The Australian residential property market has held its value comparatively well throughout the Global Financial Crisis, reflecting our broader economic experience. This contrasts starkly with what has happened in Western Europe and North America. The expansion and extension of the first home buyers grant has been a strong contributor to this phenomenon but there are also other forces at play.

Another key factor in this story is the question of supply. Unlike the large oversupply of housing that exists in countries such as the US and Spain, we actually have a large undersupply and this is projected to increase. If you look at the graph below, you can see that the rate of increase in the number of dwellings has fallen steadily over much of the past 50 years. If we overlay this with the rate of increase in the Australian population, you can see that this has increased sharply over much of the last 10 years. The mismatch between supply and demand is impacting on house prices.

How does this demand/supply mismatch play out in the market? Housing affordability in Australia is at comparatively low levels compared to other countries. That means housing, relative to household income, is comparatively expensive. However, the Australian economy is actually growing and this is reflected in our employment figures – we have strong employment growth. While our interest rates are certainly higher than our overseas counterparts, they are still at quite low levels from a historical perspective.

It would appear that the play between demand and supply has been the stronger force underpinning market movements. The combined effect of all the forces over the last year has resulted in our property market holding up well during the GFC. More recently, there continues to be increasing demand for residential property forcing prices upwards. Investors were confident there were profits to be made and started re-entering the market again during mid 2009, buoyed by attractive market conditions.

 

Moreover, recent figures prove this. RP Data recently reported that for the year to January, house prices rose almost 12 per cent. However, is this sustainable?

The extension to the first home buyers grant brought forward many buyers, contributing to the growth over the last 12 months, when it was needed most. With the government stimulus now reduced, the number of first home buyers entering the market will also fall. This, combined with recent interest rate increases, will have an impact on the lower end of the market where first home buyers were most active.

Interestingly, although recent auction clearance rates have been very healthy, housing finance figures have been falling. As housing finance figures are often a good indicator of the market trend, this would point to a softening in housing prices. However, given many of the other market conditions, the trend in house prices may not be so clear.

Louis Christopher, property analyst at Adviser Edge, believes that residential property prices may slow to 4.00 - 6.00 per cent growth over the coming year, with Sydney outperforming this average. He also argues that a couple of issues that could destabilise price growth are interest rates and banks’ Loan to Value Ratios (LVR). If banks reduce the allowable LVR to say 80 per cent, that will substantially reduce the number of people able to enter the market. Likewise, if the Reserve Bank of Australia feels the need to raise interest rates too steeply over the next 12 months, fewer people will be able to afford to enter the property market. It may also weaken the confidence of those remaining potential buyers in the market whose finance is strong.

So where to from here? Are we likely to see falls in the residential property market, or will we continue with double digit growth over the next 1-2 years. As always, it really is a case of many different stories. Different market segments and regions will play out very differently. Areas impacted by the resources boom have and will continue to see price pressures. In Sydney, the areas favoured by first home owners will be impacted by the removal of the federal grant.

All areas will be impacted by the RBA’s continued increase in interest rates and the degree to which banks pass that along to home lenders. The tightening of lending criteria by banks will affect the lower end of the market more. The demand shortage will have a strong impact in places like Sydney, where population growth is strong. One thing is certain, the love affair that Australians have with owning their own home continues and shows no sign of letting up.

Brendan Gallagher

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One of my favourite bands when growing up was Steely Dan and they had an album called Aja (Pronounced Asia) with a title song of the same name. As I sat down to write an article on Asia the above words from the song came to mind.

There are many interpretations of what the song is about but it occurred to me recently that it is to Asia the world is running, after the Global Financial Crisis (GFC) wash out. After all the “dime dancing” it’s Asia that is currently carrying a bigger share of the load in keeping the world economy going.

Importantly, Asia is not one economy and there are divergent experiences and outlooks throughout the Asian region. So what is happening in Asia today and what is the outlook going forward.

In the wake of the global financial meltdown, most Asian authorities acted swiftly to boost government spending, reduce interest rates, and stabilise financial markets. During the GFC China and India maintained growth through expansionist monetary policies; with increased lending and low interest rates. In particular, strong stimulus measures introduced in China had a big impact across the region.

The Chinese economy grew by 8.7% in 2009. India grew by 6.7%. By contrast the Japanese economy shrank by 5%.

The Chinese consumer has essentially replaced the US consumer in China and to some degree; Chinese domestic demand has filled a gap in the region that was left by a fall away in US consumption.

China’s growth has underpinned a rebound in regional exports in Singapore, Taiwan, Thailand and the Philippines. There has been an increase in government infrastructure spending in most countries across the region. In China and India, private investment has also been growing. Korea has more recently experienced a slowing growth rate. Government spending has declined as has consumer demand.

I took a trip to Vietnam with a friend recently. We went off the beaten track on Russian Minsk motor cycles for around seven days and encountered some severe weather conditions. There is a strict size limit on motor bikes in Vietnam and the Minsks are like old style farm dirt bikes. Pretty simple but a good way to get off track in Vietnam. (See the Top Gear series on Vietnam.)

We also spent time in the major cities and I was very interested in the economic story in Vietnam. Vietnam has been growing strongly prior to the GFC, however it has not fared as well as some of its neighbours through the crisis.

