2016 MARKET PROGNOSIS
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THE BIG PICTURE
Whilst we had hoped we might have been more wrong about 2015, we hope we are more right about 2016.
This year despite a still worsening economic picture at home and abroad, sales activity at the quality end of the market is set to turn upwards (though still be running at moderate levels from a historical perspective) as a slowly rising buyer pool vies for a shrinking pool of stock, the latter due to many potential sellers delaying listing their homes given their discomfort with the disconnect between the official positive line on the economy and the reality.
On the back of cheaper finance and a fast shrinking pool of alternative safe investment options this year we also expect a heightened presence in the market from a broad range of investor types, including increasingly foreign and institutional. This will give some heart to apartment owners concerned at the sheer scale of new apartment construction in and around the city that has the potential to totally flood the market, and not just short term.
There is of course that underlying concern that should there be a rapid deterioration of the Chinese economy, a correction in off the plan apartment price values, or the Chinese government have greater success than presently in stemming capital outflows, than many of the off the plan apartment sales may not settle. Given the numbers and sensitivities involved, a few crashed sales could have quite a domino effect in the market.
The flight to quality property that has been a feature of the market since at least the start of the decade will gain even further prominence this year, inner and near city areas continuing to be favoured at the expense of property holdings further afield. Again in 2016, the inner ring will be in and the outer ring out.
The now quite glaring disparity between southern capital city house prices and Brisbane’s and the fact that their booms seems to have finally peaked will see the traditional migratory path north from the southern capitals into South-East Queensland once again start to fill with traffic (though less so than would be the case were the mining boom still with us and / or if we had a more responsible and responsive state administration).
Some further shine will be regained by Queensland elsewhere because whilst there will be no letup in the fallout from the mining bust, its effects will be offset somewhat this year and going forward by a lower dollar driven rebound in tourism, that traditional second string to Queensland’s economic bow.
Housing demand generally across most price sectors will increase further generally this year courtesy of the mainland Chinese who are belatedly discovering Brisbane after having driven the Sydney and Melbourne property markets into a frenzy these past few years.
There will also be a fair increase in higher end property demand from the expat community who see the current combination of diminished opportunity abroad, historically soft market conditions in middle and top end markets here, as well as a much lower Australian dollar as an opportunity too good to pass up on.
Given these same exchange rate differential drivers, the recent boom in their property markets, and now the left-field potential of a Brexit (British exit from the EU), expect a particularly heightened flow of buyers to come from the UK (and not just be expats).
Across the state more broadly but on a less positive note, the price erosion that has been the lot for almost all types of discretionary property for most of the last decade will unfortunately continue, it’s pace ultimately determined by whether banks decide 2016 is the right time to up the ante in cleaning up their loan books.
The big4 banks are sitting on a mountain of bad discretionary property debt, much of it from the halcyon pre-GFC days, and which if sold up now would book significant losses for them as well as drag the sector down further. Whether this weeping sore in the market is lanced now of left to fester longer, the result won’t be pretty.
The market is very aware of the amount of insolvent discretionary property waiting to be liquidated as soon as any stability returns to the market (or even before if that stability is too long coming) and is avoiding the product en masse, which it will continue to do whilesoever the pall cast over the market by the insolvency issue remains.
Worse still for discretionary property is that even after the insolvency issue is addressed, it will take a full blown nationwide economic recovery to get that sector of the market back up and running at anywhere near its previous peak tempo as history shows that discretionary property values go hand in hand with (the availability of) money.
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PROPERTY AROUND THE NATION
The national residential property picture this year will be very influenced by where the respective states and their capitals sits in the property cycle, as well as by state, national and international economic dictates.
Brisbane as detailed will have a better year at the quality end of the housing market this year after several tough years that started with the GFC and were compounded by the unfortunate (and poorly managed) 2011 floods. Generally across the city inner ring housing will continue to firm as outer areas fade from falling job security. Apartments everywhere will come under severe threat from significant oversupply (present and pending).
Sydney will experience a softening of house and apartment prices across all price ranges as the market settles off its recemt peak with it’s very upper end housing market very exposed should their be a mainland Chinese retreat from the market. Like with all capitals across the nation, tough (and still toughening) economic conditions will see property values in blue collar areas come under pressure, with medium and higher density property most at risk.
Melbourne will also see a softening in prices which short of mainland Chinese buyers ramping up their market efforts (unlikely given Beijing’s drive to curb capital flight and Australia’s threat to get serious about enforcing foreign buyer rules) will be more pronounced than Sydney’s as Melbourne is far more Chinese reliant. If the Chinese withdraw from the market (involuntarily or otherwise), Melbourne could get ugly quite quickly.
Adelaide house prices at the higher end of the market will hold up relatively well this year given its relatively small size and the fact it is traditionally tightly held. The three pronged assault on the state’s economy courtesy the shrinking of its important shrinking mining, manufacturing and defence industries will of course weigh on the market’s mind but have effects that impact more on the blue collar property market than further upmarket.
