GFC

While GDP certainly decreased during the GFC, Australia avoided sliding into an official recession. And while the unemployment rate rose (reaching a high of 5.8% in June 2009), those that retained employment actually experienced an overall increase in disposable income.Many Australians are actually in a better position now than before the downturn – what with significantly lower interest rates (currently at 4%, compared to 7.25% at the start of September 2007) and greater national disposable income (estimated by IBISWorld to reach $194,500 in the March 2010 quarter compared to about $181,000 million in late 2007).Add to this lower fuel-prices (now at US$80 per barrel compared to US$145 per barrel in mid-2008) and it's not surprising that household spending has been relatively strong over 2009-10.

Where to from here?

Average Australian households remain better off now than before the GFC and the first home owner boost encouraged many Aussies to enter the mortgage market – meaning we are just as indebted now as pre-GFC. Interest rates, fuel and electricity prices have all risen and many Australian families will again feel the pinch this year and onwards.Nonetheless, conditions are forecast to continue to improve, with IBISWorld projecting that slow economic growth in the March 2010 quarter will be replaced by solid growth for the remainder of the year, as households continue to spend and businesses join the fray.IBISWorld also expects the unemployment rate to continue to trend downwards and, barring any reversal of the improving trend internationally, the Australian economy will remain strong for the foreseeable future.

John Edwards of Residex speaks

The markets across Australia are indicating that they have passed the first peak in a normal part of a growth cycle. For most capital cities this means that we will see a slowing in the rate of growth (but still growth) during autumn and winter and a move back to higher rates of growth in the second part of the growth cycle.

This second phase or part of the growth cycle is usually longer and stronger than the initial growth period. The cycle has moved to being more normal, with upper cost areas of the market now leading the way forward. This is as one should expect as confidence among the ranks of our executive and upper management groups become stronger. It will flow on to other areas as corporate profits improve and there is lower unemployment and some wages growth.

Slowing is evident from the number of slightly negative growth numbers in the month of February for houses. The relatively strong performance in the unit market is evidence that investors have become much more active.

Here are the house and unit market statistics for February 2010.

Houses
		Growth	Growth
Area	Median value	Feb 09 to Feb 10	10 year average
ACT	$501,500	9.45%	10.74%
Melbourne	$547,500	16.32%	10.16%
Brisbane	$469,000	6.52%	11.81%
Sydney	$634,000	13.28%	6.62%
Perth	$481,000	2.00%	11.67%
Hobart	$362,500	5.20%	11.98%
Darwin	$501,500	11.20%	11.28%
Adelaide	$400,000	7.95%	10.48%
Units
		Growth	Growth
Area	Median Value	Feb 09 to Feb 10	10 year average
ACT	$394,000	7.84%	10.98%
Melbourne	$422,000	16.39%	9.85%
Brisbane	$357,500	3.10%	10.36%
Sydney	$444,500	10.41%	6.00%
Perth	$391,000	7.27%	11.08%
Hobart	$277,000	9.01%	12.50%
Darwin	$410,500	17.02%	11.09%
Adelaide	$306,000	8.01%	11.57%

Darwin houses are at last taking a breather and the growth for the month was for the first time negative in more than a year. Its rental yield remains the highest of all capital cities and will cause further investor interest which will continue to drive prices but at a lower level given the cost of property which is now relatively high by comparison to the other opportunities. The cost of an unit investment here is now only very marginally lower than in both Sydney (8%) and Melbourne (3%).

Graph 1: Major Capital City Trends

Graph 1 Major Capital City Trends clearly shows that the market is now softer than it was in September/October 2009.

The auction clearance rate in Sydney last week was approximately 65% while the clearance rate in Melbourne was in the 80% range. The impact of the RBA to increase interest rates has been more noticeable in Sydney but is a reasonable outcome given the higher cost of housing and the larger mortgage position for most when you consider that Sydney has been more expensive over a longer period. The momentum and confidence of Melbourne property buyers in a city which is growing strongly is likely to carry its growth phase for longer than in Sydney. However, both cities are exhibiting a slowdown as we move into winter. In both capitals investors are active in the unit market and prices are moving forward.

