Foreigners must wonder what all the fuss lately has been about. In their eyes, the Australian property market is still the ‘envy of the world.’
Ever wondered how Australian property looks through foreign eyes? That’s what I want to write about today.
But first up, thanks to everyone who took some time to drop some comments on the last post. I really appreciate it. It was really encouraging (and humbling) to hear that people are getting some value out of these rants and ravings.
Still, I think I am going wind it back a little. I think I’ll keep one post a week to work through property issues in detail, and keep the No BS Friday to take a broader sweep of things.
And see how that goes.
But yeah, thanks for all the comments. And definitely, if you ever have any ideas for topics you’d like me to look at, or ideas of how I can do this better, very happy to hear it…
Anyway, today I wanted to just step back a bit and look at Aussie property in a global context.
And one of the reasons Australia is so popular with property investors right now is that property, on a global scale, has been a real fizzer in the past 5 years.
Take this chart put together by the IMF. This is a global house price index, lumping all the housing markets in the world in together.
The short of it is that global property prices have gone nowhere since the GFC. There was a rapid run up in property values in the early part of the 2000s – right up to the break of the GFC.
There was then a sharp downturn in prices thanks to the GFC, led by the US, but also Ireland and the UK.
But while the crisis countries have bounced back, restored price growth in countries like the US has been offset by stagnating price growth in other countries, particular Europe, but also (up to a year ago) Australia.
So the net effect is that global house prices have gone nowhere. That’s the context.
And in that global context, Australia is a massive over-achiever.
Not only did we avoid being dumped by the credit wave collapse of the GFC, we have kept property prices, more or less on an upward trend.
The other thing that’s worth noting when we’re looking at the bigger picture is that there’s been a subtle shift in the global economic outlook over the past few months.
And that shift is largely around a brighter tone to all the news that’s come out of the US. This chart here sums it up, which tracks the number of positive data surprises. E.g – if the market was expecting unemployment to come in at 8%, and it actually comes in at 7.5%, that’s a positive surprise.
And what that shows is that the number of positive data surprises in the US has surged in recent months. Employment, construction, retail sales, GDP…
Suddenly the US is returning to form.
This is important to us. America is our second largest trading partner. But it is also one of the biggest buyers of goods from our first largest trading partner – China.
So a strong US is good news for China, and doubly good news for us.
This stronger outlook for the US has happened at a time when the outlook for the rest of the world has actually deteriorated. This is largely a European story.
This chart tracks the IMF’s assessment of recession risk in each region. Following a bunch of dismal data, the recession risk in Europe for next year has surged to 40%.
The ‘crisis countries’ continue to struggle, but lately even the impregnable Germany has looked shaky. There isn’t a single bright spark of hope left in the Eurozone.
And so a region facing almost a 50/50 chance of recession isn’t good news for the globe. But it doesn’t have an overly huge impact on us. Our direct trading relationships with the Eurozone are not vital.
Emerging Asia, which has a 0% chance of recession next year, will have a much bigger bearing on our prospects.
Anyway, the short of it is that the outlook for the global supports for the Australia economy is strengthening, while the outlook for the rest of the world continues to disappoint.
Again, this leaves us very well-placed.
The other key factor is the outlook for interest rates.
Take a look at this chart here. This looks at inflation rates across the OECD.
What it does is track the number of countries with inflation of less than 1%, and the number with inflation of less than 2%.
Once upon a time, inflation of 1 or 2% was fairy-tale stuff. It was something the world had never known.
Now it’s as common as garden snails.
Now three-quarters of all OECD countries have inflation of less than 2%. Two thirds have inflation of less than 1%.
It’s hard to over-state how important this is.
Remember, almost all countries these days use interest rates to try and target inflation. Our RBA uses interest rates to try and keep inflation within the 2-3% target band.
And if inflation was less than two percent, then it would lower interest rates to try and generate more inflation.
So when you look at a stat that says three quarters of all countries have inflation rates of less than two percent, it tells you that global monetary policy is certainly going to get easier.
Interest rates are going to fall.
(That is, if they haven’t reached zero already, like they have in several major economies.)
In that context, and with two-thirds of economies facing chronic dis-inflation, there is almost no scope for the RBA to raise rates.
