Andrew Bell’s Market Wrap: How Inflation Is Tied To The Property Market?

MARKET WRAP
Issue 17   |   August 17th, 2017  |  How Inflation Is Tied To The Property Market?

The Gold Coast property market has been buoyant now for several years, yet as we moved into 2017 there have been some headwinds. A shortage of property for sale, banks tightening up lending practices and a clamp down on foreign investment to name a few and so it has been a little more challenging. I took a decision four months ago to challenge our office to buck the trend. I wanted to test what we were capable of. A goal was established to challenge all of our team to have personal best in the month of July 2017. A month that is generally very quiet in the midst of our winter. After strategically working at this month in and month out we ended up writing a personal all-time record for our company for the most number of sales and the highest dollar value of $137 million. Now whilst this is a great reflection of our company and shows the power of our operation, the reason I wanted to share that with you is to show that although there are some challenges in the marketplace, with well thought out strategies great results are still being obtained in this marketplace. We don’t take on board all of the challenges that are happening – we find solutions. Yes, it is a great reflection on our company but, more importantly, it is a great reflection on the Gold Coast property market at present that a new all-time record can be achieved.

HOW DOES INFLATION BENEFIT PROPERTY?

Now to the main topic for this week. Inflation. There are two aspects of inflation that I want to quickly cover. The first is that while inflation is at extremely low levels at present, meaning our cost of living is not rising dramatically, it accentuates the wealth creation factor that strong property growth is experiencing. If property values had been going up 8 percent per annum and inflation was running at 3 – 4 percent then we are ahead of the game by roughly 4 percent. However, when the Gold Coast property medium values go up just short of 8 percent in a year and inflation is below 2 percent, then owning real estate is a significant gain as opposed to any other form of investment in the country. I am surprised not more has been mentioned of this across the general media but they can get very fixated on other topics.

The second factor is that there is, of course, a benefit from inflation as it does tend to drive real estate prices longer term.

*Inflation is generated by the gap between the demand for goods and services and the economy’s ability to supply them. As an economy grows and demands to strengthen, that output gap should narrow and prices will rise as a result. As we know, growth around the world has been incredibly subdued for a decade or more and as a result, inflation has been extremely low. The International Monetary Fund is increasingly confident that the global economy is on track to accelerate over the next 18 months. This is even taking into account the low expectations in the US as President Trump struggles to legislate physical reforms. The IMF forecast is that economic growth will grow 3.5 percent in 2017 and 2.6 percent in 2018. At the same time, Capital Economics estimated the global economic growth picked up the 3.7 percent in the three months to June just past, which is a big rise on 3.2 percent for the previous quarter.

WHAT IS THE MISSING INGREDIENT TO INFLATION? 

I have talked recently about wages growth. It is the one missing ingredient to really drive inflation. Major central bankers around the world are puzzled by the sluggish pace of pay rises given the continuing decline in jobless rates, however, they believe economic growth will ultimately eliminate the gap between what their economies can produce and what they are now producing, supporting wages and prices.

Our own Reserve Bank likes to keep inflation between 2 – 3 percent. This flows through directly to interest rates. Sub 2 percent inflation, which is where we are now, will see us with low-interest rates and once we move above 2 percent, expect controls coming in through higher interest rates. However, I don’t think we will see the top of that range anytime in the foreseeable future.

So, great news about the significant improvement in economic growth across advanced economies – including our own, great news about declines in unemployment and great news about continuing low-interest rates as all of these create a very stable environment for real estate and when a little bit of inflation _clicks in, it will help drive real estate prices even further as long as we can keep it within that 2 – 3 percent range.

EXCLUSIVE OPPORTUNITY

The Surfers Paradise Police Station is a rare State Government tenanted long term investment opportunity in the heart of the Surfers Paradise entertainment precinct fronting Orchid Avenue. The Surfers Paradise Police Station is offered for sale via Public Auction at 11:00 am Thursday 7th September 2017 to be held at the Gold Coast Turf Club, Race Course Drive, Bundall. For all enquiries contact the exclusive marketing agent Steven King on 0417 789 599 of Ray White Commercial Gold Coast.

View property details online here.

Well, that is it for this week. When I am with you next we will be knocking on the door of spring and we expect to finish 2017 with robust activity amongst buyers and sellers to see out the year.

MUSCULAR DYSTROPHY CHARITY BALL – 4 TABLES REMAIN!

There has been a surge in bookings for our 24^th Ray White Surfers Paradise Muscular Dystrophy Ball on the 9^th of September following the announcement of Sneaky Sound System as our lead entertainers. Don’t be one of those who heard about how good it was, but come along and be part of this exciting annual event.

Visit the website here for all details: rwspevents.com.au/rwspcharityball

I look forward to catching up with you in a fortnight’s time. Until then, stay safe.

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

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