FY2015/2016: What to expect

From today’s vantage point, the 2014/2015 financial year was certainly an interesting one. We saw interest rates cut further to bring them to the lowest levels in a generation, helping to fuel higher capital city house prices. We also saw the ongoing effects of the end of the mining boom and a fall in the value of the Australian dollar – good news for exports, but less so for Australians travelling (or shopping) overseas. And although lower interest rates were a plus for those paying off mortgages, consumer sentiment was wary. Australians were working to pay off debt, and were most concerned about funding their retirement and the future of their families.1

Is there any impact from the Australian & Chinese equities markets crash on Australian real estate?

For property market participants, this is the question of the day. Will stock market investors sell up Australian Real estate fast? Will they do nothing? Or will they buy more?SPASX200

Two very different precedents have been set.

  1. The rapid Japanese sell off of Australian real estate from the early 1990s. Which arguably was caused by a rapid decline of the Japanese economy, stocks and their own local property market.
  2. The Sydney and Perth property booms of 1988 which occurred predominantly due to investors being scared off shares from the market crash of 1987. This was a text case example of investors seeking a more stable investment after the precipitous crash the previous year.

It’s early days yet, so it will be hard to know which way the winds will blow here. However it is certainly time to keep an eagle eye on the weekly auction clearance rates, which have been weakening of late. The outcome will probably depend on how geared up the investors were to begin with. Being heavily geared would ultimately mean margin calls and therefore rushed forced sales in order to reduce debt.

What of the Chinese?

Our guess would be it initially leads to less buying of property by individual Chinese investors. First it drives the market losers to cash, then they get conservative and lick their wounds. Traditionally, buying overseas property is something you do when you’re riding high from paper wealth. But after a time they might see Australian property as a relative safe haven. The institutional investors are more inscrutable, but we don’t think it’s going to slow down their acquisition of hard assets, like Australian resources and farmland.

House prices: Bubble or no bubble?

The first RBA meeting for the 2015/2016 year saw no change to interest rates, as expected. February and May’s cuts – bringing the cash rate to an historic low of 2.0% — helped capital city housing values to climb almost 10% last financial year.2

Is it a bubble and will it burst this year? That depends on who you talk to, but a closer look at the capital cities data shows that while Sydney’s house price growth for the period was a whopping 16.2%, Darwin’s was negative, at -2.9%. So, if there is a bubble, it’s certainly not nationwide. And CoreLogic RP Data’s head of research, Tim Lawless, suggests that unless there’s a serious trigger event such as higher unemployment or higher interest rates:

“… it is unlikely we will experience a significant correction in dwelling values.”3

But he does sound a note of caution:The-Beach-House-01-800x529(1)

“However, the longer this run of growth continues across our largest capital cities, the more susceptible the housing market becomes to changes in the economy or broadly across household finance.”3

2015/2016: What to expect

So what’s ahead? The International Monetary Fund (IMF) predicts for Australia that over the next couple of years:

“… activity should gradually pick up … supported by strong resource exports, accommodative monetary policy, and rising confidence”.4

The RBA has kept rates low to support borrowing and spending, while keeping a close eye on the housing market, especially the Sydney and Melbourne markets. Although an increase in the cash rate could potentially cap those house price rises, it could also put a dampener on business borrowing and consumer confidence, both vital for the economy. It’s a juggling act.

Anyone planning to buy a home or investment property needs to look closely at the data for their area, and be aware that any future movement in rates is likely to be up.

As for the Australian dollar, according to the RBA, further falls (mostly against the US dollar) are ‘both likely and necessary’.5 It might be a good idea to get that overseas holiday in now.

If you would like to know more about our FY15 wrap up, and how it could affect your personal situation, get in touch today. We’re always happy to offer advice, research, and the latest data to assist.

 

1. NAB Quarterly Australian Consumer Anxiety Index – Q2 2015

2. www.corelogic.com.au/media-release/capital-city-dwellingvalues-9-8-higher-over-the-financial-year

3. CoreLogic RP Data Home Value Index Release, 1 July 2015

4. www.imf.org/external/np/ms/2015/062415a.htm

5. www.rba.gov.au/media-releases/2015/mr-15-11.html