The health of our economy has a direct influence on property, with a multitude of elements impacting people’s confidence to buy, sell and invest.
Some elements are always a factor in people’s decision-making – they include interest rates and job security. Other economic issues only arise from time to time, like credit restrictions on loans.
image via McGrath
So, let’s take a look at some of the most significant economic factors influencing our market today.
Availability of credit
Credit restrictions have strongly contributed to a -7.2% decline in national home values over the past year, according to latest CoreLogic data.
Credit flow is a crucial economic element because not only does it dictate whether people can buy at all, it also dictates what price level they can buy at. If buyers can’t get enough finance to achieve their next goal (usually upgrading), then they can’t make offers at a level acceptable to sellers. This means properties either don’t sell and are withdrawn from the market, or they sell for lower prices.
However, credit conditions are about to change and this will have a beneficial impact on both market activity and property prices.
What’s changed is that APRA has told the banks that instead of using a 7% benchmark interest rate to assess serviceability on all loans, they can now choose their own benchmark or simply add a 2.5% buffer to their advertised mortgage rates.
This means serviceability will be assessed at a more realistic level, enabling more people to get loans and translating to more demand in the market.
The other great aspect of this change is that with every rate cut from the RBA (two expected in total this year), the serviceability test will move lower too. The banks will be adding 2.5% to progressively lower mortgage rates (if the banks pass RBA cuts on), which means more people will qualify for loans.
Employment
People aren’t going to make major financial decisions when they’re worried about job security, however Australia is doing well in this regard with an unemployment rate of 5.1%.
The RBA wants to keep the unemployment rate low or even lower and some recent softening in the labour market is why interest rates are on the chopping block in 2019.
The return of the Liberal government is also good for job security because it’s the side of politics generally considered best for business. When the business world is confident, companies are more likely to invest and employ more people.
Interest rates
Falling interest rates indicate a weakening economy – but buyers and sellers don’t care much because the benefit to them is so significant!
Unless jobs are at risk, lower interest rates will always buoy the property market. Lower rates (now at a record low) mean people can more easily afford their loans and this is a big determining factor in whether to buy or sell.
With weak income growth right now, interest rate cuts provide a boost for owners and buyers.
Tax cuts
No matter who won the election, we were going to get tax cuts because the federal budget is finally back to black. This is great news for our economy. The first round of tax cuts is due this financial year, with people earning up to $126,000 receiving $1,080 for singles and $2,160 for couples.
Confidence
We’ve gone from total exuberance between 2012-2017 in Sydney and Melbourne when prices were rapidly rising to a much more subdued attitude following significant falls of 15%-plus.
Falling property prices make people feel less wealthy. They get nervous and stay put. They don’t want to sell at a lower price; and they don’t want to buy if prices are going to fall further. So, they wait; and this means lower listing levels and less homes for sale and less demand in the marketplace.
I think confidence levels are definitely changing. The return of the Liberals, who are seen as prudent economic managers; no changes to negative gearing or CGT; APRA’s changes to serviceability criteria; and the likelihood of another rate cut by Christmas should all combine to boost sentiment.
It might even be enough to bring the end of this downturn forward.
If our economy keeps chugging along, then once people realise we have passed the bottom (you never know until it’s passed), owner-occupiers and investors will be looking for opportunity again.
By no means is this an exhaustive list, however these are the headline economic items I see as relevant to property today. By all accounts, things look positive. Sydney and Melbourne need good economic conditions to rebound and I think the stage is set whenever the market is ready.
