Precious metals soften, new home loan finance rebounds

In times of uncertainty, the market will grasp at any headline about an asset class as a means of making sense of what is happening. Big banks forecasting possible house price declines of greater than 20% is just one example.  During these downward cycles, typically precious metals like Gold and Silver work in a counter-cyclical way. In the world wars, both metals were considered as running money. That is, if you had to leave home quickly and your currency was worth very little, gold and silver would always be worth something. Worst case scenario it may even save you or your family’s life.

At NPR Co, we take an ongoing interest in monitoring the price of these precious metals as a sense of gauging where optimism is pointing, just as we do in the stock market and the value of the Australian dollar amongst other economic data sets. During periods of uncertainty, both Gold and Silver rise, when times are good, outperformance in this asset type is difficult to achieve.  As the world gets closer to finding a vaccine, there has been a noticeable erosion in the value and sentiment towards precious metals. This can be seen in the charts below where Gold is represented first, and Silver in the following graph.

Silver has been arguably more value challenged of late and if this was to be considered as relating to a capital city property price, media discussions would recently have centred around pricing bubbles and long tern unsustainability given the dramatic increases. Whether the current correction is an anomaly or not is yet to be determined. It does however appear to be under pressure.

Many of the banks have now softened their position on what the outlook is for residential property throughout the country. Whilst there is a general acceptance that some investor style product will not be fit for purpose, the broader owner occupier market has not only proven resilient in many capital cities, it has actually demonstrated the unusual circumstances where government stimulus is translating into more new starts. Cities that were not overly exposed to a glut of apartments, yet constrained by their land supply through regional boundaries have fared quite well. This has been particularly noticeable in the urban fringe and regional centres where this stimulus has had a much greater impact.

From the low point in May 2020, the loans for investment properties is up 12%, whilst owner occupier finance has improved by 17%. In many respects this is counter-intuitive to a period that has gone through a lockdown and experienced its first recession in circa three decades. As we have stated before, this is far from a typical recession and most Australian’s actually understand that this started as a health related problem, rather than an economic issue that characterised the GFC. If there are more new loans, then there is undoubtedly a level of optimism that is not necessarily translating into the data; or perhaps the commentary is more Melbourne and to a lesser extent, Sydney centric.

Perhaps one of the most unusual circumstances is that in SEQ, many suburbs have actually transitioned into a sellers market over the space of five months this year. This has happened at a significantly more rapid pace than the NPR Co believed possible, particularly when the pandemic was in its infancy. However the opportunity to work from home for one, two or more days a week has meant that people are considering moving to more lifestyle oriented destinations and dealing with the commute when they have to. In some instances, the author is aware that consultancy firms are encouraging this as a means of growing their geographic footprint without having the higher overhead costs of setting up an office in the short term. Hence both coasts are in high demand, as is park residential which was a challenging market as little as twelve months ago.

If we get back to the headline though, one has to wonder whether individuals and organisations are moving their weighting out of precious metals into other asset classes that yield and provide taxation benefits. Is there an expectation that precious metals have run their course in this cycle and that a vaccine is just around the corner? If this is right, the exuberance that the market experiences could see a sense of optimism not experienced since the early 2000’s, however should multiple waves of covid force ongoing lock downs and border closures, then this growing positive sentiment may well prove short lived and misplaced. The author’s expectation is for a continued improvement across many real estate sectors. Perhaps the real risk in 2021 is whether cheap interest rates fuel price growth above acceptable levels assuming confidence returns to the heights seen at the start of 2020.

Matthew Gross | Director