Each month the RBA offers its perspective on how Australia Inc. is tracking when it releases its Chart Pack.
I know that charts aren’t everyone’s cup of tea, but I review these each month as part of my regular research.
So here’s a stack of charts, some of my thoughts and comments from the RBA’s Statement on Monetary Policy regarding some of the factors that will impact our economy and the property markets.
This is essential reading for all serious property investors, so here goes….
THE WORLD ECONOMY
International Economic Growth
Of course Australia doesn’t operate in a vacuum, so it’s important to start with the international context…
Global economic conditions have picked up since the middle of 2016 and appear to be stronger in early 2017 than they have been in recent years
The economic growth of our major trading partners is forecast to be around its long-run average this year before easing slightly in 2018.
The strengthening in economic activity has been broad based.
Economic growth in China has retained its earlier momentum in 2017, and growth in the major advanced economies picked up throughout 2016.
At the same time the USA economy is picking up and in anticipation of this the US stock market has gained almost $3 trillion in value since Donald Trump’s election in November.
Headline inflation in the advanced economies rose sharply in late 2016 and early 2017, following the increase in oil prices during 2016.
However, with oil prices now declining, headline inflation also appears to have peaked recently and is likely to decline in coming quarters.
While core inflation generally remain low, there are a number of factors suggest underlying inflationary pressures are likely to pick up in the period ahead, including the ongoing tightening in labour markets in the major advanced economies, which has seen some measures of wage growth edge higher.
Unemployment is falling in the 3 biggest economic regions, meaning their economies are slowly improving:
In short the world’s economy is “behaving itself.”
While many of the previous concerns of a world recession have faded, we’re in a low growth, low inflationary, low interest rate environment which is likley to remain that way for some time.
Most central banks have been trying to stimulate their individual economies with low interest rates, but in general this has been to no avail.
Our economy is now growing at a much slower pace than the long run averages, more in line with the lower growth environment the rest of the developed world has experienced since the GFC.
Australia’s economy grew by 2½ per cent over 2016, a bit below RBA estimates of potential growth, but we are performing better than most with uninterrupted economic growth for over quarter of a century.
Looking ahead, economic growth is expected to pick up gradually, supported by the low level of interest rates and the ongoing recovery in the global economy.
Economic conditions continue to vary across the states.
Recently, growth in demand has been strongest in New South Wales and Victoria, weakest in Western Australia and has picked up in the rest of the country:
And like the rest of the world, Australia is in a low inflationary environment which is of course one of the reasons the RBA can keep official interest rates so low.
And as these forecasts show the RBA is not expecting inflation to jump significantly any time soon.
One of the big unknown is when wages will start rising again as this will tend to push up inflation again.
Australian household wealth is strong and now, after a period of stashing our cash following the GFC, we’re spending a little more and that’s good for our economy.
Low interest rates and ongoing growth in household net wealth have continued to support spending.
However household income growth has remained weak, and there has been a further decline in the household saving ratio.
Low growth in household disposable income continues to weigh on spending.
Households’ perceptions of their personal finances have declined since late 2016.
Surveys indicate that households believe that paying off debt is currently a wiser place for saving than investing in real estate
Having said that Australian households are amongst the wealthiest in the world, with our assets (primarily in real estate) increasing in value faster than our liabilities.
The graph below shows the interesting effect of our current low interest rate environment.
Despite record high levels of household debt, falling interest rates means that this debt is more affordable than ever with average household debt as a percentage of disposable income being at an affordable level.
However consumer sentiment remains fickle, and when people don’t feel confident about their jobs or their future, they don’t spend.
OUR HOUSING MARKETS
As our mining boom slowed down the government facilitated the current property boom by encouraging the non-mining economic sector, in particular the building industry, to take up the slack.
This has mostly come through the high-rise apartment building boom, which now seems to be coming off the boil.
The decline in higher-density approvals has been concentrated in New South Wales (where housing activity has been quite strong of late) and Queensland (where conditions have been less favourable)
This is a good thing as supply of new apartments is currently running ahead of demand, particularly in the Melbourne and Brisbane CBD’s.
Our property markets are taking a breather
The two hottest housing markets in the nation have shown signs of slowing down in April, with the CoreLogic Hedonic Home Value Index recording a rise of just 0.1% over April, the lowest month-on-month rise in capital city dwelling values since December 2015.
The moderation in growth was due largely to a slightly negative April result in the Sydney property market, where dwelling values were broadly flat over the month.
The result for the Melbourne property market was also lower than previous months of 2017, with dwelling values up 0.5% over the month.
At the same time loan approvals for investors are again on the rise, which has resulted in more macro prudential controls from APRA to slow down particularly interest only and higher risk lending to investors.
The decline in loan approvals in recent months has been driven by a decline in approvals in Victoria, while loan approvals in New South Wales have remained near record highs.
Housing finance for new dwellings has been little changed recently following rapid growth through 2016; housing finance for the construction of new homes has remained stable.
TWO OF THE MAJOR DRIVERS FOR OUR HOUSING MARKETS:
Our housing markets are very dependent on consumer confidence.
There is a direct link between consumer confidence and housing turnover and rising prices.
Consumer sentiment has fluctuated widely recently, and has slumped recently as more of us have become pessimistic.
Currently we’re creating jobs and the unemployment rate is holding steady dropping, but this statistic is a little misleading since it understates the degree of labour market slack due to the large number of part time jobs that have been created with many Australians working fewer hours than they would like, while others have been discouraged from looking at work at all.
This has created a situation where wages growth remains low and unemployment varies considerably between states.
Of course the states with highest job growth and lowest unemployment have the better performing property markets.
The following graph clearly shows how the service sector is where the jobs growth is occurring.
In turn this is where wages growth will occur enabling people to upgrade their homes, pushing up property prices
THE BOTTOM LINE:
All in all, our economy is sound and we’re now in a period of low economic growth with low inflation, low wages growth and low interest rates.
By the way…the rest of the world has been operating in this environment since the GFC
We were sheltered from this by an extraordinary mining boom and our economy’s resilience to transition from this has been surprisingly impressive.
Of course there are still risks out there…
Which means the RBA is unlikely to increase interest rates for a while but the banks, under pressure from APRA, are raising their rates and at the same time causing a “credit squeeze” in an attempt to slow down the Melbourne and Sydney property markets.
This means as property investors for the foreseeable future we can’t expect the type of strong capital growth in property prices we experienced recently.
By the way…this doesn’t mean it’s the wrong time to invest in property.
What it does mean is that careful property selection is critical as you can’t count on the market to do the heavy lifting.
It also means a more stable property environment without the booms and busts.
WHAT DOES THIS MEAN FOR YOU?
Clearly owning property – your own home and investment properties is the way to wealth in Australia
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