Market Update – October 2017

Property Report

You may have seen an unusual headline recently. Sydney house prices fell for the month of September. Not much of a fall though: 0.1%. So, basically Sydney house prices didn’t change in the month of September. Nor did Adelaide prices and nor did prices outside of Australia’s capital cities. Prices in Hobart rose 1.7% for the month, and prices in Melbourne rose 0.9% for the month. The only capital city in which prices fell (other than that slight fall in Sydney) was Darwin.

Some commentators are looking at the rise in house prices in Hobart (which is now 14.4% over the last 12 months) and concluding that demand for housing in Hobart is rising as people increasingly find the nearest mainland capital cities unaffordable. This may well be the case, although the 12-month growth figure for Melbourne was over 12%, so demand is hardly waning in that city. It is generally accepted that population growth has been a major cause of house price increases over the last decade. For example, in the 10 years to June 30, 2016, the population of Melbourne grew by almost 1 million people – a 30% increase on the 3.7 million people who were living in that city in 2006. In the same period, the population of Sydney grew by 800,000 people, which was a 19% increase on the 4.2 million people living in Sydney in 2006. Some forecasters are now predicting that Melbourne’s population will exceed that of Sydney in the next 30 years, and that both cities will have populations approaching 10 million people within the next 50 years. Obviously, 30 and 50 year predictions need to be viewed with caution: it’s not like the person who made the prediction will suffer a substantial loss of reputation if, in 50 years’ time, we discover that they got it wrong!

But we do not need to be too specific about exact populations to understand the general point: Australia’s population is rising fast and is likely to continue to rise. Combine this with the observation that 90% of Australians live in urban communities, and the news looks good for people who own property in any of our capital cities. This is because we can anticipate something of a spill-over from the population hotspots of Melbourne and Sydney to other capital cities – much like the one that seems to explain why Hobart prices rose faster than anywhere else in the country over the last 12 months. Unless infrastructure keeps up, larger cities can become less pleasant to live in. Some media reports even say that, since 2011, Melbourne has an extra 500,000 cars driving on its roads. Economically, this should mean that Australia will continue to develop and implement large infrastructure projects. To give but one example, Perth is currently contemplating extending four of its train lines. Without becoming too technical, the role of government spending within the economy can often be regarded as smoothing private demand. That is, when the private economy is booming governments look simply to facilitate that growth (and bank substantial tax receipts from the economic growth). When the private economy slows, governments can step in with major infrastructure projects which boost demand for labour and allow economic growth to continue. The very good news for the Australian economy is that we remain a country that many other people want to live in. Immigration is high and it is hard to see that changing anytime soon. The private economy will wax and wane, but our stable system of government should see that waxing and waning counterbalanced by government spending on large projects. In short, the Australian economy looks to be in a good place, and should stay in that could place for several more decades.

 This is good news for property owners. We are, of course, talking about the long term here. In the short-term, prices will not necessarily grow. In truth, a period during which prices do not grow in cities like Sydney will not hurt: prices have become less affordable and a period of no or even slightly negative house price changes will give wages time to catch up such that housing becomes more affordable. So, does this mean that now is a good time to buy, at least in places where prices are not rising, such as Sydney, Adelaide or Darwin? Unfortunately, we are not aware of any particular property investor who has done well by ‘picking’ short-term booms and busts in the property market. Property is a long-term investment – and the long-term fundamentals of the Australian economy look very good. For that reason, it is unlikely that someone who buys quality property today will regret that purchase in 20 years’ time even if it turns out that they could have purchased the same property at a lower price 12 months from now. This means that now is probably a good time to buy in any capital city. The reality is that all of Australia’s capital cities are likely to attract population growth over the next 20 years. By world standards, they are all brilliant places to live, with stable government, good quality health and education services, decent infrastructure and – by and large! – friendly neighbours. This means that now is probably a good time to buy in any capital city. Just make sure that you can hold the investment long enough for the strong underlying fundamentals of our economy to do their business.

Share Market Report

Quite literally, the Australian sharemarket did nothing in the month of September. You can see this in the following graph (thanks, Google and Yahoo!):

October 2017 Sharemarket report

The market finished the month of September almost exactly where it began. Interestingly, the market also experienced very little volatility during the month – prices rose by just 1.4% early in the month, before slowly falling back again. This does have some commentators standing on their metaphorical front veranda, looking to the horizon and muttering something like “it’s quiet out there. Maybe a little too quiet.” But, as we’ve said before, quiet spells are wonderful in the sharemarket. After all, sharemarket investing is supposed to be boring. This has been a little forgotten lately, as stockbrokers and sharemarket analysts have become pseudo-celebrities. But if you look at the personal habits of the world’s most successful company investor (Warren Buffett), you see a calm man leading a quiet life. His main recreational interest is playing bridge and he disdains alcohol, preferring to drink CocaCola or milkshakes. (This lifestyle habit seems common amongst super successful business people. In 2011, Forbes magazine wrote an article describing the non-drinking habits of 10 successful business people. The list included Donald Trump, Steve Jobs and Larry Ellison, CEO of Oracle). So the fact that September was a ‘sober’ month in the sharemarket is a good thing. The sharemarket is a place to get rich slow, and a lack of volatility can become self-fulfilling as it discourages people trying to make a fast buck by picking the next big thing. Even better, a lack of volatility reduces the chances of ‘buying high,’ only to see an investment immediately fall.

 

 

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