Where is the Australian market heading?
This week we’re looking at where the Australian market is heading. Last week we spoke about what has shaped the property market in the past, but now we’re looking forward.
In this episode we’re going to cover:
- Inflation – disinflation.
- Increase in regulation, the effect that an ageing population is going to have on property.
- The change in the economy and what that means when we are moving from a mining based economy into the future.
- The shift from full-time to part-time jobs and the Uber economy.
The property snake and disinflation
Last week we called it a property ladder because most people can get on the ladder and are being pushed along by a variety of things. I’ve recently called this one a “property snake”. Think of it like the game of snakes and ladders. Everyone has played the game and it’s really a roll of the dice. I’m not saying it’s just chance, but, in the past, you had to get things pretty wrong to not make money. Now circumstances have changed and if you’re not careful, you could hit a snake and slide down to where you were before.
What we’ve got moving forward is a disinflationary concept, meaning there’s not much price growth. So in real terms we see prices fall and value falls from those things.
I.e. if you were to assume generic prices for things we buy every day is going to fall, then there’s a variety of things that sync with that and affect the market. One is increasing financial regulation which leads to changes to the way people can borrow money.
A good example of this is the involvement of the Australian Prudential Regulation Authority (APRA) – a government associate that regulates the banks. Because of the increase in property prices, APRA said they don’t want the banks’ portfolios to grow more than 10% as investors. They also want them to be more focused on owner-occupied rather than investors, so they’re making the bank pay more for their money. That then impacts the market. There’s going to be more aspects slowing down parts of the market (probably for good reason) but these regulations influence it.
This means that instead of finding 10% deposit, now investors have to find 20% or 30%.
It changes the borrowing capacity. This smoothes the peaks and troughs out but it does have an impact overall on the market.
We have a population that is getting older. The beauty of Australia is that the ageing population is only a short-term thing. Because we’ve had a baby bonus and strong overseas migration, most are young (the average age is in their early 30s) and most have children or want to have children. We have a market coming through that will be able to pay for things in the future (assuming they have jobs). On the short to medium term, the ageing population spend less on housing and downsizes, which is a drag on property costs.
We’ve also got a changing economy, which is important to understand the job impact and what they get paid. We’ve seen people in the mining and resource industry dropping off being replaced for services like retail, tourism, education and health. The overall pay rate per annum is a lot lower in these fields. Construction at the moment is going up, so there are more jobs but they’re still not getting paid as much.
There are more part-time and full-time jobs going forward which is going to change and shape the economy.
We haven’t been overbuilding. There is an underbuilding in things that suit the market, such as stock for people earning less money, people working part time jobs, and the increasing number of people sharing and compromising their housing. This market hasn’t been supplied.
We need things like dual living so people can live 2-3 people per house independent of each other. It could also be more townhouses with a lot of bathrooms so people can share and have storage.
These two things have not been supplied, specifically in the mid-awning suburbs.
Take away points from this episode:
- We’re likely to hit a slower period moving forward and smart investors will look for yield. It’s about rental return. You can manufacture a capital growth, but moving forward it’s about getting and buying for a rental yield rather than just capital growth.
- An increase in financial regulation. It’s important to be aware of it, part of the market and working with professionals to understand that.
- Ageing population – single story products and thinking about that market.
- More part-time work instead of full-time jobs will affect the rental demand, therefore look at your investments with this in mind.
- Essentially, we’re going to see yield become a major driver in the market.
- Overbuilding and underbuilding. People are looking for owner-occupied products in areas they want to live and have access to everything, not just small boxes on the outside of town.