2019: Residential Property - The Year Ahead
Over the next three weeks I’m going to contemplate how the local residential market might unfold during 2019.
Not so much with hard-nosed predictions, as predictions can be dangerous, instead I’m going to set up a number of key points of discussions that I suggest will influence the market and will do so by firstly looking the many external factors that could impact market sentiment.
Market sentiment is always the hardest area to pin down and the hardest to reverse.
Barbecue Stopper & Sleepless Nights
Oxford Dictionaries give a definition of ‘barbecue stopper’ as ‘A topic of great public interest, especially a political one.’ It’s a term very often used and ascribed to former Prime Minister John Howard.
Housing affordability and real estate prices are two topics that have been sure fire barbecue stoppers across Australia for decades.
Real estate values are a guaranteed topic that can push aside the cold beer, steak & sausages, gourmet dips, chips and salads. Somebody mention Sydney house prices and that grabs everyone’s attention and until about 18-months ago, it was all about rising prices and those lucky enough to secure their dream home or investment, plus those still looking.
True, affordability was an issue but, even first-time buyers were keen to get a foot hold in the market, most of the news was positive, the conversations full of energy. Mention real estate at a barbecue today, over the New Year in 2019 and you might find yourself alone or relegated to the kids wading pool.
What’s happened is one of the biggest shifts in buyer sentiment in well over a decade. Real estate and house prices are topics that now keep many Australian’s awake at night, restless tossing and turning.
Those who own a home are worried about declining values, those yet to buy are worried about finance and when they should buy, how long should they wait, fear of missing out has been replaced with a commitment fear.
The markets confidence and resilience has been dealt a wallop and may well get further body blows in 2019 before there’s any signs of a return to confidence. So that shift, in my view is one of the if not the biggest hurdle the market will face in 2019.
It’s well worth exploring why this loss of confidence is so important and if shifts in any of the ‘negatives’ will encourage the market to recover, which I suggest they will but, it will take time.
Do I Look Worried
The Economist magazine (27 Oct 2018) carried the front-page headline Aussie rules. What Australia can teach the world. The article went on to say ‘But its (Australia’s) economy is arguably the most successful in the rich world.
Further, The Economist noted that our economy has been growing for 27 consecutive years without a recession; that median incomes have risen four time faster than in America, and that public debt at 41% of GDP, is less than half Britain’s.
Factors that have contributed to this level of success include our close economic ties to China and more generally with Asia, our compulsory superannuation savings and strong immigration. These are all topics that also directly influence the property market and I’ll return to them, but first there are also some negatives.
These include excessive fees associated with the management of superannuation accounts, (reference the banking royal commission) the lack of a coherent climate policy, poor indigenous affairs, political disenchantment, the constant sacking of our PM and the lack of ambitious reforms.
It is also by way of background worth noting that Australia has the 13th-highest amount of direct foreign inward investment in the world. (Source: UNCTAD stat database) In 2017 that investment was valued as $US662.3 billion and increase of 14.8% from 2016.
Population policy as already highlighted is key and directly impacts property markets and a recent quote from Project Syndicate is worth a mention:
“Throughout the West, populists and nationalists have hijacked the migration debate by framing the issue solely in terms of cultural identity. Their strategy, while often electorally successful, is laying a foundation for weaker growth and higher levels of inequality across the world’s ageing advanced economies.”
Holding Back Confidence
What we see is that despite these very positive headlines and statistics confidence and resilience have deserted the market.
Many of the reasons why have a foundation in the negatives noted by The Economist and in combination they are expected to weigh on the market for most of 2019 when a number of big-ticket external factors may further damage confidence, at least in the short-term.
The lack of confidence should start to peak by mid-year as a number of issues are ticked-off including the Federal Election, the NSW State Election (23 March 2019) and the completion of the banking royal commission (expected February 2019). However, together these will all combine to make the first six-months of 2019 even tougher.
The state election in NSW will come at a time when NSW has lost is crown as Australia’s most robust state economy and there’s wide-spread voter disenchantment with how the current government has poorly handled the delivery of billions of dollars of infrastructure.
Botched and delayed infrastructure is now unfortunately playing a role in calls to reduce Sydney’s population growth and restrict immigration to the city. Population growth and immigration (as noted by The Economist) delivers many positives and the failure to accommodate that growth has become a social and political issue at a time when the benefits of growth have been relegated.
A Federal Election will have a big bearing on property, not only because there are bound to be changes to negative gearing, but also relating to immigration and population policy, the need for a climate policy and a much wider agenda for policy reform and vision.
All of which were key points in The Economists assessment as needing fresh initiatives and new political leadership.
The Federal Government’s reaction to the banking royal commission will also, to some degree be tied to the election outcome as a strong response from the current Government, given the state of parliamentary numbers, looks unlikely or impossible.
There’s a Lot of Housework to do.
Affordability, access to finance, a possible credit-crunch, taxation policy, population policy and infrastructure policy and all tied up with these three events and until they are out of the way a sort of fog is descending over the residential market.
That fog is also filling the gaps left by a lack of buyer and developer confidence and is delaying resilience as buyers lack a clear vision of where to head to find their way out of the fog. To be continued.