Finance Market Update - 19 June 20
There are five forces fighting for a boom in property prices. In this update we talk about what has happened to property prices this year and how these forces are setting us up for another boom in property.
Tick, tick, boom
Over the past few updates, I have touched on a few important things that are happening which will directly impact property prices.
These include low rates, strong demand, low supply, FOMO, and government policy.
In this update, I am going to make the case to you that property prices are going to boom again.
This is quite contradictory to many others who think the property market is still heading for a major drop off in prices.
Of course, there are significant downward pressures on the economy and property market, notably unemployment, loss of migration, insolvencies and collapsing businesses, bank bad debts and household indebtedness that will be countering the forces below, but ultimately I believe the forces making for a rise in prices will prevail. At least for now.
A bit of background.
In my 2019 yearly wrap up prediction update that “property prices [in 2020] will reach or exceed 2017 peak values” and by the start of March this was looking true. Indeed, the Australian Bureau of Statistics said this week that according to their numbers house prices surged 12% in 2020 between January and March. My prediction was going to come true, then the virus crisis hit.
Further, in an update in April 2020 I said “Prices could flatline or at least experience a modest drop of 5% - 10% if the virus crisis social distancing measures are eased sooner than people think, which would be before September or as soon as June”.
And so here we are.
In the middle of June with restrictions eased and with a modest drop of 5% - 10% so far this year. As I predicted.
You will see the five forces outlined below but I want to make another prediction…
Property prices will recover all lost ground in 2020 and be setup for a boom in 2021 that will reach or exceed previous record highs.
And so, with that being said let’s talk about the 5 forces that will drive another property price boom.
The five forces
First – low rates.
There is a direct correlation between low interest rates and rising property prices.
Indeed, the RBA itself has admitted this trend after lowering the cash rate to historical lows to fight of unemployment and the recession.
In a nut shell it goes like this – low interest rates make people think it is a good time to borrow and buy things, the more things that get bought (like property) means there is more buying activity, the more buying activity there is the higher prices rise.
Further, the lower the rates the more people can borrow, and the more people borrow the people will spend. This is especially true in property.
We have historical low interest rates right now, with no sight of an increase. This is the key force and fuel for the fire.
Second – demand.
Australians are addicted to property.
This is not inherently a bad thing, but it is an important economic and psychological phenomenon that results in a lot of buying activity.
There is a lot of latent demand of people who want to buy property and they will continue to buy as rates are low.
On top of that, we could see huge interest from people in HK, Singapore and even US relocating to Australia. This will be largely driven by the trans-Tasman anti-virus bubble and that we have an amazing country. All the people that look to move here will be wealthy and smart and want to buy property.
Third – supply.
More properties are being listed for sale but still is not enough to outweigh demand.
Demand > supply.
I also do not think there will be a wave of forced sales from banks in September/October after the repayment deferrals. There will be some, but not a market moving amount
Forth – FOMO.
You might laugh at this being on the list but as we discussed in an update before FOMO is very real.
The thought of missing out or losing is very influential to a persons thinking. Even more so than the thought of ‘winning’.
This is called “loss aversion” and means people will buy not to lose, and when the market is rising people think they are losing out buy not buying in.
So, they buy in. Which increases buying activity, and increased buying activity, as we know now, increases prices.
Fifth and finally – government.
The government knows that if there is a property price collapse it will be disastrous, and they will fight this as hard as they can.
Not only disastrous for the economy and people, but for the ruling political party of the day. They would likely lose any elections as people look to point the finger.
That might be a cynical view, but the conclusion that the government will do almost anything to support the property market is well founded.
For proof just look at the all the stimulus and incentives for property buyers, builders and fixers they offer.