Finance Market Update - 4 December 20
We have seen a lot of negative numbers this year because of the virus crisis but there have been positive ones with more just around the corner. In this fortnights update we talk about the economic recovery and upcoming boom in property prices
This year has seen a lot of record numbers.
Many of them have been ones we would rather not have seen, like record high unemployment, virus related infections, deaths, and the number of businesses shutting their doors.
But there are also positive numbers around health and economic recovery. Specifically, the recovery in property prices.
For the second month in a row Core Logic has recorded property price increases. While marginal at 0.8% in November at a national level it is still extremely better than price falls many predicted.
Just before NSW came out of lock down in June I predicted that “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”.
This was not a common view at the time and I had a lot of robust conversations with people about this, most of whom did not agree with this prediction and subscribed to the doomsayers perspective of a double digit collapse in prices.
Not only has the property market collapse not happened, but as I predicted we are almost certain to see record high property prices in 2021.
Worth noting that most bank economists have reversed their views to say there will be growth in 2021 in property prices as opposed to their original views of a collapse, but I am more bullish than most saying that not only will there be growth but we will see levels higher than the 2017 peaks. Further, overall prices could rise between 10% - 20% over the next few years.
Whether or not this rises into a property bubble is a discussion for another time.
Another point to reemphasize is that we talked in an update in September about how property prices would lead the way to economic recovery and out of recession.
Well, property prices are recovering as a leading indicator and this week the Australian Bureau of Statistics (ABS) released official figures that economic activity jumped up 3.3% which was some of the highest growth since the 1970’s.
However commercial property is still a mixed picture.
Large office towers are seeing a decline in lease requirements from anchor tenants as they move to a staggard 2/3 in/out of the office structure for employees and as that demand lowers so does the yield and apparent value.
Warehouses are ok as demand for locally manufactured goods rises as tensions with China escalate and local businesses need more space. While retail shops have falling rents but small businesses that have survived to this point have a good chance of keeping their doors open.
The reason for my conviction in the recovery and boom in residential property prices was to do with what I called the 5 forces fighting for a boom in property prices.
The 5 forces were - low interest rates, high demand, low stock, FOMO, and government money.
Of the 5 forces the most influential on property prices is low interest rates.
There is an inverted correlation between low interest rates and property prices.
When rates go down property prices go up.
The reason this is true has to do with making debt more affordable for people.When debt is more affordable people tend to borrow more, and the more people can borrow the more people will spend which pushes prices upward.
We have talked about bidding upwards before but basically it comes down to that when someone can borrow more money they spend more money. If you can only borrow to buy a house at $1.5 million that is all you can and will spend. But if you can borrow enough to buy a house at $1.65 million it is highly likely you will buy at or closer to that price point.
While it mind sound odd one of the key reasons more people jump into a rising market when prices are skyrocketing is because of FOMO (fear of missing out) which is a very real psychological occurrence.
FOMO is specifically relevant for the property market because it touches on a key psychological action when people buy not to lose, often more than they would buy to win. For example, if you don’t buy a house now and prices keep going up you lose, so you buy in now, and you buy as much as you can with the money you have, whether that is debt or cash.
Compounding FOMO is the abnormally low number of listings and properties available. Specially houses over units. People want more space since they are working from home more and this is not only translating into intense demand for houses over units but also driving people up the coast and inland for bigger properties and less busyness.
On top of all of that the government is doing everything possible to support the economy by pumping never before seen amounts of money into the system. As they should. And though widely criticised for the record level of debt Australia is probably the best case of how a country and economy can recover from the virus crisis. The central bank has cut the rate forcing banks to cut their rates which has saved a lot of people a lot of money and there are extremely business friendly tax incentives available.
All of these things have created an environment for economic recovery and property price growth, one that will certainly lead to more record high numbers in 2021.