Property market ringside: Frydenberg v Jones
At Montgomery we have always kept an eye on the residential property market. While it’s important to many as an investment market in its own right, it also influences consumer behaviour and its significance in terms of the nation’s wealth makes it critical from a fiscal and monetary policy perspective.
Notwithstanding there are multiple property classes and regions, in 2018 property prices had fallen the most since 2012. This accorded with our expectations and ended when the Liberal National Party defied all polling and won the 2019 Federal Election. This put an end to Labor’s plans for adverse changes to negative gearing and capital gains tax benefits while also putting an end to the property bear market.
Most recently, the global pandemic has seen several forecasters including bank economists predicting a sharp decline in property prices. The Commonwealth Bank’s provisioning for bad and doubtful debts was based on an assumption that residential property prices would fall 10-20 per cent and unemployment would reach 10 per cent. In fact, back in May, one of the Commonwealth Bank’s “prolonged downturn” scenarios included a fall in property prices of 32 per cent. As an aside we were predicting a fall of approximately five per cent and no more than 10 per cent.
As recently as August, ANZ held that Melbourne house prices would fall by 15 per cent, while Sydney prices could drop by 13 per cent from peak to trough before bottoming out in the second half of 2021, as the pandemic and related shutdowns weighed on confidence.
Investors and forecasters regularly point to a raft of indicators to help them discern the direction of house prices in Australia and when forecasts come from the banks themselves we pay particular attention because they have essentially all the data as most people borrow from one of the big banks. The data used includes rental vacancies and employment, auction clearance rates, interest rates and policy settings as well as rent-to-mortgage comparisons, household debt and a raft of others.
I believe however there are far fewer signals investors have to consider.
Migration is an important determinant of property prices
In the very long term, migration is an important determinant of property prices. The wealth of those migrating will also have an impact on the property market. Australia has enjoyed the benefits of a massive increase in net overseas migration that commenced around 2007 with the Big Australia policy introduced by Kevin Rudd. Net migration increased from around 100,000 people per year prior to 2007 to approximately 250,000 per year.
With an average of three people per household, net overseas migration drives demand for about 80,000 new properties every year. As an aside about 85 per cent of new arrivals in Australia settle in Sydney or Melbourne.
Migration may become even more important in the future because the ageing demographic in Australia could have a negative influence on some property types. Having said that, investors should remember that high-end homes often referred to as a trophy homes – will always work like an option, over the success of any industry. Whether individuals succeed in mining, energy, property development, IT, biotechnology or development, success often leads to the desire to own a high-end house. In the absence of a depression, owners of such homes will always be able to sell to someone who has been successful.
While migration is arguably one of the most important determinants for property prices long term, in the shorter term it is simply the availability of credit that will influence residential real estate prices.
Availability of credit
On that front there has been some important and arguably very bullish property price news. On September 25, the government proposed legislation to remove the responsible lending obligations from the National Consumer Credit Protection Act 2009. The change is aimed at reducing the time and cost of credit assessments for consumers and businesses and speed up lending by banks that had become almost scared to lend after the Financial System Enquiry and subsequent Royal Commission.
Australian Treasurer Josh Frydenberg said the government is seeking to remove a one-size-fits-all approach, noting that “Responsible lending has become restrictive lending.”
Loosening the reins on lending by banks would be extremely bullish for property prices – especially when one can borrow for four years fixed at 1.98 per cent.
There is one caveat however and that is the government’s plan faces an arduous journey in the Senate. Labor has seized on the pleas of victims, of past poor bank behaviour, to retain the credit rules. Labor’s financial services spokesman, Stephen Jones, acknowledged there are serious issues relating to the flow of credit, but added rolling back consumer protection is a “no-go zone.”
For property owners and investors wondering whether property prices will rise or not, low interest rates are incredibly positive, as is a COVID-19 vaccine and a relatively low level of stock on the market. All else being equal, we currently believe the property market will rise next year. But access to credit and ensuring the banks are freer to lend is perhaps the most important short and medium-term ‘shot-in-the-arm.’ Therefore, how the proposed legislation progresses is something to which every property investor should be attuned.