As 2019 draws to a close, we can reflect on what has been an interesting – if a little surprising – year in terms of both residential property and the economy. It began with an unanticipated Coalition party election win, followed by three rate cuts that took interest rates to 70-year lows, and finished with a swift and unexpected turnaround in price growth for our two biggest property markets.
So, what’s next for this great land of ours?
Property prices look to be on the rise
A recent report from SQM Research has revealed that house prices are likely to increase in value across many regions during 2020, but particularly in Sydney and Melbourne.
Sydney and Melbourne could see price rises of up to 16 and 17 per cent by the end of next year.1 These cities continue to experience strong population growth rates, relatively easy access to housing credit and stable local economies, which are all playing into buyer confidence. Record-low interest rates are adding fuel to the fire. A fourth rate cut, expected in February, could push prices up even further.
Other capital cities are also anticipated to experience dwelling growth next year, albeit more moderate. Adelaide is tipped to see growth between 1 and 4 per cent, values in Perth and Brisbane should rise between 3 and 7 per cent and Hobart looks set to continue its positive run with predictions of growth between 5 and 9 per cent.1
What could cause price growth to stall?
Whether this growth eventuates will depend on how the economy and the lending market unravel over the next six to 12 months.
The Australian Prudential Regulation Authority (APRA) will continue to have significant influence over lending policies and consequently the housing market. A review of credit rules throughout this year has contributed to the current housing price rebound. So far, it appears that APRA and policymakers are comfortable with housing growth figures. According to CoreLogic’s Tim Lawless, “potentially, the improved values and activity will help [these authorities] boost consumer attitudes, fuel spending and ease the downturn in residential construction activity.”2 However, if the regulator becomes concerned about rapidly-rising house prices and/or debt levels in our two biggest cities, they may intervene with policy restrictions. This could limit growth to around 8 and 9 per cent for Sydney and Melbourne respectively.1
The data shows demand for housing finance is indeed rising. In fact, household debt levels reached a new record high relative to income back in the June quarter.3 Lawless says this suggests the sector could be susceptible to a shock (such as a recession or global event) or a change in household circumstances.
Lack of affordability may be another key factor in keeping a lid on housing growth. It is anticipated that this latest upswing in prices – particularly in Sydney and Melbourne – will not be as protracted as the previous boom that lasted from mid-2012 to mid-2017. Property in Sydney, Melbourne, Adelaide, Hobart, Brisbane and even Perth still ranks as ‘severely’ unaffordable, and SQM Research suggests Sydney and Melbourne were still overvalued even at the bottom of their property cycles (midway through this year). If enough potential buyers cannot borrow what they need to purchase property given their income relative to prices, demand and price growth should slow. As prices climb further, this problem is exacerbated. So, even though lending is cheap, if buyers can’t get the finance they need, they won’t be buying.
Another concern for housing growth will be if our economy weakens. If the RBA can’t stimulate the economy sufficiently with rate cuts and looks towards quantitative easing measures, we may see property prices start to fall, despite low interest rates.
Mixed forecast for our economy
Rating agency Fitch is forecasting global economic growth will hit an eight-year low of 2.5 per cent next year.4 This is primarily due to the escalation of the US-China trade war, which is having a heavy impact on the US and Europe. China’s economy is also slowing, with a GDP of 6.3 per cent in June – its weakest result in 30 years.4
Australia’s economy slowed to an annualised GDP of 1.4 per cent in the June quarter. The latest World Economic Outlook forecast expects this to increase to 1.7 per cent by the end of the year, but it is still well below previous predictions of 2.1 per cent.5
Treasurer Josh Frydenburg said last month, “[Australia is facing] headwinds, with the IMF World Economic Outlook confirming that global economic growth has slowed, with ‘rising trade and geopolitical tensions taking a toll on business confidence, investment decisions, and global trade’.”4
Despite these concerns, according to Austrade, our economy is robust. It is resilient to negative events thanks to solid policy frameworks, a healthy government fiscal position, an attractive investment environment and our strong ties with the Asian region. It is also more flexible than is sometimes thought, due to a broader range of sectors now driving economic growth. The huge growth of our services sector, in particular, means we are no longer reliant on industries such as mining and agriculture.6
Standard and Poor’s reaffirmed our AAA credit rating earlier this year, making us one of just 10 countries with a top rating from all three major credit rating agencies. Australia was also the only major developed economy to have no annual recessions between 1992 and 2018. The federal government has predicted a $7.1 billion surplus for the financial year 2019/20 – the first in 12 years – which should at least give Australia something to fall back on if economic pressures increase significantly.7
Looking forward, the IMF forecast is that Australia will grow faster than any G7 economy except the US over the next two years.5 Our GDP is expected to pick up in 2020 to 2.3 per cent and again in 2021, to 2.4 per cent.3
Whatever the new year brings, I look forward to helping you navigate the complex world of lending in 2020 and providing smart advice in your journey towards long-term personal wealth.
SOURCES: 1https://www.abc.net.au/news/2019-11-14/property-prices-in-2020-sqm-forecasts/11703668, 2https://www.smartline.com.au/smartline-report/october-19/corelogic-national-housing-update-october-2019/?cid=smartline-report-web, 3https://www.abc.net.au/news/2019-10-02/fitch-downgrade-australia-economy-global-recession-rabobank/11567246, 4https://www.abc.net.au/news/2019-10-02/fitch-downgrade-australia-economy-global-recession-rabobank/11567246, 5https://www.news.com.au/finance/economy/australian-economy/australias-economic-growth-to-fall-to-decadelow/news-story/9bf7b8ceeaae415eb5a5377688e04745, 6https://7news.com.au/politics/aussie-economy-growth-predictions-slashed-c-505453, 6https://www.austrade.gov.au/news/economic-analysis/robust-economy-underpins-australias-growth, 7https://www.news.com.au/finance/economy/federal-budget/no-australia-is-not-back-in-the-black-truth-behind-the-governments-71b-budget/news-story/e128eaedcd8402c88160053323425d0a