Our other cities are also exhibiting a softening but it is not as noticeable as in the two majors (see Graph 1). Again, this result is probably an expression of the lower impact of unaffordability and the RBA´s move on interest rates. (see Graph 2 Minor Capital Cities Trends).

Graph 2: Minor Capital City Trends

I have recently been reading suggestions and arguments about a price bubble in Melbourne forming.

I can see no evidence of this. Yes, houses are too expensive across Australia but that position is unlikely to change for at least a decade as it will take that length of time for governments to correct the stock shortage issues.

Further our population needs to expand to satisfy the fundamental needs of a growing resource sector. Add to this – the recent breaking of the drought and it is clear that Australia is in very good shape with the population more likely than not to see growth in wages, and reductions in unemployment than anything else. Add to this – a banking network that is strong and has the capacity to continue to lend to this sector and needs to, to maintain profits and we have a recipe for moderate to good total returns from our housing assets. Please note that I speak of total returns as the affordability issue will lead to renting becoming more normal than in the past and creating moderate capital growth, but at the same time causing rentals to rise.

But I digress a little. The RBA interest rate increases are having a slowing affect and the data is clearly showing that the rate of growth is moving back a little. This in itself points to a "bubble" being avoided as the growth rate would need to be increasing for there to be the potential of any major problem. One last point on this; our more than 170 years of data tells us that capital growth rates in the last 60 years are less each cycle and hence as property becomes more expensive, bubbles become harder to create. Having said that, we have to bear in mind, any long period of moderate growth with excessive bank lending with higher leverage being allowed or encouraged can lead to problems if the economic circumstance of the country turns down.

Our banks are well controlled and governed so a rapid adjustment to our housing values to make them affordable looks very unlikely.

With the market moving to a normally quieter period during winter, it is a good time to identify opportunities. For me winter is the best time to purchase as there is less competition in the market and sellers at this time are usually more anxious. You probably have a better opportunity to negotiate that bargain, particularly in Melbourne.

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View all articles by John Edwards

new banks entering the market

The decision by Credit Union Australia and AMP Bank to slash variable interest rates on home mortgages is good for the property market and will spur competitive activity, industry experts have said.The move by the two lenders came as Westpac chief executive Gail Kelly reportedly told a private briefing the bank would continue to raise interest rates due to cost pressures despite political pressure from Canberra.Credit Union Australia announced a 25 basis point cut in its variable rate to 6.37%, putting its products well below the interest rates offered by the big four banks. The closest competitor is NAB at 6.74%."We agree with the Treasury Secretary that the banking sector has become more concentrated over the last few years. There is a crying need for more competition and we are taking an active step in driving that competition," chief executive Chris Whitehead said in a statement."At the end of the day our profits go to our customers, not shareholders, in the form of investment in more competitive products and services. We are already a leader in the delivery of great service – this reduction in our SVHL rate means we are keen to take a leadership position in the products we offer as well."The statement comes as the property market is heating up. AMP Bank cut its rates late last week to 6.27%, while Aussie Home Loans also continues to finalise a $1 billion funding program in a return to the industry. Additionally, Macquarie Bank issued nearly $500 million worth of low-doc loans earlier this week.CommSec chief economist Craig James says he was a little surprised by the move, but says it makes sense as more players fight for the lower-end of the market."I think it's a move which has grabbed a lot of attention and I feel CUA will win a little bit of market share out of it. When you see Macquarie getting into the game again with low-doc loans, I think it shows there are more players coming into the market.""Economically speaking, it isn't a surprise, and if it's true that the banks are starting to gouge, the barriers to entry will remain high and give these lenders somewhere to move. There is a new context for the new players, and it's a good thing for the market which may make the banks watch their backs a little more."SQM Research founder and Advisor Edge property researcher Louis Christopher says the broad message of these cuts indicate the market is moving into a more competitive state, indicating a good time for investors to enter the market."The good news for borrowers is that there is now a lot of choice, and it's merely a case of doing your homework on these sorts of things. Certainly the expectation is that rates will continue to rise rather than fall, and people need to take that into their outlook. Also consider it may be a competitive deal now, but rates are going to rise no matter what.""But certainly in terms of the fact there is some competition, it is a good thing for the broader economy and borrowers, and has the potential to encourage other lenders and encourage greater growth."