If we raise rates, then Australian assets start paying even more than other assets, and increased demand drives up the Australian dollar…
… potentially undoing all the good work we’ve seen in recent weeks.
So for my money, this locks in record low interest rates, for several years at least.
So that’s what we’ve got. We’ve got a property market already out-performing all expectations, the outlook for the Australian economy is relatively strong and improving, and interest rates are locked in at record lows.
No wonder our property market continues to be ‘the envy of the world’.
It’s good to be back.
Helena says
Hi Jon, at first I thought I was being more than ordinarily dumb at reading the graphs, then I realised first and last were the wrong way round. Phew. I so hope your reading is right about the low-flation, low interest rates environment continuing, and look forward to it being so.
Jon Giaan says
oh. good catch Helena. Those charts have ended up in the wrong spots. I’ll try sort that out…
Lucky you’re on to it. 🙂
Leo says
Hi All.
An extract of a recent report might show some light on the coming year.
– (Housing market growth to slow from 2015/16) –
Continued growth in house prices is forecast over the next year before prices begin to
ease from 2015/16 according to QBE’s annual Housing Outlook.
The report highlights market activity is most visible among non-first home buyers,
as the lack of state incentives impact first home buyer demand.
“Demand is largely being underpinned by upgraders and high levels of residential
investment. Outside of Western Australia, South Australia and Tasmania, where
recent downgrades of first home buyer incentives for established dwellings have
created a temporary rush to beat the changes, first home buyer demand has
contributed little to the other states’ growth/housing market in 2013/14,” the
report states.
Residential investment account for 45.2% of total residential finance in the year to June
2014, the report reveals.
Did you get that last figure = 45.2% of residential finance last year was investor borrowings!
What I’m seeing, 60,000 people immigrated to NSW last year, mostly Sydney. I imagine Melbourne received a similar amount. They need somewhere to live. Therefore they will rent.
This also means fewer Australians are buying (not able to afford) a home for themselves.
Could a more distinct line be starting to appear between ‘Haves’ and ‘Have nots’.
Those that have their own home can refinance to buy an investment and rent to immigrants and
those that can’t buy (not afford) a home. Is this where class distinction becomes obvious amongst Australians. Once the split opens, it will continue to widen daily.
Wages do not (cannot) keep up with house prices. More people are falling behind everyday. Eventually rental yields will suffer as house prices rise and wages don’t keep pace. I have seen this already in some outer Melbourne suburbs where prices are $340,000 (avg home) and rents are $300 – $320 per week.
There are some saying that to keep prices down and improve affordability, the Gov’t should stop negative gearing for all ‘future’ investment purchases to slow down the huge flow of finance into investment property, saving tax rebates and making it harder for investors, without punishing First Home buyers with the same legislation.
No body wants the NZ answer. Putting up a 20% cash deposit.
Something to think about.
Cheers Leo
Mark says
Ummmm, so we have the strongest property market in the world, and somehow you interpret that as a buy signal? For how much longer do u think we can avoid the rest of the worlds property prices fate?
Our property market will destroy this once great nation, if the current collective housing policy’s are left in place….
95 properties says
Agreed
95 properties says
As an experienced property investor with dozens of properties, I am selling my Melb and Syd properties. No doubt in my mind a correction is coming. These two “hot” markets are way out of balance, similiar to Detroit and Miami few years ago. Many property commentators had joined the hype in the US before the correction – saying same things that people are saying here now.
I am currently buying in un-hyped areas in Tas and Qld. Also waiting bit longer to huy more in UK.
My mentor – worth 100m+ all self-made – taught me….
1. Don’t buy into hype.
2. Buy Low Sell High.
He is adamant I should exit all Melb and Syd now. Also that higher interest are inevitable and coming sooner than expected.
Younger people may wonder “how bad can a 20% correction be”? Maybe doesn’t sound so bad. I can tell you it is devastation because when many people borrow 80%, a 20% fall wipes out all/most equity. It happens more often in history than people realise, including here.
Ken. says
Hi Helena and Jon. Low interest rates are well and truly going to fall. Normally, when you want to lock in an interest rate, you have got to accept a higher rate. Now , the biggest bank in Australia, the Commonwealth Bank, has (mysteriously) dropped it’s lock in rate to below it’s variable rate. I believe if anyone knows, the banks know all about their own business principals. Once again, we will always see some want to bees, negativity, to Jon’s great Posts.Cheers, Ken.
