Welcome to the WINTER edition of HOME TRUTH summarising Brisbane’s prime housing markets.
In this edition beyond the usual market narrative we ask how it is banks are able to get away with charging a 200% – 300% premium over the RBA’s benchmark interest rate in an OECD world where around 20% represents the norm...
Firstly though as always…
YOUR 10 SECOND MARKET ACTIVITY SUMMARY
~ Inquiry – Moderate
~ On Show Attendances – Moderate to High
~ Listing Activity – Very Low
~ Negotiating Activity – Moderate to High
~ Conversion Index – Low to Moderate
~ Auction Success Rate – Low to Moderate
~ Disparity Index* - High 15%
*The Disparity Index is the percentage difference between what buyers and sellers think the same property is worth
THE MARKET IN GREATER DETAIL
HOME FRONT OVERVIEW
With the spectre of the deconstruction of negative gearing safely behind us, the Banking Royal Commission having ended on a predictable whimper with banks being thoroughly flogged with a feather, and with that other market villain APRA now that the scope of the disaster from their unheralded and inane intervention in the market so well documented they’ve become an embarrassment to the government that commissioned them having been told to lay low for a while until things cool down, the way ahead for the residential property market seems clearer of man made obstacles than it has for some time.
Certainly rising interest rates are not a threat to the market anytime soon, this because they will continue to go the other way, though true to RBA form probably still belatedly and at a slower rate than they should because someone in there either believes Australians still can’t be trusted with 0% interest rates or they don’t wish to bear the ignominy of publicly accepting that their repeated warnings that the next movement in interest rates would most likely be up was far removed from reality (and flew in the face of an Everest size mountain of evidence at home and abroad to the contrary).
The removal of all the hand crafted impediments to the market you would think should quickly engender a solid market recovery or in Brisbane’s case an immediate one in the form of a resumption of the cyclical post southern capitals boom catch-up that was so rudely interrupted by the curved balls noted above.
In an ideal world that would be the case but real estate like so many forms of investment is very sentiment driven which is why it tends to always overreach when rising and cooling post booms as evidenced in Sydney and Melbourne recently.
That said, pure fundaments should dictate a resumption of the cyclical Great Northern Migration as we like to call it. It may be subdued at the start (though it also may not) but once it gets some traction, the sheer weight of the price disparity between our feeder markets of Sydney and Melbourne and ourselves should give it considerable momentum.
Regardless of where you stand politically, that we now have a majority government at the federal level will give some much needed stability to the market moving forward.
The temporary auction ‘curfew’ caused by the combination of last year’s man made market curve balls, given they have been largely removed or have eased, means it’s pretty much back to business as usual with the exception that until bank lending gets fully back to normal longer than usual lead up times to auction day will be the norm rather than the exception.
PROPERTY AROUND THE NATION
Starting at home, BRISBANE while still somewhat under the weather from the raft of politically motivated interventions that proved so damaging to all markets around the nation is clearly on the mend and fundamentally given it has not yet enjoyed the full fruits of the cyclical eastern capital city price rebalancing should recover faster and more assertively than most other capitals and certainly the big 2 in Sydney and Melbourne who are coming off booms where our own had only just started when things went off the rails last year when the politicos saw fit to try and manipulate markets for their own ends. Despite the ups and downs, Brisbane’s average house price continues to hold in the low $500,000’s with a slow firming bias.
SYDNEY understandably given it is at a different stage of the cycle is a different story having thus far eased some 15% or so from its highs and given the speed at which it has done that may indeed test the traditional 15% that is the usual lot for a post boom correction. Some are saying that it could settle a full 25% or more off its peak but fundamentally such an outcome is unlikely, indeed even a 20% broad correction would be greatly resisted by fiscal fundamentals of the market. The further slippage sees Sydney’s average price now just over $900,000 but with a continuing easing bias.
