Market Update February 2017

 In Market Update

Property Market

The current state of the property market may be good news or it may be bad news. It all depends, really. If you already own a home, then 2016 would have seemed like a good year for you. In Australia, most markets did well during 2016. Even those that did not do ‘well,’ like Perth, did less badly than they had done in previous years. The ‘national average’ rate of growth for capital cities was 10.9% for residential property (Source: Corelogic). Once again, this prompted Barnaby Joyce to invite everyone to move to Tamworth – perhaps in the hope that this would drive up the value of his own home. That said, if you only own one home and that is the one you live in, then whether an increase of such huge proportions is good for you is debatable. Why do we say that? Well, you are living in this property now, and if you sell the property so as to move somewhere else, then the chances are that that other property has increased to about the same extent. That is, of course, unless your next home is intended to be an upgrade, in which case that next home is now more expensive and therefore less affordable for you.

In fact, rising house prices are really only good news for owner-occupiers who either: (i) intend to downsize to a less expensive home; or (ii) won’t need to buy another property when they sell the current one. And there is only one point in life when you do not need to find a new home when you ‘move out’ of the current one. So, if you the only home you own is the one you live in, then the state of the market in 2016 was really good news for your inheritors. Yes, we know: if you owe money on your home and the value rises then your level of proportional debt has fallen. But you still have to repay the bank as much as they lent you. Rising prices are OK news – but they are not great. Things are different if you own more than one property. If that is you, and all (or most) of your properties rose in value during 2016, then you did indeed get wealthier. You can sell one of the properties, have more money than you started with – and you still have somewhere to live. No change in lifestyle and more money in the bank – that is good news. Of course, if your properties have gone up in value, then selling should be less of a plan than before: after all, what will you do with your money after you sell one? Buy another one? At the higher prices? If so, then why sell? And if you do not own any properties? Well, assuming you want to own one in the future, then 2016 was a bit of a shocker for you. Buying a home got harder just about everywhere, except Perth where median prices fell a few percent (source www.reiwa.com.au). So, that was 2016: a good year for property investors who own more than one property, an OK year for property owners who own the home they live in, and a crappy one for people who have not bought a property yet, but who want to. Except for people living in Perth, who can reverse the previous paragraph. Now, what about 2017?

Well, to be honest, trying to forecast short term property price movements is a mug’s game. Every year, someone predicts a fall, presumably on the basis that if you predict it enough times then eventually you will get it right and look like a guru. Which is the truth of it: property prices will fall from time to time. Double digit growth is not perpetually sustainable. Things need to rebalance. This is why we always encourage people to (i) invest in property if they can; (ii) build in a buffer (that is, don’t borrow to your absolute limit, both in terms of LVR and your ability to service the debt); and (iii) invest with a very long-term timeframe in mind, so that you can ride out the down years and benefit from the more frequent good years. For what it is worth, the better money seems to be thinking that this will be a year for moderate price growth. One of the best analyses we have seen is from NAB, who as lenders have a particular interest in getting these things right. They are expecting average national growth of around 3.5% for houses and a little less than 1% for units. These increases are skewed up by the large markets in Melbourne and Sydney. Areas other than this are expected to do less well or even see slightly negative house prices (yes, including Perth, although the NAB expect falls of less than 1% there).

Please note, though, that these expectations are for houses: apartments, especially high rise ones, are expected to fall everywhere.  Much will depend on interest rate movements – undoubtedly the two cuts in 2016, designed to stimulate business activity and boost the economy, had a huge impact on prices in 2016. Few people are predicting further falls in 2017 – and given how low rates already are, it would be hard to reduce them further anyway. But there are also few people predicting that they will increase.

The Share Market

Following on a terrific December, during which the ASX rose by 3%, January was more or less flat. This is not unusual – most of the institutions whose trading moves the market take their holidays in January, as does much of the rest of the economy. There is one thing that we can be sure of when it comes to the share market in 2017: things will likely be volatile. This is not really a prediction – things are always volatile. But with Trump having just been sworn in as President, we expect that the markets will be a little more jittery than usual. Dealing with volatile markets is like dealing with a nervous horse: it is always best not to make any sudden moves. Think your plan out and move slowly but surely to execute it. No need to buy or sell in a hurry. And no need to concentrate all your buying or selling on a single day. The economic outlook (and the economy is where companies make their money, after all) remains quite good for Australia. The Reserve Bank of Australia (RBA) is expecting growth of 2.5 – 3.5% for the year ending 30 June, and 3 – 4% for the year ending 31 December 2018. This is consistent with Australia’s long-term growth rates. This suggests no need for us to move away from our general opinion that the share market is a good place to invest – as long as you can take a long enough timeframe (ten years plus, forever looks nice) so that you can ride out any short-term fluctuations. Same thing really: don’t spook the share market horses. Act slowly and deliberately. 

 

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