We have talked previously of the property cycle actually being a “property clock”. The market is more nuanced, it repeats and it isn’t just all about a recovery or upturn. See the graphic below as well as some observations from Michael Matuzik
Many of Australia’s residential markets are well positioned between, say, five and nine on the property clock. Better times are ahead for most, if not all, of these markets. Having stated such, the overall residential market is losing some of its puff.
In essence, the market is already correcting itself (this is what happens with the property cycle—it’s “invisible hand”, to borrow an Adam Smith metaphor), with more supply coming into the market, as evidenced by new listings and softer demand for homes in response to the higher prices. Under these circumstances, a housing bubble is unlikely. True, demand has run ahead of supply in some markets like Sydney, but overall, each market is rebalancing.
How strong calendar 2015 will be—real estate wise—will depend on several factors—job creation; what interest rates do; investor appetite; overseas buying; supply/demand balance and our overall level of confidence. We think—as has been made quite clear in recent Matuzik Missives—that our economy isn’t that crash hot. Sadly, we are relying on a sustained housing construction upturn to fill the gap left by the resources slow down. I say sadly, because building homes is the only thing we really have available over the short to medium term, that could generate more work.
Australia has great prospects, don’t get me wrong—we have the potential to be the “Switzerland of Asia’ – but it will take a lot of effort and change to achieve this. It will take a decade, at least, of hard work and a big shift away from our current culture of “entitlement”. But until then, building something—houses, roads, or casinos, take your pick— and is our next (and really only) economic big thing.
On that note, lower interest rates do impact positively on our housing market. In order to rebuilding housing market momentum, interest rates could fall during 2015. This, in turn, could see those markets in the recovery & upswing phases of the property cycle potentially overshoot. Some markets, therefore, might face a harder downturn in the future than otherwise might have been the case. This might be the price we will have to pay to keep construction moving ahead. Dropping interest rates does increase the chance of a housing bubble.
Overall investment activity has been strong this year, but it looks like it is close to peaking. There has been some “double counting” when it comes to investment home loans, so the overall level of activity—often reported in the 40 plus percent range—is overstating things. I don’t think we will see any so-called macro-prudential controls on property investors. In contrast, there is much more first home buying activity going on than the “official” ABS finance figures suggest.
Owner residents have been very active of late, many of whom are using the recovery/upturn phase of their respective property cycles to buy and sell whilst the going is good (ie, low interest rates; rising market; okay economic growth), and whilst confidence remains somewhat buoyant.
For those markets in recovery, this upgrading/downsizing activity is likely to accelerate during 2015. More so, if rates drop further. For those markets already in an upturn or downturn phase, the more traditional owner-resident real estate activity—the “bread and butter” stuff—will most likely slow down.
Finally, bad times do pass—the cycle turns—”The dude abides,” to quote from the movie, The Big Lebowski. So Emerald, Mackay and Gladstone, for example, whilst still in a downturn phase, are approaching the bottom of their troughs. This doesn’t mean that it is all cookies and cream for Gladstone, Emerald and Mackay next year, but it does mean the property owners there can start thinking about ordering some dessert. It just might take some time to arrive.