The Australian Residential Real Estate Market

I keep coming back to the outlook for the residential property market for numerous reasons but most importantly because my clients keep asking about it. Unfortunately I don’t have a crystal ball but here are my thoughts. Firstly, I do know that our residential property has become much more expensive, relative to incomes, than when I bought my first property more than 30 years ago. Why is that? Most importantly, because credit growth – lending by banks and others – has grown much faster than household incomes. Also of considerable importance has been the significant decline in interest rates over recent decades which has enabled buyers to borrow larger amounts than they otherwise could have.

Newgate Capital Partners in this very interesting research highlight that while wages have increased at 3.5% per annum over the long term, the Australian housing market has experienced price growth of 6.5% per annum. This could only have happened if lenders had been willing (and able) to lend and borrowers were (and remain) keen. The question we should all be asking is whether this can and will continue.

For the record, I very much doubt that the next 30 years will see house prices continue to outstrip income growth so my expectation is that price growth will be more modest. I also expect we will see some lengthy periods where prices are “flat” and price falls for a few years, such as when we suffer a recession, wouldn’t surprise. If you doubt this look at what has happened to Perth housing prices since the mining boom ended. It is also notable that building approvals have been at record levels over the last year so supply, particularly of apartments.

While I think low interest rates, population growth, foreign buyers, tax incentives (negative gearing and the CGT discount), supply constraints and the fact that most Australians believe in the manta “safe as houses” all currently provide a positive backdrop, I don’t think all these factors will remain positives for much longer. Also, I doubt our regulators (APRA and the RBA) will allow the same rate of credit growth going forward. If that’s right and if several of the aforementioned positives become neutral or negative, price growth will inevitably be slower than we have experienced in recent decades.

Another Property Boom – it’s not just (Eastern) Australia

John Mauldin, who is US-based and writes possibly the most widely read investment newsletter in the world, recently wrote the following about the booming Canadian residential property market. Much of this will sound familiar to Australians.

“Our neighbors to the north are at their own turning point. The Canadian economy was riding high in the commodity boom but has run into problems after two years of sharply lower oil prices. Since then Canada has avoided recession but has not enjoyed much growth, much like the US. I should point out that Canada is by far our biggest trading partner.

Canada also has a housing bubble that looks increasingly ready to pop. (Then again, I’ve been saying that for three or four years.) Home prices in Vancouver are unbelievable, and Toronto is not far behind. These prices have little to do with oil and everything to do with Hong Kong Chinese and other Chinese buying property. Wealthy Chinese, eager to evade their own country’s capital controls, are buying homes as offshore savings accounts. What look like astronomical prices to us are still attractive to Chinese buyers, especially if they believe (and I think with good reason) that their own currency is likely to drop relative to the US dollar over the coming years.

What happens in Canada will tell us something important about China and vice versa. Anything that keeps Chinese money from leaving the country will raise the odds of Canada’s bubble popping”.

Where to for the Australian Share market in 2017?

The Australian share market has started 2017 in a very positive fashion continuing the post Trump election rally and contrasting with the first few months of 2016 when it was in a funk. Anyone who sold out in early 2016 would now be wishing they had ignored the negativity and stayed in the market. It is always hazardous to predict shorter term moves but my views largely accord with recent commentary by BT Investment Management’s Equities team who said:

“We believe we remain in a low-market return environment, given a lack of strong, broad-based earnings growth and limited scope for a sustained valuation re-rating, especially given that rating gains surprised on the upside in H2 2016. That said, the market can continue to make steady gains, particularly if underpinned by a moderate level of economic growth which does not accelerate to the point where (interest rate) tightening is required – a scenario which appears reasonable at this stage.

The major risks are geopolitical; elections loom throughout Europe, while the only certainty around President-elect Trump is that there is no certainty as to what he will do. If there is a key lesson to take from 2016 it is not to get too caught up in the headlines – the year that gave us the shock of Brexit, a Trump victory, and repeated scares around Chinese growth also delivered an 11.8% total return for the S&P/ASX 300. It is important to focus on the underlying trends of growth, which appear reasonable at this point”.

Calendar Facts

Have you ever wonder how January 1 became the day when the New Year begins?  Or why there are 12 months rather than, say, 10 or 50?

We have just entered the 432nd year of what is known as the Gregorian calendar, which was introduced by Pope Gregory XIII in the 1600s but was only adopted in England in 1752 (and Australia, presumably in 1788).  The new calendar replaced the Julian calendar, which, on introduction in 46 B.C., corrected problems with the previous calendar system Before that, the Egyptian calendar—the original prototype of our current calendar system–was invented as a way to track the annual rising of the Nile River, which was critical to Egyptian agriculture.

The common thread of these calendars and others such as the Mayan, Chinese and Greek calendars is that they are based on the fact that the moon goes through 12 cycles of full to new each year, which is where the idea of 12 months (“moons”) came from.  Alas, the Gregorian calendar preserved some of the quirks of the Julian calendar: as you know, the months are of different lengths, holidays fall on different days of the week from year to year and there is the messy necessity to include an extra day each leap year.  The new calendar did manage to preserve the 7-day week, which facilitated the observation of the Sabbath every seventh day—virtually a requirement for any calendar that would be adopted in the West. This brief summary comes from a more detailed article by Stratfor, accessible here.

Work – Life Balance

The Christmas New Year holiday period is a time when many of us have time to reflect on what is commonly referred to as work- life balance. It’s certainly on my radar as I head off on a month’s holiday with family; I’m trying not to feel guilty about having such a long holiday. Everyone has constraints on their time and energy so whether we think about it or not we make choices or trade-offs. I think it’s best to make conscious choices or otherwise you risk regretting the fact that you neglected something that should have received more attention. I have long been grateful for hearing in my 30’s from one very successful CEO of a major Australian business that he deeply regretted not spending more time with his children when they were growing up. By the time he was ready to give them his time it was too late.

James Clear, a writer on behavioural psychology, says that “one way to think about work-life balance issues is with a concept known as The Four Burners Theory. Imagine that your life is represented by a stove with four burners on it. Each burner symbolizes one major quadrant of your life.

  1. The first burner represents your family.
  2. The second burner is your friends.
  3. The third burner is your health.
  4. The fourth burner is your work.

The Four Burners Theory says that “in order to be successful you have to cut off one of your burners. And in order to be really successful you have to cut off two.”… Essentially, we are forced to choose. Would you rather live a life that is unbalanced, but high-performing in a certain area? Or would you rather live a life that is balanced, but never maximizes your potential in a given quadrant?”

If you are interested in reading a bit more on this the link to his article is here.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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