What Happened in 2017
Looking back over 2017 is a thought-provoking exercise. The market was as complex as ever, I’d suggest even more so than when we started out fresh-faced and possibly sun burnt in January.
This time last year I suggested that no single issue would dominate the market, there were a few key issues, and we’ll look at those, but we did not see any sort of big market crisis. Like the varied predictions that the residential property ‘bubble’ might burst, now we wonder if such a likelihood ever existed.
Still some dire predictions persist, but my view is that the banking and finance regulators have done a good and selective job, taking any excess heat out of the market.
The sign posts I suggested we need to follow this time last year were mainly; interest rates, supply, infrastructure, tax reform, buyer’s appetite for quality, off-shore demand, prices and lastly how markets would be increasingly quality focused, driven mainly by demographic segmentation. Here I’ll take a brief look at just what did eventuate.
Recently I saw a startling quote that interest rates were at a 5000-year low!
The context was the announcement by the US Federal Reserve leaving US benchmark interest rates unchanged at between 1.00% and 1.25%. Previously after nine years the central bank had raised rates four times since December 2015.
With reference to a speech by Bank of England chief economist Andy Haldane, Bank of America and Merrill Lynch’s Michael Harnett, and his team had earlier shared the chart below that shows how rates remain at the lowest levels in the last 5000 years.
Closer to home some home loan rates and investor rates did increase this year, but they remain historically low and are expected to remain so for a while yet, with the RBA yet to show any appetite for a base-rate increase.
According to Canstar the home loan market remains competitive with sign up incentives and promotions for some borrowers. Generally, first time owner occupiers rates range between 3.54% and 4.20% but generally sit below 4%. For investors, they range between 3.89% and 4.80% and are creeping towards 5%. Term deposit rates have increased a fraction but remain below 3% in a range of 2.55% - 2.80%.
There’s been almost non-stop commentary that the level of supply of new apartments would soon out-pace demand with concerns mainly focused on Brisbane and parts of Melbourne, some concerns have also been expressed about Canberra and Adelaide and there are pockets of concern in Sydney.
In a positive sign for the market apartment settlements remain strong, and there’s been some slowing of new projects. Housing supply did however peak in 2016 with the highest levels of construction since WWII.
However, a recent report by advisory firm BIS Oxford predicts new dwellings construction will fall by 31%, from 230,000 to 160,000 dwellings in Australia in the next three years.
During 2017 it’s very easy to get the impression that the entire country, in particular our major cities, has turned into one giant construction zone. By 2031 spending will have reached $376b, the 2017-18 Federal budget allocated project funding of $75b and the NSW Government is spending $26b, while there’s a huge amount of private investment taking place. Take a 15-minute walk around the Sydney CBD and it’s a matter of ducking below a maze of building site hoardings as evidence of a development loom.
This infrastructure and building activity is powering the economy and will continue to play a central role in the demand for all resources and job creation.
Strong employment powers the demand for housing and the national figures tell the story. Construction jobs have increased from 927,000 in May 2007 to 1,110,400 in May 2017, an increase of 183,400 jobs.
The Federal Government expects construction employment to increase by 10.9% over the next five years. And in Sydney the sectors are credited with creating 100,000 jobs.
In the never-ending debate over tax reform much of the status-quo was retained over 2017. Notably negative gearing and capital gains tax discounts were retained. For property investors, there have been some minor changes to allowable deductions focused on travel claims and some depreciation allowances.
Some changes to GST policy were suggested and these changes have resurfaced possibly resulting in buyers paying GST straight to the Federal Government. Although an un-popular move the idea remains on the government’s agenda.
Quarantining $300,000 after the downsizing and the family home from the pension assets test was a welcome move, and at the other end of the market giving first time buyers access to $30,000 of superannuation savings was also welcome. However, for both groups access to suitable supply is still a hurdle.
Buyers Focus on Quality
As suggested this time last year, there’s little doubt that the apartment market is now very sensitive to the quality of new projects. This runs across all aspects from the overall design and construction of buildings to every detail of individual apartments. There are several factors driving this trend and it relates to much more than price, how well developers respond to this shift will greatly influence the success of individual projects.
Off-shore buyers became the target for an entire range of new restrictions during the years from both the Federal and State Governments. There’s been an ongoing debate suggesting that off-shore buyers have had a negative impact on the market by driving demand and so making homes less affordable. Australia is not alone in making these policy settings and similar levies, charges and restrictions have also been introduced in New Zealand, Canada and The United Kingdom.
Tying these policies as a key way of improving affordability lacks credible evidence and looks to be a misplaced motive, an easy target. However, the onslaught of new charges has dampened demand in some areas. The 50% cap on foreign investment into new developments may end up having the biggest impact, although many developers had already adopted this in their marketing plans. A decrease in the level where foreign buyers faced a 12.5% withholding tax down from $1.5m to $750,000 will capture many more buyers.
Among all of these, some would suggest increasingly complex policies, we should not forget the impact of currency fluctuations and what might happen if the value of the AUD$ falls in 2018.
The link between very low interest rates and prices remained a key influence on the market and when combined with pockets of very strong employment growth and continued strong immigration prices have generally remained stable.
Auction clearance rates, which dominate the established housing market have come off the boil and as a result there have been reports of some limited prices falling. This could well indicate overly zealous vendors who have had their expectations cut, but in areas of high demand we have also seen above reserve prices being paid. The market is now very complex and segmented and that trend is expected to become more entrenched in 2018.
If we were to rule a line under key points from 2017 the list would include; affordability, discussions over the levels of supply (in particular new high-rise apartments), the vacuum created by a lack of tax reform, market segmentation, how best to encourage off-shore buyers without scaring local buyers and finally the big issue of government red-tape and infrastructure delivery and management. With the question increasingly being asked - are we getting value for the huge investment?
In most areas, it’s no surprise that the end statement would read ‘to be continued’.
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