Written by Michael Matusik and originally published in the Matusik Missive.
It astonishes me that we still keep on reading about Australia's pending housing market crash. Moody's is the latest commentator to join the chorus singing for caution on the Australia residential market.
Sadly, most overseas commentators don't understand the nuances of the Australia property cycle or how mortgages are granted and must be repaid in Australia.
Yet despite forecasting absolute doom about five years ago, our 'property correction' actually went sideways since the late 2000s. And now the residential market is set to recover.
I am quite bullish about the outlook for east coast residential property and in particular in Sydney, Melbourne and South East Queensland.
I have several reasons for being so. These include:
- Undersupply of new housing stock, especially in New South Wales and Queensland.
- Declining interest rates in concert with low bank loan to value ratios adn our current high saving rate.
- Expanding population.
- Tight vacancy rate.
- Lower Australian dollar.
- Declining stock listed for sale; less private treaty discounting and shorter time on market plus increasing sales volumes.
- Rising confidence i.e. The Westpac/Melbourne Institutes "good time to buy a dwelling index" which is close to its pre-GFC high.
We currently are saving like there is no tomorrow. Over 10 per cent of what we earn is now squirreled away; more so when you include the reduction in our level of debt.
But is this really the new normal? I have suggested such myself, but I am really starting to wonder. A poor federal Labor government (there is nothing else one could say) and flat house prices might be more responsible for our current malaise than the financial crisis or slower world economic growth.
Surely, assuming a change federally, a realisation that money in the bank now earns very little, and once the penny drops, that house prices are increasing (a broad residential recovery nearly always starts in Sydney), surely Australians will revert to their traditional form of tax free or ATO assisted saving – property. I cannot see any other major investment path forward.
The ability of SMSFs to borrow to buy property plus the last chance (in their minds) for baby boomers to leverage and make an easier buck before they retire (or re-tread) just adds more fuel to the fire.
Ditto overseas buying in Australia. Australian property is now close to 20 per cent cheaper than it was six months ago. Chinese money is looking for an investment home, especially as their home economy declines and restructures.
According to a recent survey by NAB, foreign buyers of new Australian residential property have doubled in the last two years. Foreign buyers now buy one in every eight new homes sold in Australia, up from about 5 per cent in 2011.
Expats wanting to come home are also on the increase. Keep in mind that one million Australians live abroad and the previous high Australian dollar (plus HECS payments) has kept them overseas longer than many originally intended. The Rudd and Gillard show might have keep me away too, if I am being honest.
Plus, we have the new 888 significant investor visas, which allow overseas migrants free reign once approved and if they invest $5 million in an approved security. This will have a big impact on the top-end of the residential market. My work with the Brisbane Chinese community suggests that quite a bit of this visa money will be invested in SEQ.
Finally - and these comments are somewhat more speculative than my usual conjectures - as bank deposits (and our savings) start to be withdrawn and placed in more attractive investments, won't the banks need to continue to build shareowner wealth/returns.
They have quite a bit of room to play with - a very large interest rate margin (currently 3.45 per cent between the cash rate and the standard variable mortgage rate) plus very low loan to value ratios for existing loans (around 50 per cent).
I think that they will start to chase market share, dropping mortgage rates and loosening lending criteria in order to secure more home loans. More sales will take place as a result. Prices will rise even faster.
We are surely about to enter another residential upturn.
Property along the east coast - and especially in the three main capitals/plus on the Gold and Sunshine Coasts - will be the big winners.
A baton change must happen from resources/mining to residential construction. As interest rates (given the federal and state deficits) are the only tool in the shed, they will continue to fall until new residential construction lifts and stays high for some time. We won't get any joy this time around from the commercial sector, with office vacancy rates in double figures and the demand for new retail space in decline. Residential, this cycle, will have to do most of the heavy lifting.
As a result, some are now forecasting that the cash rate could fall another 0.75 per cent to 1.75 per cent within the next 12 months. I think the cash rate will go to 2 per cent by Easter 2014. Anyone want to place a bet?
Property values are set to rise and they will most likely overinflate (like they usually do) as a result. I think the residential market will enjoy much better times post 7th September and will remain buoyant for about two or three years. Prices then will then need to correct.
I don't really know how much they will increase in the next, say, three years, but by as much as 25 per cent isn't beyond the realm of possibility. Who also really knows how big a future correction will be. It might be another long fizz like the last five years or a sharp plunge.
The key is to invest and not speculate.
In summary, it is pointless saying that things are different this time around. Property cycles and all of the hallmarks are there to see that a recovery has already begun. We need a residential recovery. We need more new housing starts. The RBA will make sure we get one.
It's game on!