Last year when Pete Wargent took out his crystal ball, he said to ‘expect the unexpected’. Also he highlighted the impact international students would have. He was spot on – so what has he got to say about 2017?

Transcript:

Kevin:  As you’re probably aware, about this time last year, I spoke to a number of our guests and asked them what they thought about 2016, what we’d be saying about the year. One of those was Pete Wargent, who joins me once again. This time, he’s in the U.K.
Good day, Pete. Thanks for giving us your time again.
Pete:  Hi, Kevin.
Kevin:  Just to remind you, this is what you said this time last year.
Pete:  I think during some of this year’s exuberance, I believe a significant number of investors would have bought off-the-plan properties with only small deposits to hand. So, I think 2016 could be a year when APRA’s tightening measures towards the investor lending could pose problems for some of those off-the-plan buyers who’ll end up with a deposit shortfall at settlement. So, there could be some fallout from that.
I think that 2016 will also be the year the media latches on that going forward it will be the immigration of international students rather than arrivals on 457 visas that is actually driving Australia’s immigration and population growth. Enrolments and grants for students are starting to ratchet up, so with hundreds of thousands of student arrivals over the next few years, mainly headed to Sydney and Melbourne, that’s going to create a lot of demand for rental property close to the city centers, just at the same time that APRA is hosing down the investor sector.
Finally, I think 2016 could be a year to expect the unexpected. A lot of market commentary revolves around the notion that this can’t happen or that can’t happen. Well, I’ve been in Britain this month, and a lot of things that weren’t supposed to happen have happened, particularly in the investor space.
Back in Australia, we’ve seen APRA introduce macro-prudential measures this year, and I wouldn’t be surprised if there are more tweaks in 2016 in the wake of [1:40 inaudible] resulting in tighter capital requirements and lower loan-to-value ratios. So, in terms of what this means for investors in 2016, they’re likely to require substantial deposits.
Kevin:  Pete, I think of all the people I’m talking to in this program, you were pretty well spot on with a number of your predictions. A number of people did talk about APRA. How big of an impact was that on the market during the year?
Pete:  There’s always stuff going on behind the scenes with ARPA in terms of the macro-prudential tools that they deploy and some tightening in 2016. I talked about off-the-plan challenges. One of the things that happened last year was a tightening of lending to non-resident buyers.
We talked about off-the-plan challenges and whether some of the tightening could lead to defaults. Well, listed developers did report some defaults and some delayed settlements, but overall, defaults weren’t too far out of long-run averages, and the impact was relatively benign last year.
That said, vacancy rates are now rising pretty hard in some areas, so there’s more to come in 2017, I think.
Kevin:  Your comment was actually quite insightful, the one you mentioned about expecting the unexpected. And gee, didn’t we see some unexpected results? To name a couple on the world scene, Brexit is one, which would be very close to where you are right now, and also the U.S. elections.
Pete:  Yes, that’s right. I think definitely political upheaval, and we may well see more where that came from in 2017, as well. Looking back closer to home, the PM is struggling a bit in the polls, so it wouldn’t be a surprise to see more along those lines next year, too.
Kevin:  What’s the outlook for investors in 2017, Pete?
Pete:  One of the other things I talked about last year was international students pumping up Sydney and Melbourne population growth, and certainly, the most recent figures have shown that Melbourne in particular is going very strongly on a lot of criteria.
Population growth rates in Victoria or the absolute population growth has never been higher. We’ve talked for a long time about overbuilding of apartments in Melbourne, but I think actually, Melbourne could be another strong performer again this year.
But yes, it’s a bit of a mixed bag around the traps, and investors would need to be pretty careful about where they choose to invest.
Kevin:  Are you concerned about the talk about oversupply of units in Melbourne and also in Brisbane?
Pete:  We’ve been talking about it for a heck of a long time now. We can see the market has had a downturn in approvals, a slowdown in construction in Melbourne and some projects. So, the market is starting to correct itself, but there are still lots of completions to come in 2017.
There’s still a bit more to play out, particularly in inner city Brisbane. Vacancy rates around the Valley and Newstead, South Brisbane, and West End all rising about 6%, so we can expect to see rents falling, probably some correction in prices. Yes, there’s still some more fallout to come from there next year.
Kevin:  Do you see any trouble on the horizon by way of defaults, people not being able to get into the apartments they’ve purchased because their finance won’t stack up?
Pete:  Yes, I think in particular for non-resident buyers, there have been challenges. Some domestic lenders pretty much stopped lending to non-residents during 2016, so there are still some challenges there.
I think even for domestic investors, there will be another potential challenge later this year as interest rates maybe start to rise again. We’re seeing now what they’ve been labeling Trumpflation in the U.S., and bond yields in Australia were already rising before the U.S. election result. There could be some challenges there for people who have overstretched themselves as mortgage rates start to tick a bit higher.
Kevin:  What do you think interest rates will be like at this time next year?
Pete:  I don’t think we’ll see too many changes in the cash rates if I’m reading things right. The new Reserve Bank Governor seems quite reluctant to cut rates any further than they’ve already gone, but we might just start to see some mortgage rates just ticking higher as some of those funding costs start to tick up. That’s just something to watch in the background there.
Kevin:  These are the banks moving independently of the RBA?
Pete:  Yes, potentially. In fact, it’s already starting to happen with some lenders. It’s difficult to predict interest rates at the best of times, but there’s definitely a risk there that this time next year, we could be talking about mortgage rates being a bit higher than they are today.
Kevin:  Fast-forward to this time next year; give me a summary of what you think we’ll say about 2017.
Pete:  I think we’ve touched on some of the key points there. Apartment supply, potentially rising interest rates. Commodity prices are always something to watch in Australia. There was a spectacular rebound in coal and iron ore prices last year, and then in the LNG prices, too. I think we might see some downward pressure returning there.
In terms of where the economy is growing, Sydney and Melbourne have been dominating growth in the last year or two, but there’s still some downturn to come for Western Australia.
In terms of demographic trends, there is some good news there nationally. Population growth seems to have flattened out or steadied at around 1.4%. But there’s definitely some migration trend interstate, away from Western Australia and Adelaide and from Sydney, and generally towards Melbourne and South East Queensland. I’d say those two markets will be where the opportunities most likely are.
Kevin:  Very good. Joining us from the U.K. once again, very insightful comments from Pete Wargent. Pete, thanks very much for your time.
Pete:  Pleasure, Kevin.