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2019 - A Soft Landing!

Cameron Finlay • Dec 20, 2018

Last Blog for the year, a bit of crystal balling.

Nearly didn't put the '!', was thinking it could be an '?', but too many factors are lining up to be too negative.

As you no doubt have far better things to do, but knowing you'll be spending time over the next couple of weeks thinking about your strategic plan for 2019 (you will, won't you?), here is a short(ish) look at a number of the relevant external environment factors.

1. Politics

An election always results in stuff-all happening before and for a little while after.   The deficit is down, some new ideas may help, but matters economic should improve after.   Not sure by how much as political parties are about rhetoric, not good policy, but the local housing market is a key factor.   (see 3)

2. Two speed economy

Most growth has been due to public sector spending, population growth, and debt.   Businesses are making profits, paying dividends, not investing, not growing employment or paying higher wages.   Most economic indicators are fairly ordinary, or even slightly down.

3. Housing Market will be Two Speed too.

Sydney and Melbourne were over-done so further falls are likely, another 10% is possible.   The factors that drove prices in those markets haven't happened elsewhere, including SEQ.   Some marking time in 2019 but then gradual increases through to the end of the next cycle (2025?).

4. Wages

Very little growth, held back by automation, digitalization, internet, globalization, etc.   These factors keep profits down, which in turn results in ceilings on wages.   A tight year for middle income households.

5. Confidence and Perceptions

With housing prices falling, low increase in wages, little faith in politics, and negativity in the media consumer confidence is not improving.   However, it's also not dropping either.

6. Interest Rates

Unless the private business sector takes off, which is unlikely, interest rates won't rise.   More likely to see further cuts in the Cash Rates, although it may not flow through to mortgages (banks raise money overseas where interest rates have increased, so the cost of capital has gone up).

7. Population Growth

SEQ will continue to grow, with a bias towards economic refugees and retirees.   Housing prices won't lift much unless private investment is much higher.   You need more private sector jobs, and higher paid ones too, to make property values jump rather than just increase a bit.

8. Land Supply & Housing Demand

In SEQ development land is in short supply.   Demand exceeds supply (it has for years) but there must also be jobs, and better paid ones too.   There will be significant demand from first home buyers, downsizers and retirees (same comments as above – confidence, jobs, better pay, interest rates are key).

9. Tax Policy

Especially negative gearing.   If Labor allows this for new builds only, then more investment homes will be built.   As NG would not apply to resales, prices should fall, so investors will seek higher rents to compensate for lower capital gains.   Councils don't seem to have policy for dual occupancies, granny flats, etc., so single tenancy owners will have to pay more, but without better paying jobs etc they can't, so house prices could fall to result in the required investor return.

The expected economic outlook for Australia is for overall growth around 3%, so no recession for 2019.   Recessions are also unlikely in China and the US, so the big fear of 'a housing collapse' is unfounded.   (That's not just me – also the IMF, OECD, Treasury, RBA and a large number of the better economists).

A Quick Summary:

- 2019 will be harder than 2018, but probably not as bad as the media threatens regularly.

- Plan, check, then plan some more so you are always on track.

Finally, may Santa bring you everything you'd like, and the New Year all you plan for (the great US football coach Vince Lombardi said 'Hope is not a strategy').

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