Dr Andrew Wilson reflects on the first 2 months of 2015 and says that lower interest rates have boosted investor confidence and dispels a common myth that investors only chase capital gains and good returns.
Read the transcript here
Dr Andrew Wilson
Kevin: We’re at the end of the second month into the year and it’s probably a good time to actually have a look back at the first two months and where we’re headed for 2015.
Dr. Andrew Wilson, who is the chief economist with the Domain Group, joins me.
Andrew, low interest rates, good investor numbers coming through. Are these good signs for 2015?
Andrew: Kevin, 2015 is starting off generally where 2014 ended. Of course, lower interest rates are positive, particularly for mortgage holders, and I think we’ll find lower interest rates are positive particularly for investors. Investors will be encouraged by lower interest rates to become more active in various capital city marketplaces.
There’s a bit of a furfee that goes around that investors just chase capital gains. Investors look for security out of the medium to longer term. We have a small investor model in this country that is very resilient and very robust. Of course, we do have investors at the margin that do chase capital gains, but by and large, even in flat periods of process growth, we still have a 30% to 40% of activity coming from investors.
There is talk that with lower interest rates encouraging more investors into the market – as it will because lower interest rates or mortgages means lower rates for deposits, which make the housing market even more attractive for investors.
But the talk about having more investors in the market is now creating, I guess, even more activity in that conversation about banks moderating investor activity by introducing macroprudential controls over investor lending. I think this is very short-sighted and potentially dangerous in terms of that law of unintended consequences, which can occur.
The Sydney market really is the only market that continues to be very strong in terms of prices growth, and even though it has strong prices growth, it’s really not showing any clear signs – or any signs, really – of overbalancing. Vacancy rates remain low, rental growth is continuing, and investors are reaping the benefits of what is a balanced and strong market around in Sydney.
You can’t have a one-size-fits-all mechanism designed to counter what is perceived to be over-activity in the Sydney market and then restricting activity and other capital city markets, which are crying out for more healthy market activity.
Kevin: Yes, there is some concern amongst investors about what you touched on there – those macroprudential controls or just even discussion about them. But, the question I have for you, Andrew, is it the banks who’ll be doing this?
Andrew: APRA do it. They’re the regulatory body for our financial system. This was something that was introduced into New Zealand last year when there was a perception of over-investment.
We really have this scary story of housing bubbles and collapses of markets, and the reality doesn’t reflect that particular scary story. We have a very resilient, robust housing having market in this country. It typically follows what happens with the business cycle.
I believe that going forward now, we’re going to see much more moderate outcomes in terms of housing market activity. The peaks and troughs won’t be as severe as they have been over the last two or three decades, and that does reflect this adjustment process that’s happening in the economy now, which is a medium- to long-term process. They’re moving away from those big mining booms, which have driven our economy into something else, which we probably still haven’t quite worked out what that will be down the track.
It does mean lower interest rates, it does mean lower growth, it does mean lower incomes and profits growth, as well, lower inflation, and that means lower price and growth in our housing markets. But I still think that it will be more of a consistent model and the underlying trend will remain upwards, but that is I think a good thing for the industry because it provides more certainty going forward.
Kevin: Certainly, the numbers coming out of Sydney in that continued growth have been quite scary, I guess – scary for some, not so much for others, I guess, if you got into the market soon enough. Do you see that slowing down at all, Andrew?
Andrew: Eventually, it will slow down, Kevin, because income growth… There’s really no room to move any more on interest rates. Even though we’re seeing interest rates fall, they’re just marginal cuts in interest rates and the affordability upside to that is very minimal compared to the strong affordability improvement we had over 2011 through 2013 through sharp drops in interest rates.
Interest rates are at all-time lows now. There’s not just that energy that’s being released to create more house-price growth, so at the end of the day, it will be about incomes, it will be about profits, which means it’s about economic performance. With incomes growth rising at about 3%, that’s what the underlying growth of house prices will be, even in Sydney.
Once that supply-demand imbalance starts to work its way through the system, we’ll get more moderate growth in Sydney. But because there is such a shortage of property in Sydney, because the local economy is so strong, I think that Sydney will remain the strongest market of all the capitals, certainly over the shorter to medium term, but that 3% to 4% per-quarter growth that it’s being recording over the last year. I think will start to track down towards 2%. Then depending on how the economy pans out. It will remain about a percent or two above the inflation rate in my opinion going forward over the medium term.
Kevin: Good talking to you, Andrew. Dr. Andrew Wilson, chief economist with the Domain Group. Thanks for your time, Andrew.
Andrew: My pleasure, Kevin.