It's hot today, very, very hot.
I'm sitting at the cafe, Bistro C on the Beach in Noosa… Chilling and thinking.
Thinking about 2015… But firstly, lets take a step back and look how last year panned out.
The dominant themes of 2014 will carry through into the new year, but here’s a few leftfield factors to watch out for in 2015.
At the beginning of 2014, I made the following predictions about the housing market:
- The cyclical recovery already underway will strengthen.
- This will be supported by some important structural changes to the market
- and all in the context of a brighter economic outlook.
This is, pretty much, exactly how it played out. House price growth accelerated through the year, coming it at around 8% annually, though Sydney and Melbourne did considerably better.
This cyclical momentum was supported by important structural factors. Chinese buying appeared to have a major impact on the market (though no one knows exactly how much). SMSFs also positioned themselves to become major players in the market, but my feeling is we only saw the thin end of the wedge of that in 2014. SMSFs could go on to be one of the key influences in 2015.
And this was taking place in an economic context that failed to inspire much confidence, but actually did better than pretty much everyone expected. From where we stood at the beginning of 2014, we could have done a lot worse.
And so property became one of the key success stories of 2014 – the bright spot in an otherwise lacklustre year.
And over a longer run..? Well, property is still miles ahead of the pack. The latest RP Data / Corelogic Pain and Gain report shows the power of a buy and hold strategy.
Over 90% of homes sold in the September quarter last year were sold at a profit – the average (AVERAGE!) gross profit was $223,870.
In fact 30% of home sales saw owners double their money.
In the September quarter, Australians booked almost $14 billion of gross profits!
This is all very impressive, but none of these trends should be surprising. The longer you hold a property, the bigger the profits at the time of sale.
Property losses are almost entirely focused in the short term, particularly driven by regional markets in WA and Queensland – which became overblown with the mining boom.
But in the capitals, everyone is doing well. In Sydney, only 2.6% of homes sold in the September quarter sold at a loss.
As I keep saying, there’s an art to property investing. You can’t just throw money at the market and (always) expect to make money.
You’ve got to do your research, find your property and time your run.
And in any bull run, some segments will get over-cooked. I flagged a few last year. There’ll be more to watch out for this year as well.
Watch this space.
And so what are the key trends to watch out for in 2015?
Well, there’s the usual suspects. Interest rates remain at exceptional lows, Chinese appetites are unsated, and SMSFs still have plenty in the tank as well. All of these remain a strong lift under property.
But there’s a few trends, just dots on the horizon at this stage, that might come out of left-field and make themselves felt.
The first is Japanese buyers. Yep. The Japanese. There are reports that Japan’s major real estate companies are on the hunt for Australian property assets at the moment.
I thought the Japanese economy was in the toilet? Well, it is. But Japan has the money printing machine on full bore to try and dig themselves out of their hole, and that money has to go somewhere.
As we’ve seen, Aussie property remains an attractive option on the global scene, and the longer Japan leaves the printing press on, the more likely we are to see them make themselves felt in the market.
This could be interesting. Because there are reports that the Japanese have learnt the lessons of the 80s, and won’t be drawn in to luxury, trophy markets. They’ll be middle of the road players this time around.
Another segment to watch will be first home buyers. We’ve heard a lot about the absence of FHBs. The number of FHB finance approvals is at record lows.
But it seems that a lot of that is due to the fact that banks just aren’t reporting the data properly. Now that First Home Owner grants have wound up in most states, there’s less need to actually report whether a loan is for a newbie or not.
Digital Finance Analytics have done some survey work, which suggests that FHBs are still active in the market. When they adjust the official data in line with their results, it shows that FHB activity is in line with longer run averages:
And part of the reason that FHBs are flying under the radar, is that a growing share of them are jumping the principal place of residence and going straight to investment properties.
In a market like this, that strategy makes a lot of sense. But this is still a relatively new trend. It will be interesting to watch this year where FHB activity establishes itself.
But perhaps the biggest influence on the Aussie property market will be the global outlook, which remains messy and confusing.
The World Bank has cut it’s forecast for growth this year from 3.7% to 3.0%, thanks to the floppy nature of Europe. That’s a significant downgrade.
At the same time though, oil prices have fallen nearly 50%, with further to run. Lower petrol prices are a big shot in the arm, and are probably the equivalent of several rate cuts – across the world!
But a 50% reduction in oil prices is a massive structural shift in the global economy. The consequences will be very difficult to predict.
Together, these factors could make for a very interesting year.
Overall, the outlook for property is still bullish, and I expect we’ll end the year running at around the same pace as we started. I think we’ll see a rate cut or two in the mix, which will be more fuel to the fire.
But exactly how it all plays out on the ground…
Well, you’ll just have to stay tuned.