2017 report card – Andrew Wilson

We are almost half way through the year, so lets look back at what has happened so far as we look at the 2017 report card with Dr Andrew Wilson.
Kevin:  Given that we are 50% into the year already, it’s time to have a bit of a look back and check on the report card for what’s happened so far in 2017. Joining me to do that, Dr. Andrew Wilson from The Domain Group.
Andrew, how would you classify the first six months of 2017?
Andrew:  No doubt, a positive start to the year, Kevin. Also, no doubt that we’re moving away from that very strong prices growth – particularly in Sydney and Melbourne – that we had at the end of last year. Prices are still rising in all capital city markets, and interestingly, we’re starting to see a bottoming out in the Perth market as well.
I think those value opportunities and perceptions are starting to move buyers back into the Perth market. Although I don’t expect prices to grow, I think that we won’t see the sort of declines we’ve had recently.
Most other markets are certainly vibrant, although no doubt coming off their peaks of the end of last year, and no surprise because the further we move away from those low interest rate drivers of higher house prices… And of course, remembering we had a rate cut. Our last rate cut was in August. The further we get away from rate cuts, the less opportunity or the less capacity we have to push prices up. But certainly, in most markets, demand is ahead of supply.
Kevin:  Growth in prices, the blame for it still being laid fairly at the feet of foreign buyers. That’s hard to say early in the morning! I notice a report out on the Domain site saying that the majority of Sydney-siders don’t believe that foreign investors should be allowed to buy property in Australia at all.
Andrew:  I’m not sure what sort of valid insights we should gain from that type of data modeling, Kevin. I think that there’s no doubt that there is a very strong interest in our product from international investors, but there are certainly a lot of hoops to jump through for international investors in our marketplace.
I find it amusing that we’re wanting to put up the barriers for international investment in our country. We have such a need, particularly the student market, our university industry, for income generated from foreign students. I don’t think we can have it both ways, and I’m not sure that there is any real validity in terms of imbalances caused by foreign investment.
Kevin:  I sometimes wonder whether governments just go for low-hanging fruit. Everyone is talking about affordability, looking for laying blame and so on. There has been a lot of talk, even in this last couple of weeks, about how much focus we should be putting on affordability.
I had a talk to Michael Yardney about this recently and he made the point, do we really want houses to be more affordable in Australia? If you look at what needs to happen for that to happen, they are going to be a lot of investors, a lot of property owners who would be very unhappy.
Andrew:  Our latest affordability index for the capital city markets for the March quarter shows that affordability is, in fact, improving. And in most capital cities – in fact, in all capital cities – affordability as measured by the proportion from the average income of the average loan retirement is below the last 15 years’ average.
There’s no doubt that it’s tough for first-home buyers, particularly in the Sydney market, and it’s very tough for renters as well. But in terms of owner-occupiers, these low interest rates, they certainly haven’t had it this good for over a decade in terms of the growth in the house prices and low interest rates.
I think we have to realize that foreign investment is positive in terms of generating jobs and providing supply into our marketplace. High prices do mean a lot of people miss out on property – it’s a market environment – and as you said, we do get the blame game happening. Whether it’s foreign investors or real estate agents, it really doesn’t reflect what is still a remarkably robust and resilient housing market.
Kevin:  Can I just pick on a point that you just made about how difficult it is for first-home buyers in Sydney? The point I would make is that first-home buyers don’t really constitute a big slice of the market. It’s actually difficult for anyone to buy a property in Sydney because of affordability, not just first-home buyers. So why do we always focus on first-home buyers?
Andrew:  I guess that it’s the great Australian dream and we do, I guess, do have an underlying connection to being able to purchase property in this country. We’ve come from backgrounds and cultures where it’s been very difficult and there have been significant barriers to owning property, so I guess that’s part of our egalitarian society that we feel that we need to be able to own property and get into property.
But it’s always been tough, Kevin, and it is very tough now at the moment. When prices rise, it always makes it tougher for first-home buyers. That’s the nature of the beast, because first-home buyers don’t have a trade-in to bring into the purchase proposition as homeowners do have.
But with limited supply, if we start trying to increase demand through bonuses or cutting stamp duty for first-home buyers, it’ll only put up prices in the medium term. That doesn’t really do anybody any favors except existing homeowners.
I think that the clear conundrum in our housing markets, particularly the ones that have higher prices, is supply. With initiatives being announced recently to cut off supply or to curtail supply in terms of our foreign developers and foreign investors, it is quite counterintuitive given that we’re basically very, very skinny for new development coming through. Even the Melbourne and Brisbane markets are starting to look like they’re rebalancing now after a strong period of new development.
Kevin:  Pull that crystal ball out, mate. The landscape going ahead between now and the end of the year, what’s it going to be like?
Andrew:  Housing markets are vibrant still, Kevin, and as I said, growth is still positive but growth levels are declining. As I said, even the Perth market is looking like it’s going to find its bottom this year at some stage. So, I remain quite positive.
Interest rates are always the key, Kevin. We know that’s where housing markets are going to go. There has been a lot of talk, which I’ve found quite confounding, that we would get higher interest rates from the RBA this year. I think that we’re now, sooner rather than later, going to get a cut in interest rates from the RBA, maybe as soon as June or even July.
The latest economic data is very concerning. We had retail sales falling over March for the second consecutive month, and that’s the first time that’s happened since 2012. Retail sales were supposed to be one of the key drivers of the economy, and with the actual sales going backwards, it does reflect this low-growth, low-income, underemployed economy that we do have now.
I think given that banks are now looking to pass on the new bank tax with higher interest rates likely, I think the Reserve Bank will have to act now to offset that and to try to stimulate an economy that is clearly still stuck in second gear.
I think we have a chance of having negative economic growth again over the March quarter. Of course, we had negative growth over the September quarter and bounced back over December. But given we had the Queensland cyclone earlier this year and low retail sales, I think that we might see negative growth.
I think that the Reserve Bank must start to identify that and ignore a lot of the narrative about high Sydney house prices and higher Melbourne house prices and start looking at the main game, and that’s to get people in work again.
Kevin:  Consumer sentiment down, of course, after the federal Budget was released, and that probably was predictable because it was one of those Budgets that we had to have, one that doesn’t come with a lot of sweetness. So, I’m not terribly surprised that consumer confidence is down, Andrew. How would you feel about that?
Andrew:  I think a lot of the housing market initiatives in the Budget were predictable, Kevin. I think that they satisfied a lot of the issues that have been out in the public forum this year so far.
It’s been a little hysterical, some of the discussions that we have had and it hasn’t really reflected on-the-ground issues. Some of the options that are being proposed would probably cause more problems than they’d solve, but most of the issues were addressed at some level by the government.
However, I think that they were just really at the margin and they won’t have any significant impact on market dynamics. Interest rates are the main game and the economy is the main game. As I said, I think that we will see a very flattish outlook for interest rates going forward, and I think that means that our housing markets will remain quite stable.
We have to remember that migration is very strong into Melbourne and Sydney at the moment, and we’re starting to see signs that migration is turning around, particularly into South East Queensland as well.
With undersupplied capital city housing markets – we’re seeing the recent strong growth in buildings starting to decline – that’ll only mean higher prices, or certainly, it’ll keep demand ticking over ahead of supply.
But we’re not going to see those big double-figure increases in house prices annually that we’ve seen in Sydney and Melbourne recently. It’ll be flatter, but I do believe we will continue to see prices grow.
Kevin:  Dr. Andrew Wilson from The Domain Group. Thank you very much for your time, Andrew.
Andrew:  Thank you, Kevin.

Leave a Reply