MELBOURNE in a belated lock step with Sydney continues its settling phase in the market which as previously touched on given it’s Chinese weighting could see it ease further before it finds bottom than Sydney though its strong predicted population growth may cushion the fall. Again, any settling of more than 20% from peak would be extraordinary, unlikely and unprecedented. Melbourne’s average house price today is just under $700,000 where it is currently exhibiting a relatively strong easing bias.
With it’s key feeder market Melbourne having caught a cold, ADELAIDE has stalled for this cycle and if history is any judge should ease off it’s recent highs from here. The easing won’t be assisted demographically with Adelaide the capital with the least positive population increase prognosis. It’s average house price remains in the mid $400,000’s.
PERTH despite a strong and now prolonged rebound in commodity prices continues its strategic fall from property price grace which in the space of a decade has taken it from the nations dearest capital to today where it is now vying with Hobart as the cheapest, Hobart’s median house price having almost doubled in the same time Perth’s has come off by more than 30%. Perth’s average house price today is holding tenuously in the low to mid $400,000’s.
CANBERRA’s recent price pause may now extend given the recent federal election outcome which whilst not necessarily bad for it’s market would probably not have been as good as the more pro-public service weighted alternative outcome might have. All that said, given how fraught any attempt or even hint at taking the foot of the public service spend accelerator is, at worst their market should only stagnate for the next few years. The current average price in Canberra is steady in the low $600,000’s.
HOBART is now easing off what has been an incredible boom that has seen it’s average house price almost double but which will now likely see a typical post boom settling of around 10% off peak (or up to 20% down if the planets align badly). The current average price in Hobart is at a very healthy low $400,000’s but on an easing bias which may gather momentum short to medium term as the market accepts that the boom is over and profit taking takes off.
DARWIN as a Perth in miniature continues in the doldrums generally but worse is beset with a level of debt that makes any short-term economic recovery highly unlikely, particularly now that a federal government bailout is far less likely than it might have been had their been a change in Canberra. The northern capital’s average house price continues to wallow in the low $400,000’s which on the positive side given Darwin’s always exorbitant rents makes returns on investment seem very high.
The COMBINED CAPITALS average given the ongoing slippage in market leaders Sydney and Melbourne continues to erode and today sits in the mid to high $600,000’s and could get further into the mid $600k’ by the time the two big capitals find their new post boom floor.
The US market remains relatively unchanged since our last update and remains relatively robust. Positively for the US the recent threat of further interest rate rises has abated to be replaced by the likelihood that the next move in rates will be down. That won’t hurt affordability and will probably give the sharemarket some fresh impetus.
The Chinese & Hong Kong markets have experienced a rare decoupling over recent times with China’s market broadly remaining relatively subdued at the same time Hong Kong has seen a positive turnaround in its fortunes to again be in record territory. Presently in Honk Kong there is unrest perpetuated by the mainland on a scale rarely seen in the territory which were it to continue could have ramifications for both markets.
Europe is becoming an increasingly mixed bag as demographic and economic fundamentals regain primacy amid the uncertainty of a post Brexit EU world. That is seeing a pronounced flight to safety despite a recent EU wide rededication of QE (Quantitative Easing) stimulus efforts which will probably only translate into the stronger member nations markets continuing strong or strengthening at the expense of those less so (Italy, Greece et al).
Across the channel in the UK at the very coal face of Brexit uncertainty the ride is so wild even people in the know on the ground are confused. A falling currency often the friend of the market is no longer necessarily deemed so given the uncertainty around how much further the pound could fall. Regardless of currency movements people are starting to wonder if indeed post Brexit foreigners still have a desire to buy full stop. In London the market is particularly fraught with its time honoured status as a safe harbour facing serious erosion generally made worse by the professionals’ plans to abandon it en masse should Brexit go ahead, particularly worrying is prominent among them are the finance sector leaders who are seriously considering Frankfurt as a replacement European finance capital.
Given all of the global uncertainty presently economically we seem in reasonable shape which from a property perspective when amortised with the reality that most of the recent politically inspired market deterrents are now behind us (though not all the mess they caused) we should get to enjoy some clear air allowing the market to run under its own steam and auspices for at least the next couple of years. Amen to that.
