In The Second Half of 2019 - Is The Sun About To Shine Again?
Over the years I have read books and attended a number of seminars or conferences that proclaim the benefits of ignoring the mainstream news.
The general idea is that it fills our mind with negativity and does nothing to fuel our ambition and motivation to be successful in life…
Makes sense doesn’t it?
So it is with some trepidation that I venture into describing for you what I think about what the balance of 2019 has in store for wealth creators and property investors.
Since I am an outright optimist, let’s take a look at the positive signals first.
As you will no doubt be aware, the Reserve Bank of Australia cut interest rates this week for the first time since August 2016.
The 0.25% rate cut takes the official interest rate in Australia to its lowest level ever at 1.25%.
Great news for property owners with mortgages, right?
Well, this is where it gets interesting. At the time of writing the major banks had announced their responses, and the news wasn’t completely great, especially if you are with Westpac or ANZ. Despite the recent royal commission into the banks and encouragement from both sides of politics, Westpac and ANZ announced they would only be passing on 0.2% and 0.18% respectively.
On top of this, all the big banks have chosen dates beyond the official change date that will enable them to profit a little bit more, ok a lot more, from these decisions.
But wait, I said this was the good news, and it should be. A cut in interest rates has the intention of giving buyers more capacity to borrow and therefore stimulates activity in the markets, especially the property markets.
So that’s a big tick
The second significant change that will impact borrowing capacity is the change announced by APRA (the Australian Prudential Regulatory Authority).
Back in 2014, in response to the soring property markets, APRA introduced legislation that required banks to assess loan application on the basis of much higher interest rates than prevailed at the time. Effectively loans were assessed as though the borrower was paying 7.25% instead of what they were actually going to pay. Ouch.
This legislation reasonably quickly dried up the flow of money and sure enough property prices started to stall and subsequently fall, quite dramatically in some locations.
So the positive side to this story is that APRA has announced the release of this requirement, bringing the margin on loans back to 2.5%., a long way from the good ‘ol days of 1-1.5%, but still an effective 0.75% cut.
So more borrowing capacity for borrowers, meaning more cashflow and therefore stimulus for property prices to rise again from their recent falls.
Both of these changes will be well supported by the renewed confidence that the recent federal election result will have for the economy and property investors.
The uncertainty caused by the opposition’s proposed changes to negative gearing would have kept buyers out of the markets leading up to the election. Now that investors know what lies ahead, confidence can return and buyers can start to come back into the markets.
This is supported by recent auction clearance rates that have risen since the election. The June long weekend will likely put a pause on demand while everyone celebrates a few days off. I expect after the long weekend there will be renewed activity and buying leading into the traditionally buoyant spring season.
We have also been seeing the price falls across the country starting to slow down. In May the national decline was 0.4%, the smallest month-on-month decline since May 2018 according to CoreLogic data.
When you put all of the ‘good news’ together, it paints a reasonably optimistic picture for the balance of 2019. Access to money, borrowing capacity and a return of buyers all bodes well for rising prices…
It all starts to look like opportunity ahead. Or does it?
In the interest of balance, it is important to highlight some of the issues the markets are facing that won’t just go away because of the interest rate cuts.
The job market remains tight. There has been little wage growth over the last few years, and this doesn’t look like changing soon.
The job market is changing with technology advances. More jobs are being automated or replaced and there is a distinct move toward service industries. This will result in more part-time or casual jobs, which leads to underemployment.
Underemployment effectively puts a ceiling on wage growth as there is no pressure to drive up wages. That’s an oversimplified description, but you get the point.
Inflation has been contained at low levels for some time and it doesn’t look like changing any time soon. We even have the risk of disinflation, which is where the price of an item remains the same but what you get is less. Anybody notice the size of a Big Mac these days, or a Freddo Frog. Tiny right?
Housing affordability, while potentially improving a little because of ‘the good’, is still low, particularly for young renters and first home buyers who represent a significant buying group in the market.
Affordability will therefore lead to more people, especially migrants, to live together in multi-generational homes…
Despite some of what we hear suggesting homes are shrinking in size, this fact of multi-generational housing is actually resulting in home size increasing to accommodate the extra residents.
So what does all this mean for you?
My perspective is that the second half of 2019 will see property prices stabilise and start to increase again, but slowly.
Rental yields and capital growth are likely to remain low for a few more years yet, but they will improve. For investors, this means you are going to need to create your capital growth with smart improvements, which is always a good idea anyway.
There are going to be good opportunities in the coming months and years to grow your wealth. So it’s not time yet to give up on property as a wealth creation tool.
So having attempted to avoid the hyperbole we get from the mainstream media, I hope you feel that the second half of 2019 is an opportunity for property investors, and potentially the start of a turn- around that will breathe life back into your investments.
Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at theinvestorsway.com.au.