Market Volatility

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The current volatility of the world economy will have some significant ramifications for property investors, owner occupiers and developers alike.  At this point in time, it is too early to tell just which way the market will go.  Historically there has been a link between the ASX performance and housing finance approvals.  When the ASX has dropped, finance approvals have followed the trend.  Essentially this means less supply into the market.  However the timing of the Queensland Government housing stimulus package may initially provide some form of a buffer.

With less supply into the market, one could make the assumption that rents will increase because in theory vacancy rates will tighten.  This is particularly true if you believe that Australia has an undersupply of residential property, the author does not share this opinion.  However (and there will be a few of those), there is an expectation that employment will soften as a result.  With Bluescope Steel making workers redundant and Qantas threatening to send jobs offshore, there is a very real economic restructuring taking place in Australia.  Already the most recent (July 2011) data shows that this is the case.  So people are going to be cautious about outlaying more of their income in rents.  Investors shouldn’t be seeing the potential tightening of the vacancy rates as an opportunity to lift rents. 

On the upside of this is that interest rates may actually start to fall.  Again it is too early to determine whether this is the case as the last quarterly CPI data came in at 0.9%.  This is outside the RBA’s guidelines of an annual band ranging from 2.0% to 3.0%.  So whilst inflation is up, many of the country’s major employment sectors are struggling; in particular retail, manufacturing, tourism and property to name a few.

With property prices having declined in most capital cities, the RBA would actually be quite happy that this is occurring in a very orderly and gentle manner.  The last thing the RBA wants is for house prices to drop dramatically like they have elsewhere in the world, which is unlikely given the strong fundamentals of our economy.  However they would like to see it become more affordable.  With annual wage growth continuing around 3.5%p.a and property prices softening, the affordability equilibrium will by default occur sometime within the next five years if current trends continue.  This is based on the assumption that no value shocks occur over this period of time.

One thing we can be grateful for, is that if the market and economy should start to trend into a major downturn, which is unlikely so long as China and India continue to experience such massive domestic expansion, the RBA does have quite a lot of stimulatory power with the cash rate at 4.75%.  With the start of the GFC in 2008, the RBA demonstrated it was prepared to move swiftly in order to help the economy through the tough times.  It will do so again if it feels the need to and if inflation is under control.

At present the property market is suffering largely from a lack of confidence.  This could not be more evident than in Queensland and W.A.  Both capital cities, and in particular their surrounding regions, are experiencing some of the toughest conditions on record.  If you believe in the longer term fundamentals of both of these capital cities then there are some very good buying opportunities to be had.  What the purchaser has to be sure of in their own judgement, is whether they are getting great value or market value.

One thing is for sure though, whether the market is up, down or sideways; most people have to buy and sell in the same.  The gap between the mid range properties and the top priced properties has shrunk considerably since 2007 in almost every market in Australia. 

The difference this time round is that the general public are arguably not as highly geared and unlikely to face the extraordinary number of margin calls seen through 2008.  What we may see is the market go back to working counter cyclically.  Residential property may be seen as a safe and defensive strategy in these uncertain times when shares have become and remain highly volatile.  This may prove particularly true for those approaching retirement who look to spread their risk across a number of different investment classes.

Confidence surrounding our economy, the international events of a “not so bright American congress” and a well put description that “rumour is treated as fact before it can be verified” continue to cause waves of instability.  Combine this with the carbon tax that is as clear as mud to the average person on the street and Australian’s are keeping their hands warm in their pockets.

What we all need to do is believe that Australia is essentially sound at present.  Our banks are solid and until the author hears differently, this takes a lot of risk out of the broader international turbulence impacting individuals.  China and India are strong and this is where Australia’s trade is focussed.  If this were to cease, then the picture changes dramatically.  The nation is for all intents and purposes at full employment despite the slight rise in unemployment.  In terms of stability, property has been resilient throughout recent adverse conditions and doesn’t show any immediate sign of a value crash.  For some, the buying opportunities and conditions to negotiate a deal may never be better.