Market Update May 2017

 In Market Update

Property Update

The property market did a most unusual thing in April – it went down in Sydney! Media reports late last week revealed that one researcher, CoreLogic, had observed a 0.1% decrease in Sydney house prices in the first 27 days of April. The other ridiculously hot Australian market – Melbourne – still rose by 0.5%. These figures are for one month, so a rise of half a percent in one month is not exactly a massive cooling, but the drop in Sydney is significant. Other major cities had mixed results. Perth fell by another 1%, as prices continue to adjust from the highs of the mining boom. Canberra fell too, while Hobart, Adelaide and Brisbane all rose. The size of the Sydney market, however, meant that the overall national trend was down. The change in property prices in the major markets probably reflects two things. The first is logic: prices cannot keep going up forever. After all, the only thing that causes prices to rise is demand from buyers. The more people who want to buy property, the higher prices go. As prices rise, fewer buyers can afford to buy, which cools demand – and takes the upward momentum out of prices. This only holds, of course, if the number of homes for sale (supply) stays the same. If demand and supply both fall, then prices may not change. If demand falls and supply increases, then prices fall even faster. This is what happens in an ‘asset bubble’: prices rise while more people are buying and few people are selling. The bubble then ‘bursts’ when significant numbers of people want to sell. To attract buyers, a seller must accept a lower price – and if this happens en masse then overall prices can fall quickly. There is no indication of an increase in supply in the housing market, so it looks like the change in the price trend is due solely to fewer people wanting to buy. The second reason for dampened demand is perhaps the increase in certain interest rates being charged by the major banks. The increases tended to be on investor

loans, such that the cost of borrowing to buy an investment property rose. This may well have reduced investor demand. You have to hand it to the banks, here. The interest rate rise on investor loans happened without the RBA increasing its target interest rate. Normally, banks only change their property loan rates when the RBA changes its target. This is done for marketing reasons, mostly: home loans are such a political football that a bank that raises them without a ‘lead’ from the RBA faces a public relations crisis. “Those greedy banks!” But not this time. This is because much of the media commentary has become anti-investor in recent months. People in the hot Sydney and Melbourne markets feel that it is investor demand that is pushing prices skyward, and they may well be right. So those investors get little sympathy when asked to pay higher interest rates to their lender – even though this is really just a chance for the banks to create greater profits for themselves. This is another reason why it will be hard to go broke investing in Australian banks (provided you do prudent things like buy over time to manage timing risk). They are simply very good at making money in the Australian economy. For what it is worth, most people are actually of a mind that the Sydney and Melbourne markets have become a little silly. Most people are hoping for what is known as a ‘soft landing.’ This is where the rate of growth in prices slows, maybe even becoming slightly negative, but things do not get so bad that people feel forced to sell their home: which is what happens if a bubble bursts. The econocrats in positions of influence in the Australian economy have shown themselves to be pretty good at managing soft landings in recent times. Here’s hoping for another one.

Share Market Update

April was also a pretty quiet month in the share market. The ASX 200 started the month at 5,864 points and finished it at a little over 5,900 – about a 0.6% increase. Nothing major in that. Here is how it all looked on Google (the 0.04% refers to the change on the last day of the month):

We have said it before and you may be starting to find it boring when we say it again: this is actually a good monthly result in a share market. The longterm trend for the Australian economy – and hence shares in companies that participate in the Australian economy, such as the banks we discussed above – is a good one. This means that April was right ‘on trend‘ – a gently positive month where your share investments (including investments you might hold in things like your super fund) ended the month worth a bit more than they started the month.

People who do well investing in shares treat the share market more like a library than a rollercoaster park.  They like the slow and steady. So shhhh.

Recent Posts
Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Start typing and press Enter to search