrocketed, then saw our market correct in 2022.
• It's likely that our property markets will reset and a new cycle will begin later this year.

2. Regional markets outperformed – but this is reversing
3. Apartment markets underperformed – but are now in favour
4. Today our property markets are very fragmented
5. Our rental markets are in crisis with no end in sight.

RBA is closer to a pause but still sees further tightening being needed and is clearly data-dependent.

• A pause in interest rate rises could potentially happen in April or May, although it’s not certain.
• Reserve Bank governor Philip Lowe said, “we are closer to the point where it will be appropriate to pause interest rate increases”.
• The central bank boss said there were“…four really important pieces of data that we’ll look at our next board meeting”, including monthly updates on employment, inflation, and retail trade, as well as the NAB business survey.

Global inflation fears have returned over the last month

Australia’s economy does not work in isolation and the renewed concern about signs that global price pressures are taking longer to subside, and that economic activity appears to be holding up better than expected.

This in turn raises the prospect of both further monetary tightening and tighter settings being maintained for longer overseas and potentially here in Australia.

Silicon Valley - the second-largest bank collapse in US history

Could a bank failure like Silicon Valley Bank happen here?

It’s very unlikely because we have much bigger banks and even the smaller banks are pretty big.

Also, the regulation of our banks is world-class, helped by the extensive branch system.

This partly explained why Australia was the only western economy not to go into a recession with the GFC!

This SVB failure is the tip of the iceberg for failing US businesses but I don’t think it will be a huge iceberg of a GFC or dot-com bust proportions.

However, just like our RBA, the Fed has to be careful about US inflation-killing interest rate hikes.

Prior to the collapse of Silicon Valley Bank, the US Federal Reserve had been of the view that the best way to curb inflation was to deal with it aggressively.

However, if it persists with that strategy now, it could cause significant harm to those sections of the US banking and business communities that have been hurt by the collapse of SVB and its ramifications.

Last week – in the space of three days – we had three US banks go bust.

• First, there was Silvergate – an almost entirely crypto-focused lender. With deposits of just $6bn at the end of 2022, this is reasonably small-fry.
• But then came Silicon Valley Bank (SVB). When it was forced into administration by authorities on Friday, it became the second-biggest bank collapse in American history.
• Over the weekend, as contagion spread, Signature Bank in New York was also forced into administration.

No wonder people are freaking out.

The US government has stepped in.

Like Australia, America has a deposit guarantee scheme for deposits up to $250,000.

So they’re safe.

But the US Treasury has just announced that not only are all of those deposits safe, but the entire book is protected as well.

Treasurer Jim Chalmers has downplayed concerns about the potential implications of Silicon Valley Bank's collapse for Australian banks.

He says the federal government, the Treasury, and regulators are monitoring the situation and the potential impact on Australia's financial system.

Australia’s economic outlook:

• Bill Evans from Westpac expects a sharp economic slowdown in 2023, with growth forecast at a well-below-trend 1%.
• The softer-than-expected end to 2022 lends support to this view.
• Domestic demand stalled in the final three months of 2022, including a slowing of quarterly consumer spending from 1% to 0.3%.
• The sizeable household savings buffer, and a still robust labour market, will cushion the impacts of these pressures.
• Economic growth is forecast to lift to a still modest 1.5% in 2024 (downgraded from 2.0% previously) supported by an emerging easing of monetary policy.

Housing loan commitments continue to fall

Housing loan commitments fell -5.3% over the month of January, its twelfth consecutive month of decline, to be at its lowest level since October 2020.

• On an annual basis, the value of loan commitments is down -35.0% year on year but is still 15.2% above pre-pandemic levels.
  • The reason why the value of loan commitments has remained high relative to pre-pandemic is mostly about house price growth during the pandemic.
• The actual number of owner-occupier finance commitments is now 13.1% below pre-pandemic February 2020 levels on our calculations, while the implied average value is still 24.2% above pre-pandemic.

January plunge in house approvals

House approvals have now declined for five consecutive months and are at their lowest levels since 2012.

Dwelling approvals fell 27.6% in January.

A reversal in volatile apartment approvals, which fell 40.8% after a 41.9% rise in December drove the decline, but there was also a weakness in detached house approvals which fell 13.8% month on month.

Links and Resources:

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

Join Pete Wargent and me at Wealth Retreat 2023 – click here to find out more

Some of our favourite quotes from the show:

“In the last 5 months, one-third of all properties currently listed for sale were on the rental market before.” – Michael Yardney

“We have a number of supports that are going to make it much less likely to have a run on the bank or problems.” – Michael Yardney

“The shortage will settle down, so therefore, there will be a stabilization phase for a while, but certain properties, certain locations, are always going to be in strong demand, and I guess we’ve got some fragmented markets ahead of us.” – Michael Yardney

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