Why this property market won’t derail

Written by Mark Thomas

22 October, 2019

The recent property market upturn has surprised many market commentators, and some would argue it keeps surprising. Just last week, the volume of sales expanded to 1,200 odd properties in Sydney with clearance remaining above 80%. 

Australia’s world record 110 quarters of growth has been a precursor for a sustained property market upswing.  Some are now calling for a recession with signs of weaker consumption and export growth.

We think not.

While there are many risk factors that could derail the economy there are also many reasons why Australia will continue to grow.  

 

Positives Negatives
Long term infrastructure spending by the government Trade wars impact export income as commodity prices weaken
Low government debt provides fiscal options ie tax cuts or handouts Low wage growth reduces consumer spending
High levels of household debt imply lower rates will have an immediate effect on economy Slower property sector produces less tax revenue

 

A slowdown in economic growth implies rising unemployment. Uncertainty of employment trickles down to reduced consumer confidence and with this a slower property market as there are less buyers.

Every day we read that the US and China are at (trade) war and this is slowing down world growth prospects. The world spent the last 30 years globalizing and removing trade barriers. Trump has raised tariffs with China to win votes and “make America great again”.

Globalisation was good for Australia – a price taker for most of the things we sell like coal, iron ore, wool – and Australia is exposed to a world with restrictive trade practices. Particularly, Queensland and WA rely heavily on exporting resources and would be hit hard while the more diverse states of NSW and Victoria would muddle through.

But there are strong domestic factors such as long term infrastructure projects offsetting these global worries.  

The NSW budget highlighted a $93 billion infrastructure spend. This large spend will contribute to more than 40 road projects across western Sydney and create jobs. About 2,000 people are now working on road projects and this predicted to grow. 

And then there’s the longer-term project – Western Sydney Airport – where construction began last September.  These projects will go on for a decade.

Premier Gladys Berejiklian announced plans to spend nearly $3 billion recruiting 5,000 new nurses and midwives over the next four years. “This is unprecedented. We have never seen a boost to the workforce done on this scale,” Ms Berejiklian said at the time.

The Australian household has also been tagged as the second most indebted group in the world behind Switzerland. Looking at the numbers it is clear that this trend is alarming, but we must remember that household debt is backed by property. This is not debt that was built on irresponsible spending on luxury cars, expensive wines and branded jewelry.

Commentators are suggesting that a rise in interest rates would most certainly cause a recession given the indebtedness of Australian households. But interest rates are going down and the RBA will monitor those issues, I’m sure. 

I am of the opinion that the argument should be reversed in the short term ie a high level of indebtedness is a key reason as to why the property market will continue into some sort of sustained uptrend. With every drop in rates there is a positive and meaningful impact to the consumer’s budget.

Australia is a world record holder with 110 quarters of uninterrupted growth.  The lucky country has dodged the Asian crisis (97), Dotcom boom & bust (2000), GFC (2008) and most recently the Chinese led resource boom & bust (2014). 

With nine Prime Ministers in 27 years this success story may not be reflect great leadership… but something is going well for Australia.  Structurally the economy is in great shape with emerging tech sectors in education, agriculture, medicine and finance and the $A acts as a shock absorber when world growth slows making Australia competitive,

We will be discussing these economic challenges at the upcoming Property Buyer & Investor Expo on Saturday 26 Otober at 10:30am. We will be looking at how these could challenge or propel the property market recovery. Get your free tickets here