Iron ore and world economy instability

Chinese Premier Wen Jiabao not only warned the world of a possible return to recession, but was subject to impassioned pleas by steel makers over the enormous price rises looming in iron ore. The Australian economy depends more than any other in the world on the Wen Jiabao forecast and the iron ore strategic discussions.Whether we have a global recession will depend in part on whether the world cost of money rises substantially as the US, European and other governments step up their borrowing. In turn, that will partly depend on how much of the global money demand China can fund.But when it comes to iron ore pricing, it is China that caused the problem and Wen Jiabao has made the first moves that may lead to a big fall. The spot market for iron ore is double the 2009-10 contract prices, so the Chinese are looking at a truly enormous rise in costs, which will flow right through the Chinese economy. That spot iron ore price increase was mainly driven by incredible spending by the Chinese on infrastructure and dwellings as part of their response to the global financial crisis. In turn, that forced the Chinese steel mills to pay big prices on the spot iron ore market to gain material to satisfy the demand.A lot of the Chinese infrastructure spending was very productive, but a vast amount was wasted. The Chinese have built empty blocks of apartments, roads and rail that they will not need for years.This took place because the bulk of the capital expenditure was undertaken by local governments. Imagine what would happen if our local councils or state governments had the ability to borrow virtually unlimited amounts of money. Almost certainly they would spend it to satisfy local vested interests. The Chinese behaved exactly as you would expect equivalent bodies in Australia to do.According to JPMorgan, Chinese local governments were responsible for some 80 per cent of the capital spending and therefore dominated demand for our iron ore and are the main drivers of the price rises. It is also a force fuelling overall inflation in China.Even though it is the wasteful spending that is causing the problem, reversing the policy will be hard. But Wen Jiabao has taken an important first step removing the guarantees that enabled the local councils to borrow. In theory at least, the central government will then have a much bigger say over what takes place, but slowing the economy means many jobs will be lost.The stance of BHP is that annual iron ore price talks are just too disruptive, but a switch to spot prices would see the price sky rocket. Gradually, Rio Tinto and Brazil's Vale are coming to a similar view although they are sensitive to the Chinese demand for certainty.But one way or another, iron ore pricing is going to be much more orientated to the spot price and/or other short term price mechanisms.If Wen Jiabao is successful in curbing the expenditure of the local governments, then we will see a significant fall in the demand for iron ore late in 2010 or 2011, assuming current tasks are completed. Such forecasts have been made in the past and have been wrong as the demand for iron ore just keeps rising. But Wen Jiabao's prediction of a possible global recession is unprecedented.Both BHP and Rio Tinto believe that the Chinese growth story will not be a straight line graph and will have big variations. We will need to watch the curbs on Chinese local government work. And if the Chinese do pull back, Australia will bear a lot of the short term pain.

This article first appeared on Business Spectator.

Is there trouble on the horizon?

