Andrew Bell’s Market Wrap: How Are The 5 Fundamentals Going?

Issue 16 | Thursday July 2nd 2020 | How are the 5 Fundamentals Going?

Hi, Andrew Bell here and today I am coming to you from 7402 Marine Drive East at Sanctuary Cove. I always enjoy being able to show you some of the standout properties of the Gold Coast and this property is certainly one of them.

On a magnificent North facing 1,148 square metre allotment on the banks of the Coomera River, this 4-bedroom plus study home is a true masterpiece of design and construction and offers a wonderful one level living lifestyle. It is a luxurious and contemporary home designed to take full advantage of this spectacular aspect with wide river views, whilst maintaining incredible privacy. This truly is a home that sets itself apart from all others. Have a good look through as a share some thoughts for this week.

I check in on regular occasions about the 5 fundamental drivers of the real estate market, and I thought it timely to do so again today.

First and foremost is GDP where pre COVID-19 it was hovering around the mid to high 2% range which gave us modest expansion of our economy. We were trending upward. However, with all the restrictions our economic growth has been knocked off track and we are now in a recession that we are still trying to get some accurate read on. This of course means economic activity is contracting not expanding which means more people are making less money and so there is less money to circulate and drive prosperity, which of course impacts the real estate market.

Second is interest rates. Pre COVID-19 we were already at record lows at .75%. We are now at .25% with really nowhere to go, but the big lesson is that the greatest tool we had over the past hundred years to spur on economic activity and growth, being reducing interest rates, is not a tool that is available. Whenever we were in recessions in the past interest rates would drop and people would be inclined to borrow money and then spend the money, and that would stimulate growth in the economy. Not only is there no more capacity to drop interest rates in any significant way but we have learnt over the past couple of years that lower interest rates did not stimulate the economy but rather just helped in another area I will touch on in a moment.

The third is unemployment. If you do not have a job you cannot buy real estate. We were hovering either side of 5% unemployed pre COVID-19 and now of course we are significantly higher, and that happened quickly. We will not really know the level of unemployment until post JobKeeper, but the numbers are likely to be the biggest since the last recession and possibly the highest since The Great Depression. It is just not known yet. From a real estate perspective, unemployment affects us because not only does it knock out the unemployed as potential buyers but it creates a whole pool of other people who are worried about their job security who also decide not to buy because of that insecurity. One other point people forget is Banks tighten their lending criteria because they also worry about people’s ability to repay. That means a big chunk of buyers is taken out of the market.

The fourth is population growth. It is a fundamental that most people don’t give much thought to. Our economy has been so dependent on its expansion each year by creating new and additional consumers through immigration. Anywhere from the 200,000 to 300,000 people per year over the past twenty years. They add to the economy from buying food, clothing, cars, and of course are a strong demand for real estate; either to buy it or rent it. With the borders closed we have zero immigration at present and when they open up we are likely to see an 80+ percent reduction in immigration because the Government won’t want to add to the unemployment queues by bringing more people in. This will take a lot of buyers out of the real estate market.

The fifth is housing affordability. I have touched over the last year on the fact that income growth was just not happening. There was no wages growth at a time when personal debt was rising. What avoided a mini crisis was the fact that interest rates kept falling; giving people more money back in their pockets which did cushion the debt issue. Now, of course, most people’s incomes will be less, many will be unemployed, others will not have access to overtime or bonuses, and dividends for retiree’s and so on will be down for quite some time. There will be an affordability issue moving forward.

None of the above is helpful for real estate. However, we have to remember that this recession we have entered was created not through normal economic fundamentals of an overheated economy with excesses left, right and centre that needed to be reined in, which is what causes most recessions, but because the recession was created by all the manmade restrictions that had to be put in place to protect us from COVID-19. Increasingly we are removing those restrictions and so now we just do not know how people are going to respond to the stimulus measures that have been put in place. We have no previous experience to reference.

There will be much speculation but keep a close watch on those 5 factors and you will get a clearer picture of the road ahead for real estate. Right now, we are in a bit of an artificially created period of confidence. Restrictions have been lifted, we are encouraged to get out and have a holiday somewhere within Australia, we have JobKeeper to protect hundreds of thousands of people that otherwise would have been unemployed, Banks have provided a brief holiday period on mortgage repayments, and so on and so on. We really will not be able to measure what is happening until all of those have ended and when we will all have to stand on our own two feet. So much is dependent on the next three months and how the economy responds to the recovery which will impact on interest rate settings, unemployment numbers, population growth, and housing affordability. Fascinating times to say the least.

I hope you have enjoyed looking through 7402 Marine Drive East. Please reach out to Matt Gates (0404 444 439) our Sanctuary Cove marketing agent for more information or to arrange an inspection of this stunning home.

We have just passed the shortest day of the year, we are into the new financial year, and it is up to all of us to make great decisions for this financial year ahead. See you in a fortnights time.

Warm Regards, Andrew Bell

Kind regards,

Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group

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