Are Low Interest Rates A Risk to the Property Market and Economy?
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Are Low Interest Rates A Risk to the Property Market and Economy?

As MSQ Capital’s Managing Director Paul Miron sees things, we’re pawns to a rather significant economic experiment.

By Paul Miron
Fri, Apr 9, 2021 11:17amGrey Clock 4 min

OPINION

It is to the astonishment of most economists, politicians and property experts that we are experiencing an extraordinary V shape recovery.

This week’s fundamental economic good news is that the unemployment rate has fallen to 5.8%, smashing expectations. The property market seems to be booming, job adverts are increasing and consumers are now freely going back to pre-Covid-19 spending levels. Millennials are once again ordering smashed avocados whilst leisurely completing their online home loan applications in order to begin the hunt for their first property purchase. That debut purchase, mind you, is now mostly sponsored by the government’s extraordinarily generous schemes, such as ‘home builder’ ($2billion worth) and other various grants (providing up to $50,000 per person).

This is a far cry from expectations a year ago, when Prime Minister Scott Morrison sternly prepared Australians for a 6-month hibernation, followed by a high unemployment rate and a long and hard economic recovery.

Despite current positive economic euphoria, there are some very respected and seasoned investors, politicians and economists who are extremely worried — of the view that the economic recovery, both locally and internationally, is founded on fragile thin ice.

There is a high risk that both our local economy and international economies may generate inflation past the prescribed target of the 2%-3% tolerance of central bankers around the world. This would place the RBA Governor, Philip Lowe, under significant pressure to increase interest rates, despite his assertions that rates will stay put for at least 3 years.

Lowe’s motivations would be to avoid the undesirable economic and social impacts of hyperinflation, akin to past historical experiences that lead to the Great Depression of the ‘30s, the late ’70s oil crisis and the ’80s, where many people can remember living through official interests of 18.5%.

During the past few weeks we’ve seen a number of global central bankers — notably as those from Russia, Brazil and Turkey, among others — increase their official interest rates as their economies simply do not have the financial capacity to continue printing money as freely as our economy.

Increase in interest rates would put downward pressure on asset classes such as property and shares, whilst undermining consumer confidence — resulting in lower spending and impeding a full economic recovery.

The current unemployment trend would very quickly change from positive to negative. The most alarming comment is that both monetary and fiscal policies have pretty much been exhausted during the pandemic. Worse still, if the Government was unable to support the market, it could lead to a market collapse like the crashes of 1987 and 2004 and the various property market corrections we have experienced in the past.

The rationale for such divergence of economic opinion is fundamentally based on the fact that we’re living through an economic experiment. The combination of monetary and fiscal policy employed by the Government and RBA has never before been tested — think zero interest rates, Quantitative Easing, Job Keeper, Job Seeker and mortgage payments deferrals to name but a few.

Another way to appreciate this is via the below graph prepared by AMP. It demonstrates the hypothetical green line if Covid-19 had not happened. The blue line depicts actual GDP figures.

Despite Australia’s GDP being in excess of 3% for the past two quarters (for the first time ever), we remain 2.4% below than what we would have been if Covid-19 never arrived. Our unemployment was mid 4% pre-Covid, with wage growth peaking at a mere 1.4%p.a., whereas today unemployment sits 5.8%.

It is the RBA’s fundamental economic assumption that in order for inflation to shoot past 3% maximum traditional target, interest rates must be kept low and we require the unemployment rate to fall to 3%. This is because in the current economic situation, wage inflation is the key element to push overall inflation. According to many economists, it  could take years for unemployment to reach a rate below 4% and which therefore supports the RBA’s expectation.

The estimated financial cost to future tax payers to ensure we have this V shape recovery is estimated to be circa $350b, roughly 17% of our GDP. This is 5 times larger than any stimulus that was provided during the GFC.

And so, despite the surging asset values, it is unlikely for the economy to suddenly overshoot the green line while a number of industries, such as tourism and international students, remain subdued (and let’s not forget those industries being targeted in our ongoing trade war).

The true economic recovery picture will be seen in the next two quarters of GDP figures, where either the fear of inflation will abate or crystallise into reality.

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

msquaredcapital.com.au



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Property values have experienced strong growth around the country, but there are two highly desirable areas where oversupply is putting downward pressure on sales

By Bronwyn Allen
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While property values are rising strongly in most markets across Australia, it’s a vastly different story in Victoria and Tasmania, new data from CoreLogic shows. Over the 12 months to May 31, the median house price lifted just 1.8 percent in Melbourne and fell 0.6 percent in regional Victoria. The median dipped 0.1 percent in Hobart and ticked 0.4 percent higher in regional Tasmania. This is in stark contrast to Perth, where values are up 22 percent, and regional Western Australia, up 14.8 percent; as well as Brisbane, up 16.3 percent, and regional Queensland, up 11.8 percent.

CoreLogic Head of Research, Eliza Owen says an oversupply of homes for sale has weakened prices in Victoria and Tasmania, creating buyers’ markets.

On the supply side, there has been more of a build-up in new listings than usual across Victoria, even where home value performance has been relatively soft,” Ms Owen said. Victoria has also had more dwellings completed than any other state and territory in the past 10 years, keeping a lid on price growth. The additional choice in stock means vendors have to bring down their price expectations, and that brings values down.”

Melbourne dwelling values are now four percent below their record high and Hobart dwelling values are 11.5 percent below their record high. Both records were set more than two years ago in March 2022. The oversupply has also affected how long it takes to sell a property. The median days on market is currently 36 in Melbourne and 45 in Hobart compared to a combined capitals median of 27. It takes 55 days to sell in regional Victoria and 64 days in regional Tasmania compared to a combined regional median of 42 days.

Changes in population patterns have also contributed to higher numbers of homes for sale in recent years. Since COVID began in early 2020, thousands of families have left Melbourne because working from home meant they could buy a bigger property in more affordable areas. While many relocated to regional Victoria, a significant proportion left the state altogether, with South-East Queensland a favoured destination. Meantime, Tasmania’s surge in interstate migration during FY21 was short-lived. Data from the Australian Bureau of Statistics shows the island state has recorded a net loss of residents to other states and territories every quarter since June 2022.

Record overseas migration has more than offset interstate migration losses, thereby keeping Victoria’s and Tasmania’s populations growing. However, the impact of migrants on housing is largely seen in the rental market, so this segment of population gain has done little to support values. Growth in weekly rents has been far stronger than growth in home values over the past year, with rents up 9 percent in Melbourne and 4.8 percent in regional Victoria, and up 1 percent in Hobart and 2.7 percent in regional Tasmania.

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This stylish family home combines a classic palette and finishes with a flexible floorplan

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Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

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