Perth house prices at the quality end of the market (indeed across all price points) will continue to unwind in tandem with the deconstruct of the mining boom. Most concerning for that market should be that values still have a very long way to fall before they intercept their longer term (pre mining boom) price trend path. Investment property prices will be particularly vulnerable as the de-risk, cash up mood in the state becomes all-pervasive.
Hobart will do well this year as cashed up retirees and eco-sensitive types who have sold in the southern capitals seize the opportunity to acquire a much better standard of home for much less money than what they got for their own, and to live on the cash left over, a phenomenon that should trigger a positive ripple effect state-wide.
Canberra middle to top end values have help up particularly well despite a conservative government being in power for more than 2 years. With cuts to government spending now becoming critical in a fast faltering economy, the immediate to medium term prognosis for the nations capital will likely equate to a general softening in values. Should the government seriously take the axe (razor) to the public service, expect a downward acceleration.
Darwin’s nascent middle and upper end markets are always a hard call given they are so small and so reactive to internal and external forces. On balance though, short of any major projects being announced or moth-balled, this year expect further market price contraction, though less than in that other resources ultra-reliant market Perth.
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AROUND THE GLOBE (select countries of interest | relevance)
If you think the flight to safety for property investment in Australia is a big thing, internationally it seems it is the only thing with buyers happy to pay a premium price (and for international investors ridiculous tax penalties) to get footholds in markets deemed most safe at the time (this quite a moving target, the UK the latest to seriously move the goal posts with its no longer idle threat to leave the EU, more on that below).
Given what is known today, expect property prices in real terms in CANADA to firm, CHINA to be soft, (balance) EU soft, FRANCE soft, GERMANY firm, HK softer, INDIA softer, JAPAN soft, NZ softer, PIIGS softer, RUSSIA very soft, SINGAPORE softer, SA softer, SWITZERLAND firmer, UAE stable, UK softer, and the US firmer.
Should there be a Brexit in 2016 (a 55/45 against split today but with many undecided, very much in play), it won’t just be the UK (and particularly London) market that will be smashed, property market (and other) contagion would quickly cut a swathe through Western Europe, and given the sheer breadth of their UK property holdings, have serious ramifications in particularly Russia, the Middle East and China.
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KEY INFLUENCES CRYSTAL BALL
THE GOOD
~ The RBA finally concedes that everyone else has been right about the real state of our and our major trading partners economies (and they totally wrong) and cuts interest rates
~ A much lower dollar value brings in more investors and visitors to our shores
~ The mainland China capital flight gathers pace (despite or perhaps because of increasing efforts to contain it)
~ Fast falling interest rates see housing affordability improving further, with it the attractiveness of residential property as a secure investment (at the cost of other traditional forms like shares and cash)
~ The periodical rebalancing of eastern seabord capital city property markets ups tempo
THE BAD
~ China’s GDP confirmed to be as bad as we suspect it is (closer to 5% than the official 7%)
~ The present Chinese anti-corruption drive either too successful or unsuccessful. Neither a good outcome
~ Australia’s sovereignty rating in question as recessionary pressures and our foreign debt mount
THE UGLY
~ China’s current GDP turns out to be worse than anyone’s direst predictions (including ours)
~ Australia joins the big boys to try Quantitative Easing (with Zimbabwean rather than EU, or US consequences)
~ The Labor Party is returned to office to implement its key re-election platform policy of ending (again) negative gearing on all investment property (except new build) and halving the current tax free threshold on sale profit.
Comment:
‘Whilst this would achieve the party’s stated desire of making property prices drop right across the country (and particularly in blue collar areas where an investment property or two has become the retirement vehicle of choice), the question has got to be asked whether the minute short term financial fillip and the votes of the minority who are not yet on the property ladder (and who still wouldn’t be post implementation) is worth greatly disenfranchising the vast majority (and not just temporarily).
The folly of the policy of course doesn’t stop there. Any short term gain in revenues for the government would be far outweighed by the losses to the states of diminished stamp duty revenues from both the lower prices and the much lower turnover that would ensue (on top of which you can add the total loss of the income taxes they would have paid if they still had a job and the cost of having to pay them welfare until they find another job).
Looking beyond these immediate, most obvious failings in the policy is that as prices start to unwind, banks would understandably substantially tighten up their lending criteria to limit their exposure, the upshot being that anyone who thought they may have been able to get a loan now that the prices were lower, still wouldn’t be able to.
Indeed many wouldn’t want one because who in their right mind would want to buy a property in not just a falling market but one openly engineered at government level to fall. One can almost see Bill Shorten’s desperate sales pitch to all monied brain dead imbeciles (if indeed such an animal exists) as the market unravels from his fiscal folly. ‘STEP RIGHT UP FOLKS, HURRY UP AND BUY BEFORE VALUES DROP FURTHER’ That’s sure to fly!
