Market Report December

 In Investing, Market Update

Property Report

As 2017 is drawing to a close, this is a good time to reflect on the performance of the property market during this year. According to data published by Core Logic, the 12 months to 31 October 2017 were generally good for Australian property investors – although there was substantial variation in different markets.

Investors in Perth and Darwin essentially lost money across the period. Perth house prices fell by 2.5% for the 12-month period, while Darwin prices fell by 5.7%. This is what happened to the market value. Investors also receive rent. Rents in Darwin are high, but not high enough to prevent the average investor losing money during 2017. In Perth, an investor collecting average rent was just able to bring their investment back above water.

Investors in Brisbane and Adelaide enjoyed capital growth of 2.7% and 4.6% respectively. Canberra returned 6.4%. Sydney did slightly better, with capital growth of 7.7%, although this includes a fall of 0.6% in the last quarter of the 12-month period. Melbourne’s strong growth continued, with prices rising 11% and Hobart topped the nation annual growth of 12.7%. Interestingly, rents in Hobart remain high, such that the total return to an investor in Hobart was more than 18%. Notwithstanding this, Hobart remains the capital city with the lowest median price, at $396,000.

Sydney has the highest median residential value, at $905,000, clearly marking itself out as the most expensive city in Australia. Melbourne’s median price is $710,000. Canberra is $580,000, but every other capital city has a median value below $500,000.

Regional (that is, non-capital) areas did relatively well across the period. Average capital growth of 4.9% was augmented by an extraordinarily high average rental yield of 5.5%, giving investors an overall return of 10.4%. The median dwelling price in noncapital cities is $350,000.

Of course, all of these figures are averages or medians. That means that any individual property is likely to vary from these figures. However, particularly in the larger markets, that variation should not be too substantial and so these average returns and median prices are a good indicator of what most property investors achieved.

To summarise: except for Perth and Darwin, property investors who held representative property investments, even in regional areas, did well in 2017. Of course, to have done well in 2017 they needed to have purchased their investment property in or before 2016.

What about property bought more recently – or property not yet bought? Especially in the dominant Sydney market, prices appear to be cooling. There are two main reasons for this. The first is that the Sydney market has achieved above average returns for several years. As a result, some periods of neutral or slightly negative price changes are to be expected. Markets correct themselves and this is a natural and helpful economic phenomenon.

The second reason is that it became government policy to try to cool the investment side of the market. In early 2017, the main regulator of credit lending asked lenders to restrict interest only loans to no more than 30% of residential mortgage loans issued after that date. The lender’s response was predictable (which is why the regulator made its request): interest rates on investment loans rose by as much as 0.4%. Given that many investment properties purchased with debt are negatively geared, this 0.4% represented extra cash that the investor needs to find each year to continue holding an investment property. As is the nature of things, when holding properties becomes more expensive, fewer people want to do it. Demand falls, and so do prices.

The regulator’s response was quite an artful strategy designed to target property investors only. Given that housing affordability is at generally low levels, the last thing the regulator wanted to do was raise interest rates across the board. This would make it even more difficult for people to buy a first home. Because of the targeting, owner occupiers have not experienced an increase in their interest rates and they have therefore been able to continue to borrow at the same price as before.

In the markets that had become superheated, this has been a very neat piece of work from the regulator. As we have said before, the people and government bodies pulling the strings on Australia’s macroeconomic policy generally do a good job of things.

2018 is unlikely to see such strong across-the board growth investment property values. That said, no one purchasing an investment property should be that fussed about what happens in the 12 months immediately following the purchase. Investment properties are long-term investments. Investors need to expect to hold their property for at least 10 years, and generally much longer than this, to reap the full benefit from this type of investment.

Sharemarket Report

Australia’s share market also had a good year (at least, the 12 months to the end of November 2017). The ASX 200 finished the 12-month period around 10% higher. Add to that an average dividend yield of around 4%, and the total average market return becomes around 14%.

That is a very good year.

Very few people would have expected this result. Remember, November 2016 was when Donald Trump was elected as the US president. In the 12 months prior to his election, the Australian sharemarket had not performed particularly well. Things did not seem especially promising. No one was suggesting that our market was about to start a steady climb that would last for the next 12 months.

As we have said before, this is the whole point about the sharemarket. No one knows in which direction it is about to move. Short-term prices are subject to sudden ‘shocks,’ such as the ‘Trump bump.’ But the whole logic of a shock is that people do not see it coming.

In the longer term, however, the sharemarket tends to reflect whatever is happening in the general economy. This is a lot more predictable. For example, Australia has not had a technical recession for the last 26 years. This is unprecedented for a developed economy such as Australia’s – indeed, in June 2017 we overtook the Netherlands for the mantle of longest run without a recession. 104 quarters, and counting.

There are many and varied reasons for Australia’s economic outperformance. We did well with the mining boom. That boom ended (and Perth property copped it). But when the boom ended, we could lower our interest rates to help household spending. What’s more, our floating exchange rate let us take advantage of a lower Aussie dollar to attract and better service export markets (which include things like tourism, which is essentially an export market). Underlying all of that, we remain a ‘destination country’ – our population is growing at about twice the rate of other developed economies. As The Economist magazine put it recently, our population growth means that Australia must build a city roughly the size of Britain’s Birmingham… every five years. (Happily, all of our cities are nicer then Birmingham!)

Population growth is also underpinning various residential property markets.

The association between a solid economy and immigration is nothing new in Australia’s economic history. For example, economic historian George Megalogenis has compared Australia’s immigration policy with the extent to which Australia has coped with international economic crises, such as the recession of the 1890s, the two world wars, the great depression, stagflation in the early 1970s and the global financial crisis of the late 2000’s. To summarise, when Australia has open immigration this provides a boost to the economy that reduces the impact of economic downturns. At times when Australia’s borders have been relatively closed, such as prior to the great depression, the effect on our economy of international downturns is worsened.

Sharemarkets bounce around with much greater volatility than property markets. For that reason, no one really knows whether 2018 will be a good year for sharemarket investors. What we can say is that the period between now and the year 2028 is likely to be a good one. Australia still has a fundamentally strong underlying economy. It is worth investing in – but just make sure you have at least a 10-year timeframe whenever you invest in the share market.

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