For investors looking for certainty and clarity it can be useful to take stock of where we have come from and where we are today before we examine what the future may have in store.
Australia has always been affected by the global economy.
The 1890s recession had its catalyst in some part due to a fall in global demand for wool. The Great Depression of the 1930s that affected Australia so much stemmed from the Wall Street market collapse of 1929.
Fortunately, you are not reading this in such dramatic times nonetheless, 2018 was a busy year and our economy was affected by some prevailing global conditions
Globally, 2018 saw a tightening across the board!
The US-China trade war kicked off with enthusiasm and remains an unknown on the global stage. Brexit continued to meander along with no end currently in sight and where this matter will end is anyone’s guess.
Central banks have tightened monetary policy as the expansionary policies of quantitative easing unwind and while there were some bright spots overall global growth was tepid.
While 2018 can be characterised as a busy year by most subjective measures, growth fell in developed and developing nations from the second quarter to the fourth quarter.
Australian GDP was stable in 2018, hovering around the 3% level.
Volatility returned to equities, with an equities sell-off across September 2018 which only recovered through January 2019 with recent risk-off (sell-off) behaviour again during February and March.
The slowing of global trading partners, combined with the timing issues of new data points indicate that the coming months will be similarly low-growth. This is also likely among our key trading partners.
Although 2019 retains a somewhat flat growth forecast there are positive signs into the future with confidence to be gained in economic forecasts for the back half of 2019 projecting an upturn in both GDP and inflation:
The big show
There was no greater show in 2018 than the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, aka the Hayne Royal Commission, or simply ‘The Royal Commission’.
The Royal Commission painted dramatic scenes of systemic flaws across various quarters of the industry. Daily, our news reports were filled with videos, transcripts and updates of executives squirming under the rare glare of public scrutiny; it appeared no one had a good day at the hands of Royal Commission inquisitors.
The governance, cultural and regulatory burden of the Royal Commission Final Report focused overwhelmingly on large institutions and banks and will be incredibly distracting for banks over the next 3-5 years.
The impact of a tightening on credit will now continue to play out supporting a view of increased market share to non-bank financiers over the coming years.
The property market
If the Royal Commission was the biggest show in town, then the property market was the support act. The housing market is just that – a market and, as a market, investors (or just home owners!) must accept that it rises and falls, correlates and confounds like any other.
Factors affecting the housing market are numerous and as central banks globally flex their monetary policies, our economy reacts.
With lacklustre growth settings expected globally, many economists speculate the next move by the Reserve Bank of Australia will now be downwards, which may further support house prices.
Conversely, the upcoming federal election in Australia and the well-publicised proposed changes to negative gearing and increasing the capital gains rate (Labour Policy) combined with Franking Credit losses by current opposition may compress prices.
The leading indicators for Australian housing; being residential building approvals and Construction PCI (the changing month-on-month activity levels in the construction industry) both point to a weakening supply moving forward.
Of course, reducing supply of new housing stock with low interest rate settings and low unemployment could also have a strong stabilising effect on prices.
Also, property markets are affected by population growth.
Australia stands as a fast-growing nation, with its population growing – particularly in metropolitan centres at around 1.6% per annum with growth from both natural increase and net migration set to continue.
Population growth supports house prices, broadens the national tax base and prompts spending on infrastructure to maintain our liveability and is expected to increase by 4.5 million individuals over the next ten years.
Additionally, a key component of calculating GDP and our economic rate of growth is Government spending on infrastructure. Australia’s infrastructure projects in recent history have come from a low base to now be an immense pipeline nationally.
These projects are supported by low financing rates, strong government balance sheets and a commitment to maintaining economic activity.
With the Major Public Projects pipeline growing from $21 billion in 2012 to $120 billion in a matter of seven years, these combined national infrastructure projects will also maintain employment growth, adding to GDP figures that will further help support house prices.
Key takeaways for investors
Review of historical factors, current policy settings and forward indicators point to a stable overall economic environment, with underlying volatility in equities markets and a retrace in property values by 10-15% nationally (back to early 2016 levels);
Australia’s economic fundamentals are sound. However, history shows us that global events can impact our markets and this has been noted in equity market movements over the past six months;
Our housing market is underpinned by population growth, a sound economy and a structural undersupply of new dwellings. Falls in housing prices are part of the normal market cycle, and current changes should be seen in that context; and
The game-changing Royal Commission will accelerate demand for non-banks products and services.