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.