THE world's top central bankers began arriving in Australia Feb 6, 2010 as renewed fears about the strength of the global economic recovery gripped world share markets. Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed.The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.
Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.Australia's ASX 200 slumped 2.4 per cent, to its lowest close since November 5, echoing a sharp fall on Wall Street.Asian share markets were also pummelled, with Japan's Nikkei 225 down almost 3 per cent and Hong Kong's Hang Seng slumping 3.3 per cent.The damage was also being felt by European markets last night with London's FTSE 100 down sagging 1 per cent in early trade.Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night."This does feel like '08 and '07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,'' said H3 Global Advisors chief executive Andrew Kaleel."Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.''
It wasn't all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.
The outlook for global growth is likely to be a key theme of the high level central bank talks.
The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night. On the Australian market 31 billion was wiped off as the all ords plunged by
2 1/2%
In addition:
EUROPE'S top central banker Jean-Claude Trichet yesterday cut short his visit to Australia as fears intensified in global bond markets that Greece, Portugal and Spain would default on sovereign debt this year and trigger a new financial crisis. Mr Trichet, the president of the European Central Bank, left a meeting of central bank governors in Sydney a day early to attend an emergency summit of European Union leaders later this week. His sudden departure came as risk premiums continued to blow out on bonds issued by debt-laden European governments such as Greece, Portugal, Italy and Britain. Mr Trichet arrived in Sydney at the weekend where he had high level talks with the governor of the People's Bank of China, Dr Zhou Xiaochuan.
European financial leaders are agitating for China to invest in bonds issued by troubled European countries in an effort to head off a regional financial crisis in the region.Rumours last week that China was set to invest in southern European sovereign debt triggered a rally in Greek bonds, but this was short-lived after the speculation was rejected by officials. Without support from China it is doubtful whether Greece will be able to refinance 54 billion ($A79 billion) of debt due this year.Global equity and money markets have come under extreme pressure in the past two weeks as worries of a second wave financial crisis have gripped traders.The Dow Jones index slumped almost 8 per cent since January 19, while falls on European markets have been more severe.Australia's $65 billion Future Fund yesterday moved to allay concerns that it had significant exposure to Euro-zone bonds after its general manager Paul Costello appeared before the Senate estimates committee.Mr Costello said the Future Fund was not holding any bonds issued by countries such as Spain and Portugal.
The rising risk of government defaults is believed to have figured prominently in the deliberations of central bankers in Sydney on Sunday and Monday.But the outcomes of those high-powered meetings have been kept secret by participants, which included Mr Trichet and representatives from 24 central banks.One of the key players in the meetings was the general manager of the Bank for International Settlements, Jaime Caruana, who is scheduled to speak in Melbourne today.The BIS is developing a new regulatory framework for the global banking system, which also covers new remuneration principles on executive pay.In a speech given yesterday at a symposium organised by the Reserve Bank of Australia, Mr Caruana said that some central banks were not properly equipped to maintain financial stability in their banking systems.

To raise rates or not?