Don't Prop Up the Ponzi says
“No wonder our property market continues to be ‘the envy of the world’”
Oh yes, everyone’s envious – they wish they could become slaves to humungous mortgages too. I can just see people in other countries wishing they could be outpriced by foreign investors, huge numbers of immigrants, tax-incentivised investors and other vested interests. Doesn’t everybody just wish they lived in a country like ours where prices are at least 10 times the average wage, and climbing daily?
Anth says
Would you like to reconsider your position? No!?
Ok feel free to live elsewhere.
Iraq perhaps? Israel? No. Ok let’s get out of Middle Eastern countries.
Would you prefer Portugal Ireland Greece or Spain where they are experiencing massive unemployment? And the government is unable to afford its bills? Would be nice if you could even find a job.
Africa perhaps? No? Can’t I interest you in any one of those countries in civil war?
U.S.A then? Don’t worry. You won’t get shot randomly walking down the street. Guns don’t kill people. People kill people…
Ok how about closer to home like China itself. Good luck with your human rights.
So how about now.
Seemingly we’re cheap, too cheap!!!
Tom says
It’s a pity that our Governments continue to kow tow to Rupert and his backers and henchmen. The
Big end of town knows on which side their bread is buttered. The banks around the world caused the GFC and Governments worldwide had to bail them out, using Taxpayers’ money. They were “too big to fail”!
Unfortunately, they are also the chief beneficiaries, whether the housing market is healthy or sick.
They never suffered from the GFC!
None of THEM were forced into bankruptcy, the way their victims were – and still are!
They never had to make any recompense for their misbehaviours!
Some of their misguided purchases of foreign businesses have dented the bottom lines of some of our banks, but they continue to provide dividends for their top-end-of-town shareholders – who now invest a lot of that cash in property!!!. They made sure they continue to benefit, regardless of their effect on of the lives of the majority of the people.
That video was a good “Banking” summary which one of the readers posted last week. Thanks!
Thanks Leo for the stats in your post. They just reinforce a point I have mentioned before, about the ‘unmentionable’ big demographic change which is taking place, with the impending death of the “Great Aussie Dream” – as we become a country of “Haves” & “Have-nots”, with progressively larger and larger proportions of the population renting their homes.
The effect on the ‘spirit’ of the Nation is going to be horrendous.
The greed of the financial institutions and their failure to responsibly manage our Super investments, is forcing more and more concerned thinkers into SMSFs, holding property (REAL, tangible assets of bricks & mortar, rather than ‘theoretical’, ‘paper’ assets). The proverbial will hit the fan when the trillions of Greenbacks which, post GFC, the US Fed has printed and sent all around the world to bolster the standing of the US economy all comes home to roost? As other economies recover and repay their debts, the value of the $US will plummet! Inflation will explode! But fortunately that is in the future. We can ignore it! – Can’t we?
Along with the unusually low interest rates, this transfer of the Baby Boomer equity, away from the ‘sharks’, at a time when the going is good, must be hurting the money lenders who have been bleeding the populace dry for so long. With such large amounts of the Nation’s equity being locked away permanently, they are losing a large swag of their control of the downturn-susceptible economy. Their traditional “Boom / Bust” cycle will not be so profitable any more. What will their response be?
Fortunately for Australia, we have been blessed with philanthropic people such as Dymphna Boholt & Jon Giaan educating us, en masse, in the arts of intelligent property investment. This awakening of thousands of people MUST have had a profound effect on the nation’s future and account for a sizable lump of that 45.2%. Unfortunately, the inability of so many young families to buy their own homes will force Governments to re-think the issue of ‘Negative Gearing’. When Paul Keating thought about it, the drop
in investment money going into property threatened to kill the construction industry. Perhaps the Canberra economists will NOW look upon the 45.2% stat and decide that it may now be beneficial to close that Tax-avoidance loophole. Previously, that money was taxed in the share market or elsewhere. They may decide that the pent up despair of ‘First Home Buyers’ will be enough to compensate for the reduction in participation by wealthy Baby Boomers. They may even decide that the risk of such a reduction is probably over-estimated anyway. Even without negative gearing, property will still be a better retirement investment than the volatile stock market.