As we have written about often in our reports, the Australian property market is in fact made up of hundreds of smaller geographic property markets. They are all affected differently by their local social and economic factors, which directly determines their performance. By example, if we look at the performance of the Melbourne and Sydney property markets vs the Perth property market in the past two years we can see two dramatically different stories. Perth, with the decline in mining investment boom has suffered and seen price falls, while their eastern rivals have experienced double digit growth. If you drilled down further however, you would find suburbs within all three of these cities that have fared much better than others, mostly due to their local social and economic influences.
These local social and economic influences affect supply and demand of any particular area. Despite everyone thinking they are quite unique and in charge of their own decision making, in fact, human behaviour is reasonably predictable. Generally, everyone wants what everyone else wants and the reverse is also true. It makes stock markets go up and down, on a daily basis, and although less fluid, it also does the same to the individual real estate markets of Australia but over longer time frames.
Other than supply and demand, the third aspect to any asset market is sentiment. It over arches the local market conditions of individual property markets and can change the performance of any asset market without the underlying fundamentals changing much at all. We saw this in 2011-12 when the European debt crisis became headline news. Locally we were in a sound position but it made many people cautious until the headlines faded. Nothing has practically changed since then. The Greeks still don’t like paying tax but the sentiment around it has changed and essentially we have moved on.
In 2017, it is market sentiment that will be the most interesting element to watch. Like the European debt crisis, the election of Donald Trump and his ability to generate worldwide attention grabbing headlines is a great example of an event that can alter sentiment. To the 24 hour news providers of this world he is a gift from news heaven. One headline from these now global news providers can affect our decision making despite our local market conditions remaining relatively unchanged.
So far his victory has created both caution and optimism. The Dow Jones index has hit 20,000 points for the first time in its history signifying that the US business community is optimistic that Trump’s pro growth strategies will be good for them. The performance of the 30 major US companies that the Dow Jones measures hasn’t really altered, it’s the sentiment that’s changed and pushed the index higher.
On the caution side there are quite a few elements to choose from but at writing it’s mostly perception rather than reality. The ability to actually get anything done in the slow moving US government structure will see most initial alarmist headlines continually watered down by bureaucracy, but it is the initial reaction not the reality that has the effect on sentiment.
We saw the perfect example with the Brexit vote. A huge worldwide reaction, now its old news.
In a practical sense, there are many safeguards in place for the Australian real estate market and some would even welcome a sentiment change to take the heat out of the Melbourne and Sydney markets. Interestingly, commercial real estate agents are reporting a significant re-engagement by Chinese developers in the last five months of 2016 after a quieter first half of the year. Whether this is a reaction to Trumps anti Chinese rhetoric we don’t know, but at a minimum, it is a significant vote of confidence in Australian real estate. When the GFC hit in 2008 (talk about a sentiment changing event!) it was the influx of Chinese money into Australian property that underpinned the market after the government altered the immigration laws to promote foreign investment. Australians have a strong fear of missing out (FOMO) and when outsiders engage, we do too.
The obvious factor is continued low interest rates. Low interest rates are here to stay and continue to provide a platform for transactions in the owner occupier sector, while lack of investment alternatives will continue to point small time investors towards property. Especially when there are periods of volatility in the stock market.
A factor that protects Australian lifestyle property, that we have spoken about many times, is that the large Baby Boomer demographic are implementing their lifestyle plans and buying and selling to suit. The interesting aspect about this demographic is that they are essentially reallocating assets to suit their lifestyle needs. If they are borrowing, it is against current assets that will be sold later, when their timing suits, to cover the debt, and as their professional responsibilities continue to lessen and their time frees up. Essentially they are either cashed up now or have the assets to cover borrows that will eventually be extinguished. Given their time of life, they want what they want now and will act if they see it become available and are less worried about “timing the market” or sentiment changes.
So, it will be an interesting year to watch how sentiment ebbs and flows. The key, as usual, is to separate the perception from the reality and to also be conscious that the former alters a lot more frequently than the latter.
If we can ever be of assistance in any real estate matter please do not hesitate to call.