Better days ahead… perhaps
After two tough years, there are signs to suggest the market could be close to bottoming out. Whilst there are still many obstacles to scale, the price correction of the past few years has recalibrated a lot of the over pricing that existed in the market.
Election Result & Negative Gearing- The property market will be a winner from the election result. Aside from whether you believed in Labor’s negative gearing policy or not, the reality was it was a policy that would have put downward pressure on property prices. Hardly an incentive for investors.
Given the ALP led the polls for three years, the market has operated under an assumption that a policy designed to drive prices down would become legislation. No one will ever know the exact degree to which the market priced in the removal of negative gearing.
The manner in which the policy was rejected suggests no party will attack negative gearing anytime soon.
In its purest form, negative gearing is a fundamentally flawed concept. It is the tax payer supporting private citizens in loss making business transactions. However, governments have cleverly introduced taxes unique to property investors to rebalance the equation. E.g, land tax, stamp duty and council rates are taxes that investors don’t pay on shares.
Negative gearing keeps market rents lower than it may otherwise be – meaning that investors play a crucial role in providing affordable housing.
The demonisation of investors backfired badly. Labor demonised as many of their own supporters as Coalition supporters on the negative gearing and franking credits issue.
‘land tax, stamp duty and council rates are taxes that investors don’t pay on shares’
Many markets desperately need investor demand to soak up oversupply. To kill demand and divert the investor demand towards developers would have punished unsold vendors in the market. These issues no longer hover over the property market.
Regulation relief– The correction was necessary and was a manufactured credit squeeze via regulation. Now that the speculators have dropped out of the market, regulators have scope to dilute the more draconian elements. Buyer sentiment never wavered during the downturn. Inspections numbers remained strong. It was the offer, finance and contract exchange process that became problematic.
Areas where regulators can or have eased red tape are
· Mortgage assessment rate (removed 21/5/19)
· First home buyer’s incentives
· Credit flow
· Provide more time & latitude for ‘Interest Only Investors’ to refinance across to ‘Principal and Interest’
Price appeal – we felt that property prices would keep falling until there was:
· Regulation relief or
· Interest rates were reduced or
· Buyers felt that properties were compelling value
To one degree or another, all three elements are now in play that weren’t - at say Christmas 2018.
The price correction from the peak now, sits somewhere between 10-15% for houses & well located apartments. Generic high rise apartments in suburbia probably face more price pain.
Economists continually misread the property market. It is not like other asset classes. If you knew with near certainty that Telstra shares were going to drop tomorrow and the day after, you would not buy. However, buyers will purchase a property they know is falling in value. Home ownership is a part of Australian’s value system. Given a property has periods of price fluctuation, buyers don’t buy with the sole focus on price performance that economists believe they do.
First Home Buyers have been further incentivised to enter the property market. They are a crucial missing element in the property market in recent years. Their hope for entry will create demand for newly constructed dwellings and help absorb oversupply.
Given this is one of the few major policy announcements of the Morrison Government during the election campaign, you get the sense it is more of the same in terms of economic management.
Interest rates, tax cuts & employment –
Even though rates have not been reduced since August 2016, the RBA acknowledged they are prepared to cut, as soon as June 2019 has reassured the market.
As a footnote, lower interest rates also means a lower $AUD. A lower $AUD will incentivise ex-pats and foreign investors to invest in the Sydney and Melbourne markets.
The Government propose income tax cuts which will support household budgets and help see off cost of living pressures. These are crucial given the lack of wage pressure in the past few years and the foreseeable future.
The unemployment rate jumped to 5.2% last week and set up the June rate cut.
NSW will continue to have a State & Federal Government operating in sync. Good news for infrastructure spending which will flow through to employment. This brings risks to individual home owners – most notably tunnels and traffic changes.
Given the oversupply in residential construction, an increased focus on infrastructure spending will aid construction employment, which is falling off a cliff at present. Continuing to build residential dwellings into an over supplied market will simply create a nasty downturn in the future. This is the mistake that was made with the Brisbane market. At the height of their downturn in 2015, 16% of apartment owners in Brisbane were reselling at a loss.
Incidentally, the recovery in the Brisbane market began with investors. As the oversupply was absorbed, vacancy rates fell and rents gradually increased. Investors re-entered the market.
Every market boom starts with investors and ends with speculators. Every downturn starts with speculators and ends with investors.
Risks to the recovery
There are many risks towards the property market recovering. Let’s face it, government and household debt levels are excessive and pose a major risk. At the same time, markets are fragile as central banks attempt to end the easy money environment.
Risks to the recovery
· Global correction/event – overdue
· Regulators don’t/haven’t come to the rescue (soon enough)
· Debt in market, in society and on Governments books
· Mismanagement of the economy – Pressure on Liberals
· Decrease in population growth