Economists believe a rate rise next week is a near certainty after a rise in the cost of living in the final three months of last year. Australia's headline consumer price index (CPI) rose 0.5 per cent in the December quarter, for an annual rate of 2.1 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.Fruit, holidays, beer and house prices all rose, but were offset by lower petrol prices (lower petrol prices?gee folks, I must have missed that one!). Electrical goods and pharmaceutical prices also fell. The trimmed mean CPI rose 0.6 per cent in the December quarter, for an annual growth rate of 3.2 per cent.The weighted median CPI rose 0.7 per cent in the December quarter, with an annual rise 3.6 per cent.The median market forecast was for the headline CPI to have risen by 0.4 per cent in the December quarter, for an annual pace of 2.0 per cent.Economists had expected the average of the two underlying measures of inflation to rise by 0.6 per cent in the December quarter, for an annual pace of 3.35 per cent.The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank of Australia (RBA), which uses them to gauge the underlying trend in inflation.
Unlike the headline CPI, the RBA's underlying measures are subject to revision due to the seasonal adjustment of some of their components.The RBA is still likely to raise official interest rates next week, economists predicted. (yeah, so what's new?)Commsec senior economist Craig James said the headline result was above than market expectations, albeit not substantially higher.The good news was that the annual growth rate of CPI inflation was within the RBA's two to three per cent target band, he said."If there is any risk, it is that it could end up bottoming out right at the top end of the band or slightly above, so I think on balance the Reserve Bank will increase interest rates in February," he said.But a rise in the cash interest rate after the bank's board meeting, to be held next Tuesday, was by no means certain."The Reserve Bank will be using a lot of strategy in terms of looking at interest rates over the next few months," he said.
"It may decide to wait in February and look at a bit more evidence on the economy." (yes! please do that. allow people a breathing space, recovery is slow and uncertain. don't blow it for Australia's economy, RB)Interest rates in Australia remain well below long term averages.
Mr James said the high point for the cash rate, currently at 3.75 per cent, in 2010 would probably be somewhere between 4.75 and 5.00 per cent."I don't think that's under threat, but clearly there's a lot of things the Reserve Bank has got to juggle in its own mind - things like the special stimulus being applied from tax breaks, the [federal] government's assistance payments and what the cessation of those measures is likely to do to the economy," he said. (yes! they need to look at how the tax breaks have eased the situation and how an increase in rates will make things so much more difficult)"I don't think the (latest result) is going to stop the Reserve Bank lifting rates up to more normal levels."He said inflation at this stage looked "reasonably controlled," but could creep higher if the economy picked up steam amid strong employment growth.The trajectory of rate increases throughout the year was still "an open question," he said.ICAP senior economist Adam Carr said he could not see how the RBA could pause on raising interest rates at its next board meeting on February 2."We are not looking at a subdued inflation backdrop," he said."We're looking at a situation where although core inflation is moderating, it's not really going down fast at all."It's grinding lower and going into what could be a very strong recovery."It's very dangerous to have core inflation well and truly above the target, or even at the top end of the target, so for a forward-looking central bank with an existing stimulatory policy setting I think they will be compelled to hike by 25 basis points."Mr Carr said the prospect of an interest rate pause by the central bank in March was "questionable"."There's no automatic resting point for the RBA."I think that's a misunderstanding by people in the market."He said the underlying inflation figure was the main driver for the RBA to lift interest rates next monthMr Carr predicted inflation would not fall much below three per cent by the end of the year."I think we will be at three per cent by the end of the year, notwithstanding RBA rate hikes."He forecast the RBA would lift interest rates by 100 basis points by the end of 2010. staff

'Mingles' and investment properties

What is a 'mingle'? Glad you asked. A mingle is the middle-aged single person from the baby-boomer generation as a social group which is becoming a force to be reckoned with in our property markets. So yuppies and dinks, make way for the "mingles" because here we come!
Mingles are single, independent and know what we want and probably have pets.
So what does this mean for the property investor? This means an increasing demand for smaller houses, units and pet-friendly apartments. While more 45 to 59 year olds are choosing this life style, some mingles do not live alone by choice but by divorce or the death of a partner.
Taken from Michael Yardleys article:
In 1976 the number of Australians in this age group who were single was 381,000," Salt says. "These mingles broke down into three more or less equal categories -- the widowed, the separated and divorced and the never married. The latter group would have contained most of the gay community in this age group at that time."Over the quarter of a century to 2001, the mingles managed to multiply to 834,000. In an era when the middle-aged population has increased by 66 per cent, those ensconced in singledom soared by 119 per cent."But some categories have multiplied faster than others.While the number of middle-aged widows of both genders shrank, the never-marrieds expanded. And the separated and divorced rocketed up in numbers by nearly 400 per cent to over 500,000.These half a million extra mingles underpin a huge demand for housing, so as a property investor it is interesting to understand the type of property that would attract these them.Unlike the young singles who are more likely to live in an inner city or near city high rise apartment, the mingles are more likely to prefer a smaller dwelling or a unit in the middle suburbs.
Remember these single baby boomers are not hermits. Many have a relationship, but they just don't want to live with another person. Particularly if they are recently divorced. Instead they prefer living with animals who require less emotional and physical “maintenance.”