What will happen to the Australian property market in 2017
Written on the 26 January 2017 by James Cagney
(A 5 minute Read)
In the article I wrote last week entitled "What happened to the property market in 2016´ (click >>> PROPERTY 2016 if you have not read this information) I mentioned that for you to make money in property you need to understand:
Macro and micro economics - the property market do not operate in isolation it follows the trends and cycles. I covered this in greater detail in an article I wrote click >>> INFLATION and SURVIVE & THRIVE.
Demographic trends - it is about the spending capability and patterns of the demographic groups. I covered this in several articles I have written and a good place to learn about this is >>> THE BBB CYCLE
Federal, State & local council plans - plans for immigration, major infrastructure spend and mining development are where the jobs and rental demand will be.
Big business and large commercial plans - this is where the companies who have spent big money on research are going to invest and you should take note.
Property Cycles - what goes up will inevitably come down. We forget the falls of the past, put on blinkers and believe the market will continue to rise. I wrote an article on how the property cycle actually works and this is vital so click >>> PROPERTY CYCLES
The media hype - avoid at all costs what the media are saying about the market. Do your own research. Read below to find out more about this.
So what we will focus on in this article is Micro and Micro economics that we need to take note of that will affect the property market in Australia. We try and to ignore what is happening global because it's too complicated and we are too busy making a living to think about that. After all why do we elect our politicians they should take care of this. That is why they get paid the big money. Wrong - the politicians are too busy looking after themselves.
Not that we individually can change the economy of Australia let alone globally. Let's look at what the experts are saying about the economy of Australia in 2017.
In the Mid-year financial Forecast delivered by the government for the 2016-2017 they announced:
So how is the government going to fix this problem. The Government is cutting $250 billion in expenditure and already has a $22 billion saving since the election in 2016
I agree that we need to cut expenditure because the government cannot continue spending above their means but in the short term these cuts will not generate consumer confidence in Australia. The government predicts a return to surplus by 2020-2021, which is what the economy needs to do in order to save our AAA rating.
These cuts in government expenditure will not go down well with welfare recipients and the aged. Therefore the Labour Party will be well placed to win the next election. There goes any hope for a return to a surplus as Labour once again gives away the farm.
Let's look at macro-economic factors that will affect 2017:
Commodity prices increased by 40% during 2016. Local real estate agents in Mackay, Gladstone, Rockhampton, Emerald, Perth, Kalgoorlie and Port Hedland will be spruiking that their property market is in recovery. Many investors will run off once again and buy property in regional areas thinking the mining boom is back.
However, one of our commodity major trading partners economy is in turmoil. They say they had a 6.7% growth in GDP in 2016 but you can't trust the Chinese government figures.
China is about to float their currency. Most economists believe that the value of the yuan will decline as much as 10% which will make the price of Australian commodities more expensive. The Chinese steel industry is already in strife and predicted to decline by 250 million tons in 2017. In addition the Chinese property market is in oversupply and with the government cracking down on currency leaving China. This does not look good for the commodity market and I would not be investing in regional mining towns just yet.
This is a typical example how micro economics affects the property market. You have to take an eagle's view (macro-economics) as well as research what is happening on the ground (micro-economics).
Another example is the Reserve Bank of Australia's (RBA) crackdown on investment property investors through the Australian Prudential Regulation Authority (APRA). The RBA is concerned about the high prices of property in Sydney and Melbourne and an eminent bust in the property market. I agree that Sydney and Melbourne are overpriced but talk to people in most regional areas. The growth rate is shocking and they feel that they should not be penalized by the government because of the Sydney and Melbourne figures.
Because of the stringent criteria APRA has placed on the banks they have raised interest rates between 0.25% and 0.5% and there are more increases on the way. So even though the RBA cash rate is 1.5%, bank interest rates on investment property is moving to 4.5%.
The stricter lending criteria for Foreign buyers by APRA will create huge problems in the Central Business Districts (CBD) around Australia. These investors were duped by slick sales people who spruik that the unit they purchased will increase in value by the time the high-rise building is completed making it easy for them to resell and finance. Well the bad news is there will be no growth because of a huge oversupply in units in these CBD's. In addition many of the banks are only financing 70% maximum of the unit purchase on the valuation of the property.
