I was recently invited to present to Mirvac’s WA sales team on the current state of the economy and give a market snapshot.
Being real estate salespeople they, like myself and the team at Ocean Edge Finance, are constantly being asked to predict the bottom of the real estate cycle. It’s a keenly sought-after piece of information. Naturally, any property purchase made at the bottom of the cycle will immediately benefit from the resulting upside in property increases and subsequent equity growth.
Whilst no one is in possession of the elusive crystal ball, it’s important to keep our clients well-informed by having a broad understanding of the economy, with a specific eye on how this plays into the local real estate market.
It was these key economic points I shared with Mirvac in order to answer the big question of the right time to buy.
Make no mistake, events playing out overseas may seem like white noise, but the effects felt locally can be significant. The two big issues currently facing Australia follow:
1. The trade war between the US and China
US President, Donald Trump, is determined to redistribute the supply chain. In other words, he wants to see the US return to be the manufacturing powerhouse it once was by making locally produced goods more affordable than Chinese-imported equivalents. He also wants to protect agriculture and technology in order to grow the US economy and create jobs. Making low-cost imported Chinese goods more expensive, via tariffs, is his strategy. China exports more than it imports so this play from Trump has China on the back foot and has compromised future growth. But China is standing firm, fighting fire with fire and imposing its own tariffs on US imports, as well as devaluing the yuan to make their exports cheaper and more attractive for overseas buyers. All in all, this trade war is playing havoc with international trade, stock markets, currencies and political tensions.
Will the UK’s new Prime Minister, Boris Johnson, find a way through the current quagmire of detaching the UK from the EU? Trade and border issues, as well as political infighting is playing havoc in the UK.
These major events are dragging the global economy down and have potential to cause pain in the Australian economy, stuck between our security allegiances to the US whilst China remains our key trading partner.
There’s bad news and good news when applying the microscope to the Australia’s domestic economy. The bad news has generally been driven by tightened credit conditions, however stagnant inflation and resulting anaemic wage growth have also played a significant part.
1. Credit Crunch
Debt’s function in the economy is to generate growth. Macroprudential changes to investment lending in ’16 and ’17 based on spiralling Sydney and Melbourne property prices, followed by the Royal Commission in ’18, has significantly impacted consumer and business access to credit. As a result, Australia’s economy has effectively stalled.
2. Stagnant inflation and wages growth
Wages have grown just 2.3% across the last three quarters off the back of inflation at 1.6% for the year to June ‘19, which is well below the RBA’s inflation target between 2 – 3%. It’s sounds counter-intuitive, but whilst inflation is low, cost of living continues to skyrocket (childcare and education, for example, are not in the basket of goods used to calculate CPI). Meanwhile, retail spending is also in the doldrums, growing just 0.2% in the June ’19 quarter.
The Government and the RBA have combined to address these challenges, with the following stimulus strategies in place to drive economic growth:
1. Tax Cuts
The Government’s much-publicised income tax cuts are in full swing as tax return lodgements surge. People earning between $25,000 and $120,000 per year will receive between $255 and $1,215 in tax refunds, which the Government hopes will be spent in the economy to provide much-needed stimulus. This is the first of a three stage, $158 billion tax cut rolling out from now to 2024.
2. Interest Rate Cuts
In the months of June and July the RBA lowered the cash rate 25 basis points per month, totalling a 50 basis point cut overall. The cash rate now sits at a record low of 1.0%. On average the banks passed on 43 of the 50 basis points. This frees up cash flow for homeowners with a mortgage to spend in the economy or pay their home loan down faster. However, rate cuts also see the Australian dollar weaker currently at its lowest level since the GFC, trading around 68 US cents.
3. Lowering of Assessment Rates
In early-July regulator APRA gave the green light for banks to lower the stress test they apply when assessing home loan applications. On average, banks were assessing home loans at 7.25% and this has now been lowered to 5.50% on average. In effect, this gives borrowers improved borrowing power, releasing home borrowers from mortgage prisons and assisting property purchasers, especially first home buyers.
These measures have given the Australian stock market confidence, whilst excitement abounds in the resource sector.
The ASX has finally beat its record high set nearly 12 years ago. Last week the ASX200 hit 6,875.5 points passing it’s previous high, set on November 1, 2007, of 6,845.1. The market is looking past global uncertainties and capitalising on lower interest rates, that said, the trade war between the US and China is causing fluctuations.
5. Mining and trade Surplus
Iron ore prices are at five-year highs after nearly doubling this year as a result of the Vale dam disaster in Brazil back in January this year. The Federal Government is reaping the benefits as the surge in export income improves the budget bottom line. Australia’s trade surplus is now at a record $5.7 billion as a result of this iron ore boom.
