Key Market Indicators
Interest rate movements are normally the key to understanding where the property market is heading in the short term. But these are not normal times. To read the current property market is to accept normally quoted market indicators such as interest rates, auction clearance rates and home loan applications lack precision and broader perspective.
The media is littered with commentators and analysts that are mostly credible well researched and empathetic, each one convinced that their forecast of the housing market is the correct one.
The only challenge being, many of these analysts often contradict each other, leaving most of us confused.
The reason these analyst’s competing views are so compelling is it’s conceivable either the market pessimist or optimists view could turn out to be correct.
Upswing or sugar hit – The current could be described as a tug of war between positive and negative market forces. Finding a forecast that is balanced is rare, so it can pay to be your own analyst. Forming an opinion too quickly can create a misread. This is why the current market rally (since the Federal Election) is so hard to quantify between a “sustainable upswing” or a ‘sugar hit’.
Employment – low interest rates only benefit those that have a job, a stable one at that. The unemployment is well above what is deemed healthy and further weakness is on the horizon. Employment trumps interest rates as a key market indicator. To prove the point, take a look at Perth/WA. Record low interest rates have had next to no impact on the housing market as prices have fallen for over 6 years whilst unemployment remains stubbornly high, well above 6%.
The government promised job security during the Federal election and the electorate now needs them to deliver.
Government intervention – interest rate cuts have seen the RBA cash rate drop to 1%. That’s four more rate cuts before they hit zero and need to consider further stimulatory and/or supporting options for the economy. In late July, the RBA flagged that they are willing and able to cut rates below 1%, if necessary. The RBA has called on the Government to do more to support the economy and employment – in an acknowledgement that interest rate cuts alone cannot do all the heavy lifting.
Globally, governments want inflation and are seemingly determined to create it. Relative to asset values, deflation increases debts in real terms and inflation shrinks debt levels as a percentage of the asset value. Governments are attempting to inflate their economies out of trouble to avoid experiencing ‘Japan’s Lost Decade’. See section on Japan’s experience with deflation.
The Lost Decade
“The Lost Decade was a period of economic stagnation in Japan following the Japanese asset price bubble’s collapse in late 1991 and early 1992.
Broadly impacting the entire Japanese economy, over the period of 1995 to 2007, GDP fell from $5.33 trillion to $4.36 trillion in nominal terms, real wages fell around 5%, while the country experienced a stagnant price level.
The economic effect of the Lost Decade is widely acknowledged and Japanese policymakers continue to grapple with its consequences in 2019. Source: Wikipedia
Up until late 2016, Chinese investment in Australia was crating all the inflation we needed. As capital controls in China take hold, the impact is being felt far and wide.
Economy – if the economic performance of Australia stays reasonably healthy, the housing market will avoid the savage downturn being spruiked and predicted by many doomsayers. There could still be pockets of pain for the market though – such as poorly built high rise apartments in suburbia.
When the U.S and Europe’s housing markets imploded in 2008, it was caused by the evil twins – excess debt and nationwide job losses. Most Australians would acknowledge that our debt levels are alarming. A resilient economy that has avoided recession for nearly 30 years has been a savior allowing households to trade out of trouble time and time again.
Global/market event – major market events unofficially occur every 8 to 10 years. Think the 1987 stock market crash, the 1998 Asian Financial Crisis. As we head toward 2020, markets become more susceptible to a similar event. The largest bubbles tend to pop first as happened with corporate debt in 1987, Thailand’s currency in 1998 and the US mortgage market in 2008.
There are wheels within wheels when it comes to predicting the property market. Following auction clearance rates (that are fudged by real estate agents) won’t cut it from here. Hopefully our miracle economy keeps producing more miracles.
By Peter O’Malley