Let's look at the maths:
A two bedroom unit costs $900 000 but because of an oversupply the valuation comes in at $720 000. The foreign investor put down 10% deposit at purchase. The bank will only lend 70% on the valuation of $720,000 is $504,000. Investor needs to come up with $396,000 less their initial deposit of $90,000. Then they have to pay stamp duty on top of that plus legal cost and bank charges. The States have jumped onto the band wagon are charging foreign investors a levy on top of stamp duty.
The State Governments are very quiet about all of this because one of the major reasons that property is expensive in Sydney and Melbourne is the excessive stamp duty they charge. The NSW revenue from stamp duty in 2016 is in excess of $8 billion up from $4 billion in 2012. Hold on weren't they supposed to drop stamp duty charges with the introduction of GST? Fat chance they need the money.
In addition you have councils who have excessive red tape on land development and building permits which adds to the cost of property. Council employees' flexing their muscles to justify their jobs putting hurdles in front of business people who are trying to have a go at making a living from property. Scandalous and a waste of resources and in the end it is the consumer who pays.
You might think that this is good because many of these foreign buyers will default and lose their deposits and the developers will score. On the contrary Developers need completed sales to satisfy the bank's lending criteria. In a market that is oversupplied the developers will have thousands of units which will come back onto the market that can't sell. The banks are ruthless - they will call in these developer's loans and many of them will go bankrupt. I saw this happen on the Gold Coast during the Global financial crises (GFC). Long standing reputable builders and developers became bankrupt and independent contractors were left in the lurch. Then the next wrought comes into play - Administration companies who get paid millions of dollars to wind up these bankrupt developments whilst independent contractors suffer.
Once again a case of macro-economics unnecessary controlling micro-economics and to the detriment of the consumer.
Last but certainly not least President Donald Trump. I must admit I was inspired by his inaugural speech. Building roads, bridges, railroads, manufacturing to get Americans off welfare and working again. Bringing back the national pride. I particularly liked his point of making politicians accountable and to stop them playing games. I think that would be a good policy for Australia. I wrote an article about Australian politics entitled "Bring in the Clowns" which is a good read so click >>> CLOWNS.Back to Trump's policies. I have read numerous reports from reputable economists and his announced policy of cutting taxes for businesses and individuals will not support his mammoth plans of expenditure to create jobs.
His plans to dismantle Obamacare will also take time going through the two houses of government and it is hard to take something away from the public. It is like giving a child candy and snatching it back from them.
However Trump's election is a great example of how macro-economics works to effect micro-economics. People need hope and dreams and he is an expert at creating this. Hope creates consumer confidence and people spend more.
Make no bones about it - the state of the American economy directly affects Australia and so we can expect some of the consumer confidence to spread to our country. However, do not get too excited. We have to take demographics into consideration and the large aging population in the USA are unlikely to run out and spend more. They know they are living longer and need their money particularly for their health care. The tax cuts favour the wealthy more than the middle classes and the poor. The wealthy do not need to run out and buy more consumer goods - they already have what they want.More about Demographics and Spending Trends in the property market in the coming Finance and Property Update.
Next week's finance and Property Update we will discuss the affect Big Business and large commerce expenditure on the Australian property market in 2017.
You need to take advice from someone like James Cagney who has the motivation, time and energy to study macro- and micro-economics and its effect on our property market in Australia. If you are interested in investing in property give James a call on (+61) 416 137 645 or click >>> HERE .
This is not financial advice. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Thank you to the resources of Terry Ryder, Property Observer, The ABS, BIS Shrapnel, Michael Matusik, Property Monitors, Colliers, On the House, Corelogic, RP Data, Residex, SQM, Herron Todd White, NAB Residential Property Survey, Australian Bereau of Statistics, Peter Wargent, Port Phillip Publishing, Economy & Markets, Harry S. Dent and the many others for the material discussed above.
Author: James Cagney