Dr Andrew Wilson talks about his 2016 predictions and what impacted his views, what happened and how those actions will impact us this year.
Kevin: In my regular show on the Macquarie Network, I had as my guest Dr. Andrew Wilson from The Domain Group, and I tackled him about his comments from this time last year about what he thought about the 2016 market. Just have a listen to what he has to say about the 2016 market. Just have a listen to what he has to say about his predictions.
Andrew, I want to take you back now. This is a little presentation I’ve done.
Andrew: Thanks a lot, Kevin.
Kevin: That’s okay. Have a listen to this:
Kevin: Andrew, fast forward through to January 2017, what do you think we’ll be saying about the year 2016?
Andrew: It’ll be less exciting in Sydney particularly and Melbourne in terms of the discussion point, and I think the outcome that we’re likely to see going forward is a much flatter cycle. I think that would have been validated through 2016, where prices growth on a quarterly basis really would have been just a bit above or below the 1% mark per quarter, depending on seasonal factors.
I’m not sure we have much wiggle room left in interest rates, and any more cuts in interest rates would likely be a negative rather than a positive. We’ve seen continuous low growth in the economy. This is the future of really all our economies – national and state economies – reflecting what’s happening internationally, of course, and with low inflation and low incomes now translating into less of a cyclical element to house price growth, I think that’s what we would have seen crystalize over 2016 – a much flatter cycle.”
Kevin: We’re back live now, but that was a recording we did 12 months ago. Of course, we’re all surprised by what happened in Sydney. No one saw that coming. And I guess 2016 was the year of the unexpected – expect the unexpected.
Andrew: Yes, to a certain degree, Kevin. There’s no doubt that the markets picked up over the final part of 2017. In fact, the December quarter was clearly the strongest quarter for growth in most capital city markets for houses. But of course, units went the other way, and I guess when we put them all together, it flattens out to something around about 1%.
Kevin: Oh, nice twist.
Andrew: But there were some key “out of left field” drivers of higher levels of growth, and there’s no doubt that investors moving back into the market in 2016 was a key driver of a resurgence in prices growth in the Sydney market.
We had investors back, pushing up over 50% of market share in Sydney. Those levels obviously are such that would activate price, and there’s no doubt that not just interest rates, but the clear driver of that was the announcement by the Australian Labor Party that they were going to change negative gearing if they got into power.
That was announced in May, prior to the cut in interest rates. That’s when we saw a resurgence right across the board in investor activity, even in some of those weaker market, because it was that FOMO energy – fear of missing out – investors back in the marketplace after being sidelined by higher interest rates at the end of 2015.
And this just validated what I said all along about the changing the tax mix for property, you unleash potential for disruptions to the marketplace. That’s what we saw. We’ve seen higher prices as a consequence of that.
So even though at the time, of course, the ALP didn’t win the election, just the hint of a possible change to the property mix… And you have to remember that the Liberal Party just won that election – by the tiniest of margins. That was a very close call, so those who were perhaps speculating that property taxes would change and did get back on the market on the basis of that were working on the fact that the election result was a very close call, and the polls were showing at some stage that the ALP was ahead.
What I’m saying is it was just the prospect of the change to negative gearing that had investors – particularly in the Sydney market – rushing back, rolling in like the marines. That, of course, changed the whole market dynamic and pushed prices up.
The momentum from that was clearly evident right through to the end of the year. And of course, another two cuts in interest rates were part of that equation, as well. Momentum is such an important thing in housing markets.
All we have to do is look at the other end of the scale where the Perth market continues to decline, Darwin is flat. But other housing markets did get results very similar to 2015 in 2016, and quarterly growth rates were – plus or minus – around about that 1% mark in every capital city market except the Melbourne and Sydney markets. What’s driven the Melbourne market has been an unprecedented increase in migration into that marketplace.
Yes, a little higher than expected, but overall the same sort of energy has driven the market. But as I said, the clear lesson for higher prices in the Sydney market was don’t play around with the tax mix for property because you unleash the potential for disruptions to the housing market, and that’s what we saw after the second half of last year.
Kevin: A good message. I’ll give you the quote for next year now. This is what I’m going to replay back to you at the start of 2018 about what we will think about 2017.
Andrew: The other interesting point about the Sydney market is that when we look at the quarter-to-quarter growth rates annually – that’s a December quarter 2016 versus December quarter 2015 – we see that the Sydney market recorded a boom time result, and that’s over 10%. It was 10.6%.
But the reason it was so strong was because the last December quarter 2016 was a strong result, but the December quarter 2015 was the lowest quarterly result ever recorded by the market.
Now, if we take the annual growth rates of 2015, and that is all the house sales, the median of those over 2015, we compare the full 2016 medians, we see that the Sydney market actually grew on a year-on-year basis by 4%, which is 1% per quarter, which I think is exactly what I predicted.
Kevin: Which is what you predicted. So, in summary?
Andrew: In summary, this year, I think we’ll see similar energies. I do continue to believe that we’ll have lower and certainly moderating growth rates, similar to the last year. But the key driver of housing markets this year will be the disconnect between where banks situate their interest rates and where the official interest rates are.
I think that we will continue to see upwards pressure on interest rates from the banks regardless of what happens with interest rates from the Reserve Bank. So, I think that effective interest rates will continue to rise.
That is, even if the Reserve Bank cuts interest rates, the banks won’t cut them as much. And if interest rates stay stable from the Reserve Bank, I think banks will continue to increase rates, and that will only act to moderate prices growth.
So, I still think we’re looking at around about that 1% at best per quarter growth rate on average over the year. So, similar results again, flatter economy. You have to remember that we’re halfway to a recession at the moment.
The September quarter data was negative for the national economy, for the GDP. If we get a negative – which I don’t think we will; it’ll be close, but I still think we’ll be positive over the December quarter – if it’s negative, then we are notionally in a recession. So, that is certainly not the environment for higher house prices.
Kevin: No, indeed.