Australia’s domestic economy is experiencing significant challenges. However, much-needed stimulus backed up by record stock market results and a record trade surplus off the back of an iron ore boom means there is some positivity on the horizon. It’s hoped this positivity will see Australia continue to build on its 27-year run without recession.
Local Economy - Perth & WA
The local WA economy has been experiencing significant challenges since the last mining boom fizzled out in 2014. Crashing property prices, high unemployment and soaring costs has seen a dark economic cloud sit over the WA economy for more than half a decade.
1. Boom to bust
During the boom WA was Australia’s engine room, regularly referred to as the powerhouse of the nation. But since the boom fizzled WA performance across economic growth, retail spending, business investment, construction, population growth and housing investment has deteriorated beyond recognition. State debt sits at $37 billion.
2. Property Prices
Perth property prices have officially “crashed” and are back to 2006 levels. Whilst there was significant property growth from 2006 to its peak in 2014, all those gains have been wiped out, declining a whopping 20.2 per-cent. The median house price is now $441,275, ranking Perth the sixth capital city behind Sydney, Melbourne, Brisbane, Hobart and Canberra. The declining wealth affect for WA property owners has had a dramatic impact on the confidence of WA property owners. Negative equity is commonplace, and properties sold at a loss sits at record highs. Too many highly-leverage home owners, and those in negative equity, are just one catastrophe away from significant financial hardship. It’s little wonder, given this backdrop, retail spending in WA is down.
3. Wage growth
Whilst wage growth nationally is down, WA is worse again at just 1.6% over the last year.
There’s no doubt WA has gone from chocolates to boiled lollies when it comes to the economy. Property equity wipe-outs, high unemployment, stagnant wage growth, construction companies in receivership, high street ghost towns, pitiful population growth and the legacy of hard-hitting cost of living increases from the boom all loom large over the WA.
Whilst WA locals are a resilient lot, expectations of economic growth are palpable. And maybe there is reason for optimism.
4. GST Fix
WA won big on the GST State redistribution earlier in the year with a new 70c floor. An extra $4.5 billion over three years will go into WA coffers, allowing the State Government to pay down debt and invest in infrastructure.
5. Mining investment
A $75 billion infrastructure investment in the mining sector is poised to transform the WA economy. Whilst not the $320 billion spent in the previous boom, this latest investment will ensure manageable and sustainable growth. Resources such as iron ore, gold, nickel and lithium will all see investment from numerous companies including Rio Tinto, BHP and Fortescue. Meanwhile the oil and gas industry has shaken off the price shock of 2016 with significant investment in WA imminent from Chevron and Woodside.
6. Rental vacancy rates
The Perth rental vacancy rate now sits below 3.0 per-cent, which accounted for rent increasing 4.3 per-cent for the year to June ‘19. Experts point to lowering of rental vacancy rates and increasing rents as a strong indication the real estate cycle is bottoming out.
7. Interest rates , assessment rates & Keystart
As previously mentioned, interest rates at record lows and improved assessment rates for home loan applications will assist purchasers get into the market, particularly first homeowners. It will also assist mortgage prisoners refinance to a better interest rate to improve cash flow or pay down their loan faster. Keystart has also increased its income cap by a further $15,000 which will be another door-opener for first home buyers.
WA farmers enjoyed their most valuable crop ever last season and their second largest harvest ever. Strong demand from drought-affected regions on the East Coast drove the harvest’s record profits. The result was a $7 billion crop and a windfall for regional WA.
WA tourism has enjoyed a 24 per-cent increase in spending to $7.8 billion over the last year delivering an extra $1.5 billion to the WA economy. This has been driven by a 10 per-cent increase in domestic tourism with the Perth Stadium and more direct flights being credited for the increase.
10. State Election
The next election will take place on 13 March 2021, which is just over 18 months away. Expect Premier Mark McGowan and State Treasurer, Ben Wyatt, to increase investment in the lead-up to the election. This will create jobs and provide a boost to the economy.
With the most challenging period in the WA economy now in the past, prosperous economic opportunities lie ahead. This was reinforced when the State Government announced in May the first budget surplus in five years to the tune of $533 million. Surpluses are forecast through to 2022-23 totalling $9.3 billion. This will go some way to arresting the State’s debt of $37 billion.
A Question of Timing
So, is now the right time to purchase a property in Perth? All indicators would suggest yes. Ideally it would be good to start seeing slight median property price improvements this side of Christmas. This will give the market the last piece in the puzzle it needs to start the bounce back – confidence.
From here, once confidence kicks-in, 2020 looks set to be the year the WA economy rises to its feet.
The Final Word
If you would like to find out more about your finance options enabling you to enter the Perth property market contact us at Ocean Edge Finance. We can provide a full analysis on your borrowing capacity to assist you in building a plan to realise your property goals.