Both Bob Hawke and that famous architect of the Banana Republic and Recession we (never) had to have, the real World’s Greatest Treasurer in Paul Keating (not Wayne Swan sorry) are both still physically on this planet. Just why Wild Bill (BS to those close to him) didn’t have the presence of mind to share a beer with them first (not together of course) to ask why they dropped the same lame duck policy like a hot potato from their re-election platform in the late 1980’s (the last time the Labor Party sought to punish the financially responsible for their impudent audacity at trying to be less [or non] reliant on government handouts in later life) is quite the mystery.
Certainly he wasn’t told that the vast majority of the 1.3 million Australians who have negatively geared property investments earn less than $80,000 p.a. and are predominantly teachers, nurses, and blue collar workers, all stalwart labor types. Oops! Add to that the two-thirds of Australians who own their own home will to a man (or women) revolt at the prospect of their home values dropping so that the bloated public purse can remain fat. Double oops!! Rack up another pin point accurate own goal to Labor!’
THE UNKNOWN (or GOOD LUCK - BAD LUCK WHO KNOWS FILE)
~ The impending sharemarket crash whether good or bad will depend on how severe it is and how quickly it is over with. A short sharp crash would be good for the market but a drawn out water torture type affair would not
~ ‘BREXIT’ - Britain chooses to exit the EU (not unlikely given present discontent) causing terminal fracturing of the EU, a global sharemarket crash, massive devaluations of the Euro & British Pound, and their property markets to crash (as well as have untold other ripple effects).
~ A near term double dissolution of the Australian Parliament
~ Success of China’s current drive to stem the flight of capital from its country
~ Yuan depreciation - A slightly lower yuan would be ok, a moderately lower one good, a much lower one very bad
~ Uncharted Waters – 0% Interest Rates + Negative Birth Rates + Unlimited Money Printing + Runaway Debt = ?
THE HOPE FILE
~ Queensland goes to the polls (early) this year to allow it to break the current political dead-lock
~ Bank lending margins currently at record highs come down through competition or by dictate
~ Governments state and federal don’t interfere with the natural attrition of non-competitive industries
~ If the government acts on the GST, they take the fairer path of broadening rather than raising it
~ The government addresses its spending problem (that it can control) over its income problem (which it can’t)
THE HOPE NOT FILE
~ The government tries to spend and tax its way out of trouble and / or [back] into office
~ The government decides that the many trillions of dollars Australians have in super funds would be safer and better managed under their auspices (translation: they garnish your retirement savings for their own use)
~ APRA sees fit to interfere in the market again, mindful of how cringeworthy bad was the timing of their last foray
THE WHAT WON’T HAPPEN THIS YEAR FILE
~ An Interest Rate Rise in the US, the EU, China, Japan or Australia. The latter 4 can expect cuts
~ Our government or the opposition come entirely clean on the incredible challenges facing our economy
~ Economic recovery in any of Australia’s key trading partners (except perhaps in the US, a small reward for the $8trillion dollars in debt they have amassed from money printing and other folly over the past 8 years)
~ A sustained recovery in commodity prices
CURVE BALLS
Putin’s [oil price sensitive] Russia ~ ‘beware the caged bear’ | North Korea overstep | Refugee Flood Folly | EU Fracturing | Religious Intemperance boil-over
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LEASING:
2016 to be a watershed year for residential property leasing, full of surprises for the uninformed or unprepared
THE GOOD
~ The interstate migration tide turns back in favour of Queensland, bolstered by heightened overseas interest
~ The economic reality driven trend to lease rather than buy puts upward pressure on house rents
THE BAD
~ Diminishing job security sees significant downward pressure on rents in blue collar worker areas
~ A flood of investment apartments hitting the market puts significant downward pressure on rents everywhere
THE UGLY
~ Rental guarantees for apartments bought off the plan dishonoured en masse as they were at the end of the last boom causes panic leasing in the market, sending rents plummeting and vacancies skyhigh
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THE FINAL WORD
One thing we can be sure of in 2016 because it has always been that way is that common sense at government level will continue in short supply (everywhere) and be applied even more sparingly. History shows that regardless of how obvious the most responsible course of action is, political interests and / or political expediency rarely allow its implementation.
On a slightly more humorous note (which it would be were it not so true) and paraphrasing Warren Buffett, in 2016 we will get to see who has been swimming naked, (of whom many will lose everything, except their money..)
The ultimate conundrum, what number is higher, the IQ of anyone who believes China’s official GDP forecast numbers or the claimed GDP numbers themselves?
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I hope you have a great year. There’s opportunity aplenty in adversity… (and with adversity aplenty in 2016, the year should be replete with opportunity!)
John Johnston
