As discussed previously, it has always been difficult and fraught with danger to forecast markets. The Sydney property market in 2016, even with all the technology we have at our hands, was no different. From the property market to politics, most called it wrong. The property market uptrend remains intact and now most forecasters think we are going to have another good year, up between 5-15%.
One thing I do know is the Newell Property Indicator was spot on last year, using clearance rates as the guide to annual gains. We ended the year at around 78% and that read on the Newell Property indicator as a 15% annual rise.
Property is a very free market. Property prices simply reflect what people can afford to pay, so interest rates and unemployment are key factors you should watch in the future, along with other property markets around the world.
Interest rates: Banks are torn wether they go up or down, ease or tighten…..in other words they have no idea. The RBA clearly misunderstood how interest rates effect our property market as the rate cuts fanned our market higher to be up almost 15% in 2016. The correlation between interest rates and property is undisputed. Property has been going up for thirty years and US interest rates have been falling for thirty years. If US interest rates are really going up, then eventually, real estate will go down or correct to a more normal wage/earnings relationship. If rates stay on hold or go down, the price will remain flat or go up.
Unemployment: Remains strong at 5.8% which is more or less full employment. The biggest reason most people sell their house is because they need the money, for example if you don’t have a job or work is slow. If unemployment goes lower, prices will remain strong and if unemployment rises, prices will weaken.
There are two property markets I am watching to provide another form of clarity, they are Singapore and Vancouver. I don’t confess to be an expert in these markets, I get information from what I read. Although we have no link to these markets, I look at them as an indication to where our market is heading and what may lay ahead for our market. Why ? you might ask..…
Singapore began its rise several years earlier than ours and now are down about 11% from their high. Like our market, the government and banks intervened to slow the markets with prudential measures and raising rates. In Australia it has been about 12 months since the banks and government have intervened, so I expect the above kind of impact on our market very soon.
The Vancouver property market has many similarities to our market. It is highly influenced by the Chinese and has had similar percentage gains as to what we have experienced. They also are a resource based economy and are seeing the government and banks trying to cool their market. If we start to see Vancouver come off, we won’t be far behind.
2017 is the fifth year in the cycle and traditionally should be the final year. As previously mentioned, if interest rates remain at these levels and Trump causes the boom the equity markets are telling us he will, then our cycle will be prolonged. Although we are red lining at very high valuations and low yields, instincts tell me it is a dangerous time that could change very quickly. It reminds me of the 1990 and 2004 feeling….the feeling that ‘it will never stop’. We all know what happened in 1992, the last recession Australia had and 2008, the Global Financial Crisis.
In summary, it is worth noting the rises we have experienced are not normal and are usually followed by some form of recession in the preceding years. Australia is approaching the world record for a developed nation without a recession, our last being in 1992.