In November last year the Central bank was forced to devalue the dong and raise interest rates responding to heavy selling pressure on the currency. Unlike many of its neighbours, it has a high current account deficit; in 2009 this was 9% of GDP. Cautiousness about the country’s debt levels and a move by investors to more safe harbours has resulted in a fall away in foreign investment. Vietnam is essentially in a similar position to that in which most of Asia was in 1997 after the Asian financial crisis.

A significant recent development is the emergence of inflationary pressures in China and India. In China this is most evident in the property sector with price rises above 50% over the last 12 months in some areas. India has seen food prices increase by over 20%. These developments are of particular concern to governments in these countries as they can lead to civil unrest and instability.

Already governments are moving to tighten monetary policies. Interest rate rises are expected across the region. In China, lending has been tightened. India hiked lenders’ reserve ratios, while Taiwan moved to curb speculative capital inflows and stem the local currency’s appreciation against the US dollar. The Philippines increased the rediscount rate (the Central Bank lending rate).

What is of concern is how much impact these tightening measures will have. Whether there will be a significant slowing of the Asia economies and how this may impact on the global economy.

The US economy is still quite fragile showing early stages of recovery but with many challenges ahead. Europe is even more fragile. These regions are not yet ready to take up the slack should Asia experience reduced growth rates.

Japan continues to face deflationary pressures. It has the highest public sector debt in the developed world and essentially zero interest rates. This severely limits what the central bank can do to stimulate the economy. Consumers are saving rather than spending and at some point the government is going to have to reign in the burgeoning debt which will put a further break on economic growth. Add to this an aging population and things do not look great for the world’s second largest economy. That said, there are some very well managed and profitable companies in Japan and some excellent investment opportunities there.

There is clearly a divergence of experiences in Asia, with China being the stand out. The sheer size and scale of the developments there have far reaching social and economic consequences around the world, both now and for the decades ahead. With the rest of the world slowly and tentatively recovering from the worst financial crisis in a generation, Asia and particularly China are seen as a lifeline by many.

It will be an interesting year ahead if nothing else, as countries in the region balance economic imperatives with political ones and the world will be watching with interest as it tentatively moves to recovery.

Andrew Condell

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The global economic recovery continues to gain momentum, led by China and other Asian economies, with most advanced economies trailing behind. Australia is the pick of advanced economies, riding the coat tails of the Asian growth story.

In the US, cautious optimism continues to be the central theme. The extreme nature of the Global Financial Crisis has resulted in the economic recovery being more muted than past recoveries. Housing and employment are slowly recovering. Consequently, the US Federal Reserve has signalled they are likely to continue the current loose monetary policy to ensure that the recovery is well underway before commencing any tightening.

European economic growth remains soft. The biggest news coming out of Europe during the past quarter has been the sovereign debt concerns of Greece. This has put downward pressure on the Euro and spooked international sharemarkets for a short period in early February.

The Japanese economy is picking up momentum thanks in part to recently introduced household support measures such as child allowances. Also, business and housing investment is improving.

In China, strong economic activity and increased credit expansion will likely see Chinese authorities tighten credit growth by increasing banks’ reserve requirements. Increased interest rates are also likely.

Australia continues to benefit from Chinese growth, with resource prices improving. Australia is also experiencing increased domestic demand, housing growth, large public investment and increasing private investment. This good news has seen the Reserve Bank of Australia (RBA) continue increasing interest rates, with another rate rise in early March from 3.75% to 4.00%. The market expects the RBA will continue to lift rates during 2010 by another 0.5%.

The Australian share market has taken a breather over the past few months, following a strong rally. January in particular illustrated the anxiety concerning the upcoming reporting season. There were expectations that companies wouldn’t hit their targets. In the main however, companies reported healthier profits and were generally cautious in their future earnings guidance. This led to the Australian market improving through February and early March.

 

International sharemarkets took a hit in early February following concerns about Greece’s ability to service its massive government debt. These fears were somewhat allayed later in the month following expectation of a bail out for Greece, sending markets back into positive territory for the month.

The US stockmarket picked up during February when the market was surprised by the improved earnings figures announced during the quarters earning season. The strong Australian dollar reduced the impact of much of the gains experienced in the US and European share markets.

Most sharemarkets rebounded strongly over the last 12 months. The outlook going forward is not so clear. The downside risks include sovereign (country) debt worries in parts of Europe; the future removal of quantitative easing (artificially low interest rates) across the globe; future reductions in government stimulus packages and general concerns about the ability of the world economy to recover from the worst financial crisis in decades.

There are a number of positives to counter these risks, which could assist share markets. Central banks around the world are willing to be flexible in leaving interest rates low for the foreseeable future to help their respective economies get back on their feet. Credit has again started to flow and investor appetite has vastly improved from where it was 12 months ago, allowing companies to raise capital, repair balance sheets and explore new opportunities. Also, in Australia, employment growth and company earnings growth are surprising many.

The short term is difficult to predict. At these times, fundamental investment principals are all the more important. Stock selection, country selection and risk reduction through appropriate diversification are all key elements for those seeking a superior investment performance this year.

Brendan Gallagher

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