Particularly encouraging and long overdue the RBA has finally formally acknowledged the writing on the wall in accepting we cannot have interest rate settings for 3% inflation when underlying inflation is actually closer to 1% by reducing the benchmark rate by a further .25% to a new multi-generational low 1.25%, probably not the last cut we will see this year. All we need do is force the banks to pass it on (which of course the government can readily do by removing its guarantee of deposits - more on that below).
For Queensland, even though we have been spending all of it plus a little more, and even allowing for a continuing high level of waste, the sheer magnitude of the recent record mining royalty windfalls must soon start to filter through to positively stimulate the state economy.
That is very timely as it will further incentivise those Southerners who now that their property markets are coming off their peaks are selling up to up stakes to head for our sunnier climes. They do this at the end of every cycle but given the current record price differential between their average house prices and our own it won’t surprise if this cyclical great migration north outdoes all previous.
They’re entirely justifiably now down to just 1.25% and short of an unforeseen economic windfall (or a new China rising out of nowhere) should go all the way down to zero where they fundamentally should have been long ago.
If the RBA has any foresight, it will allow that to happen more immediate to short term but given their past rear vision mirror driving behaviour intransigence, it would not surprise if the cuts that we know to be so necessary to restimulate the economy are not passed on until the RBA has absolutely no other choice and then only with them kicking and screaming.
TAILWINDS: Mild Economic Recovery | Attractiveness of Brisbane House Prices | Cheap Finance (though hard to get)
HEADWINDS: Investment Apartment Elephantine Oversupply | Banking Royal Commission Hangover | Soft Sentiment
CROSSWINDS: Sino-US Trade War Hotting Up | Brexit Impasse
CRYSTAL BALL: 0% Benchmark Interest Rates | Lower Yuan | Extended Period Subdued Global Growth
- BUY Brisbane Housing as close to land value as possible 5 – 10k from the city and wait
- SELL investment apartment holdings anywhere you still can
- SELL Hobart now if you want to get out at or near the top
- DO NOT BUY mining industry related or reliant property regardless of how cheap they become
- BE CAREFUL with discretionary property buys that are hard to sell in tough times and quick to be acted on by banks
- Near 0% interest rates globally for as far as the eye can see (except in the developing & third worlds)
- Low yield world also until and unless another China rises (unlikely) or rampant global money printing triggers something
- The US will stop raising interest rates and start easing
- Brexit whether with a deal or no deal given the subliminal subconscious might of the UK will be a game changer
EDITORIAL ~ WHY THE GOVERNMENT MUST LIFT ITS ‘TEMPORARY’ GUARANTEE ON BANK DEPOSITS
The ultimate panacea for the property market and the broader economy nationwide given it would almost immediately greatly lower borrowing costs is simply removing the government guarantee on bank deposits that was so generously gifted to our big four banks as a ‘temporary’ measure to shore up their solvency at the height of the GFC in 2007.
Whilesoever the temporary measure remains in place there can be no real competition in our markets, and certainly not effective international competition as the cost of funding for financial institutions without government guarantees on their deposits versus ours with (and therein their subsidiaries) is understandably vastly different.
In the 12 years since the unprecedented government guarantee has come into play, the normal 20% loan premium between the cash rate (currently 1.25%) and the borrowing rate has increased by between 1,000 and 1,500% or 10 and 15 times.
No where else in the western world has such a thing happened or been tolerated.
The reason why banks here have been able to get away with charging on average between a 200% and a 300% premium on the cash rate is simply because they can. The rorting is effectively government guaranteed.
Of course the blow out in premiums whilst patently extortionate is also entirely understandable because our big banks (who have largely consumed our little banks) have used the unique government guarantee to effect a complete monopoly over the market which they are milking for all its worth while they still can.
And you can forget all of this defensive ‘real cost of funds’ rubbish the banks indignantly put up as screen to justify the rorting. That is largely fabricated nonsense. Remove the guarantee and all the alluded to additional funding costs would quickly disappear.
Why hasn’t the government acted on this already (or the opposition or any of the minor parties)?