As share markets around the world settled down after the early August rout it became apparent that this round of economic uncertainty was yet another consequence of the original GFC that still bedevils western economies.
Future Fund Chairman David Murray warned that the debt crisis affecting the United States and most European countries could take several years to resolve.
“The sorting out of that problem is something that could take up to 20 years. As that post crisis environment unfolds we will see continuing events such as we've seen in the past couple of weeks.”
David and Libby Koch in their regular feature on the News.com website said on 8 August that the investment world has changed and it will affect the way people invest for the next ten years. They see a shift where investing for capital gains is in replaced by investing for what they call “solid, dependable income returns and annuities.”
It isn’t surprising that, after a free-fall in global markets followed by an almost Phoenix-like recovery, investors are hesitant to continue placing their faith in shares as dependable long-term investments.
ABC News Online quoted investment bank Morgan Stanley's global strategist Gerard Minack who warned that there could still be further falls ahead for Australian shares:
"If the S&P 500 falls another 20 or 30 percent, it's hard to see why our market wouldn't fall a similar magnitude," he commented.
Naturally, all the current economic dramas will impact on Sydney real estate to some degree. Fortunately, not all the effects will be negative.
RBA Interest Rate Rises On Hold
In its meeting on August 2 the Reserve Bank of Australia decided to leave interest rates on hold. Within a week the Commonwealth Bank of Australia had cut its fixed-rate home loans by 60 basis points and Westpac cut its three-year fixed mortgage rate by 20 basis points.
Nationally, housing prices have been softening for some time. Even Sydney prices were virtually flat over the June quarter, and in the month of June, detached new house sales fell 1.8% in New South Wales according to the Housing Institute of Australia JELD-WEN New Home Sales Report.
Speaking just before the latest share market tumble, Jason Anderson, manager of economics in NSW for property researcher MacroPlan Australia, said his view was that the housing market would ‘track sideways.’
“In the past, when share markets have really fallen away, there has usually been a good reason for that such as a wider economic slowdown occurring, and in that context, you usually get rate cuts.”
Christopher Joye, joint managing director of Rismark International, wrote in his ‘Property Observer’ column on 8 August that he remained confident about Australia’s economic prospects, noting that the unemployment rate is under 5%, private wages including bonuses grew by 4.1% over the past year, and disposable household incomes rose by even more than this amount.
His confidence is supported by what happened to housing prices during the original GFC when the peak-to-trough fall in Australian home values was just 3-4%.
Before the GFC mortgage rates had reached 9.6% as late as August 2008. After mortgage rates were cut to 5.75% in April 2009, Australian house prices soared by a massive 12.1% by the end of that year.
Long-Term Sydney Property Prices
Housing is always best seen as a long-term investment, while most sudden economic swings in recent years have been resolved about as quickly as they’ve begun.
Michael Yardney, director of Metropole Property Investment Strategists, points out that property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards. This, he says, is one of the slower phases in the property cycle.
“The market is correcting, not collapsing,” he concludes.
Interest rates now are historically low, and there’s a good chance they’ll stay that way or even decrease over the next six- to twelve months. Rapid increases in housing prices, like those of 2009, are unlikely to reoccur during this period, but neither are Sydney’s prices likely to tumble.
Investors seeking security and long-term growth have even more reasons to put their money into rental properties. And the family home, if it is the homeowner’s main residence, remains exempt from capital gains tax.
Home affordability, writes Jessica Irvine on SMH.com.au, has actually improved: “The national median house price is now about five times average household disposable income on the Reserve Bank's preferred (but hotly-contested) ratio, down from a peak of nearly six times in the early to mid-2000s.”
Housing is simply the most tax-advantaged investment in Australia, and it’s easier to place one’s confidence in bricks and mortar than in a roller-coaster share market or an even riskier fund that can fall prey to management failures.
“When it comes to being the Lucky Country, we are it,” says Ian Verrender in the Herald’s Weekend Business. “But the frenetic growth of the past 15 years has ended.”
Sources:
- Kelly, Joe (10 August 2011) "Global debt crisis could last 20 years, warns Future Fund chairman David Murray." The Australian
- Koch, David & Libby (8 August 2011) "Outlook far from rosy." News.com, National Features
- Janda, Michael. (9 August 2011) "Spectacular share rally on stimulus speculation." ABC Online
- Pederson-mckinnon, Nicole (7 August 2011) "Buyers in the driver's seat." SMH Money
- Curran, Edna (9 August 2011) "Commonwealth Bank, Westpac cuts fixed-rate home loans." Dow Jones Newswires
- Property Wire (9 August 2011) "Oz property prices fall for sixth month in a row." Premier global property news service
- Joye, Christopher (8 August 2011) "Hiding in Australia's property hedge." Property Observer
- Yardney, Michael (3 August 2011) "A new era for our property markets?" Property Update
- McMahon, Stephen (9 August 2011) "Home loans show investors shun market." SMH Business
- "Interest rates cut tipped as stock markets reel." (9 August 2011) Herald Sun
- Irvine, Jessica (12 August 2011) "Ardour starts to cool in our frenzied love affair with bricks and mortar." SMH.com.au
- Verrender, Ian (13-14 August 2011) "Our Lucky Country rating under threat as the dragon tires." Sydney Morning Herald
Philip Keeffe - Phil Keeffe is an Australian journalist originally from California who has lived in Sydney since 1968. His communications background ...
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