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February 22, 2013

The final piece of the puzzle has fallen into place


For much of last year, Australian housing markets were a ‘tug-of-war’ with low interest rates pulling hard on one end of the rope and poor consumer confidence at the other.

BY MICHAEL YARDNEY

Despite many of the fundamentals being sound, consumers were sitting on the sidelines waiting to see how the economy played out or perhaps for someone to ring the bell indicating that markets had bottomed.

Well, no one rang the bell but our markets did bottom in the middle of 2012 and consumer confidence is now slowly returning.

Last week the Westpac-Melbourne Institute Index of Consumer Confidence rose to its highest level in more than two years. It rose sharply in New South Wales and Western Australia and also recorded healthy gains in Victoria and Queensland.

The index is up 7.2 per cent over the year to February and this is the first big jump in confidence since the Reserve Bank commenced its rate cutting cycle, which reduced the cash rate by 1.75 per cent.

This is good news for our housing markets, but confidence isn’t at the level it was in previous rate cutting cycles and this points to more subdued property price growth than might be expected given the current level of interest rates.

consumersentimentWhat does all this mean? Over the past few years, global and local economic uncertainty caused Australians to stash their cash. Some saved their pennies, many reduced credit card debt and others took advantage of low rates to pay down mortgage principal.

But things are changing and the average Australian is now feeling more confident about their future and job security. There has also been a strong wealth effect for households from rising stock prices.

If history repeats itself, increasing confidence, low rates and robust financial positions will encourage many to ramp up their borrowings again and get into the property market.

realhousevsconsumersentiment

What are the implications for interest rates? It’s likely we’ll see the increase in confidence feed through to the broader economy, as well as stimulating further increases in house prices.

In today’s connected society, as confidence rises there will be a new group of investors who’ll fear missing out and this will stimulate the investment cycle to once again move forward.

This suggests the Reserve Bank won’t make changes to interest rates any time soon, preferring to see how the economy responds to the cuts it has already made.

I’m confident about the prospects for property in 2013, and not just because consumer confidence. Here are nine other reasons I’m optimistic.

  1. Last week the National Australia Bank confirmed that business confidence is also rising. This is good for our economy and for job prospects.
  2. The sharemarket has performed remarkably well over the past year, enhancing people’s wealth, replenishing their super funds and instilling confidence in investors.
  3. The world’s economic problems seem to be diminishing. China’s economy seems to be back on track with predictions of eight per cent growth this year. The US is slowly working its way through a raft of economic problems. While Europe is still a basket case, no one seems to be as worried that it’ll bring down the world banking system like they were last year.
  4. We have record low interest rates. This means existing homeowners and investors are benefiting and paying down their debt faster. New borrowers will reap the benefits of being able to borrow more.
  1. Household budgets are in good shape. Since the GFC, Australians have been saving more. Credit card debt is low and 68 per cent of people are ahead on their mortgage payments. Our robust personal balance sheets mean we have more money to invest and as people hear more good news in the media they’ll start to put that cash into property.
  2. After the turmoil of the GFC, more baby boomers are keen to control their own destiny with self-managed superannuation funds (SMSF). Rivers of cash from SMSFs are going to be flooding real estate markets over the next few years.
  1. Low interest rates and less volatility in our economy make cash and interest bearing deposits unattractive investments. While some investors will look at getting into the sharemarket, many won’t forget how the volatility of equities burned them a few years ago and will look to the security of bricks and mortar.
  1. Increasing immigration and a shortage of properties in some inner and middle ring suburbs of our capital cities will see rents continue to increase. On the one hand, this’ll provide investors with better yields, but on the other it’ll encourage a new group of first homebuyers to get a foot on the property ladder.

Economist Christopher Joye recently used the following graph in the Australian Financial Review to confirm that Australian house prices a

This chart from economist Leith Van Onselen of Macrobusiness plots the annual change in house prices (as measured by the Australian Bureau of Statistics) against the annual change in consumer sentiment on a quarterly basis up to December 2012. It shows how rising consumer sentiment is a bullish indicator for house prices.

mortgagerepayments

In summary, real estate markets have bottomed, consumer confidence is returning and the property cycle is moving on. Already we’re seeing more people attending open for inspections and making offers on good properties. Auction clearance rates for the first few weekends of 2013 have been strong.

The beginning of a new property cycle is a great opportunity for investors to ride the next property wave and doesn’t come around that often. This year will be a good one for property. Educate yourself, learn lesson from the past and take advantage of the opportunities that market has to offer.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

 

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