Issue 7 | March 28th | Is It Worth Buying Before a Federal Election?
Hi, Andrew Bell here and I thought it was time that we checked in to see how the fundamentals of real estate are sitting at present as we draw to the end of the first quarter of 2019.
When looking at the 5 key components that drive the real estate market, we will look first at GDP where we saw just over 2-weeks ago that it has eased back in the early parts of this year but still remains at one of the highest levels of all the international economies, and we have continued to avoid any form of recession. We are now 28 years without a recession and all the current indicators are that we will continue to avoid one for at least another two years. However, whenever there is a dip in GDP there are plenty of commentators who jump on board suggesting that we are heading towards a recession, and that has happened in the last couple of weeks.
Population growth remains at very firm levels and continues to supply a constant demand for real estate. This supports the demand side of the equation, so looking at the other side of supply and demand, we see a very clear shift that should be carefully noted. The number of new homes built across Australia is expected to drop dramatically by about 25% from when construction peaked three years ago. This, of course, will progressively see the imbalance of a steady annual demand not being met by the new construction levels required to balance up pricing. Whenever we see the construction of new homes not keeping up with the demand, we know that will create a shortage of property, and as a result, ever-increasing upward pressure on real estate prices. It is forecast that home starts will decline from 228,000 across fiscal 2019 to just 176,000 in fiscal 2023.
Unemployment is our next fundamental and we see that has been in decline throughout 2018 and we now find trend unemployment around 5.1%. Over the past year, trend employment increased by 295,500 people, which was above the average annual growth rate for the past 20 years. Even the trend employment to population ratio rose to a 10 year high of 62.4%. So, yet another very supportive component of the real estate market.
Interest rates have always been one of the most critical factors in the real estate market. Over the years it has been a very blunt tool used by our Reserve Bank to either increase demand by consumers to borrow or decrease demand to borrow by lifting and lowering interest rates. Their primary target has always been the control of real estate pricing. With the economy showing some signs of softening in its growth, and with real estate prices have gone through its typical correction phase, they now like to provide more support to the economy and to real estate prices, and as such, there is increasing discussion about the next move in interest rates being downward. That will be below the historically low levels we are already at, but I don’t expect to see that happen anytime soon.
Finally, consumer confidence. Waiting for the latest figures but no question we are all a little perplexed as to exactly what is going on at present. One of the problems about the amount of information that is now freely available for all of us to access is that so often that information from various sources is quite conflicting. Different economic forecasters will produce different reports; looking at one part of a statistic whilst someone else is looking at another, and so we can see one strong story on something such as population growth, whilst someone else can find something negative to talk about. What is really needed, and what I try to do in these reports, is to try and give meaning to all the reports that are available to try and assist us all with some clarity.
What we can be certain of is consumer confidence will be knocked severely over the next 2 months. Once all the negative Election Campaigning commences, we will be bombarded by all Political parties with the highest level of fear-mongering which will leave us fearful about our futures. As you know, it happens every Election and that is why consumer confidence always dips in the lead up to an Election. In actual fact, it is a great time for buyers of real estate to buy as that negativity that comes out during an Election does result in many people deciding not to buy until after the Election, and so the real estate market always has sellers who need to or want to sell irrespective of the Election and they are more likely to listen to whatever offer has been made prior to the Election.
Overall, all the key components that drive the real estate market are in positive territory. Real estate prices have, of course, corrected across most markets of Australia, with quite severe drops in markets like Sydney and Melbourne yet modest adjustments in other markets like the Gold Coast which will probably end up being judged as one of the strongest and most stable markets of 2019. This has followed a normal correction phase that is part of the real estate cycle; after strong growth in real estate prices in 2015, 2016 and 2017, and now a correction over 2018 and 2019 to get pricing back into balance. Once we are passed the Election and into the second half of 2019, greater stability will start to come back into the market.
In fact, at present, we are noting one other unusual occurrence in the lead up to the Election. We are seeing many investors coming back into the market to buy. They are concerned with the prospect of a change of Government at the next Federal Election in May that negative gearing will not be available for resale properties and they see that they would be wise to secure the negative gearing arrangement, which has been a long-held Australian tradition prior to our upcoming Election. The Labor Party has said there will be no ‘grandfathering’ and whoever has negative gearing in place before any changes occur will keep that negative gearing arrangement. Perhaps a good strategy for all those looking for their next investment property to get out and buy it before there is any change after the Election.
I’ll be back with you in a fortnights time. Until then, stay safe.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group