Here is my first prediction for 2016…
Most predictions will be wrong!
How do I know?
Because they always are.
Twelve months ago no one would have predicted the Reserve Bank dropping interest rates twice in the first half of the year fuelling our already hot Sydney and Melbourne property markets.
Similarly, at the beginning of last year few predicted how APRA’s measures would constrain investor lending, even thought it had already started wielding its stick.
And who would have predicted before Xmas that in the first weeks of January this year the ASX 200 would fall by 7.5%, the S&P 500 in the US would drop 8.5%, the price of crude oil would be 19.7% lower than its 2015 close and consumer sentiment, that was rising so strongly at the end of last year, would slump?
Here’s my next prediction…
The media will be full of negative sentiment this year, not only because of the economic turmoil engulfing the world, but because our property markets are changing and moving into the next stage of the property cycle.
Truth is: very few people like change and they see it as scary, so watch out for the property pessimists and doomsayers.
2015 in a nutshell
I believe, in the world of property, last year will go down as the year that:
- Our property markets were a two horse race as the Sydney and Melbourne property markets boomed
- Interest rates fell to historic lows and investors and upgraders responded strongly to the lower cost of money
- Our property markets were more fragmented than ever with many locations falling in value as the 2 big markets boomed.
- Rental yields fell as rental growth remained at very low levels
- APRA’s intervention caused banks to tighten their lending policies causing many borrowers to revise their plans
Remember… the government engineered the property boom
A housing boom was always part of the government’s rebalancing plan.
While the mining boom was strong, interest rates were raised to hold back the housing and other economic sectors in an attempt to keep a lid on inflation during the mining upswing.
Then as the mining boom ended interest rates were cut, which drove a large upswing in housing construction to help fill the gap left by mining. At the same time low interest rates encouraged us to upgrade our homes.
However, the property booms can’t go on forever.
Sydney and Melbourne housing prices increased by 48% and 32% cent respectively since this cycle commenced in mid-2012.
With our low inflation rate, low interest rates and low wages growth prices this type of price growth was unsustainable and if property values kept growing at double digit rates this would eventually threaten our financial stability.
How will 2016 compare for Australian property?
Our property markets don’t work in isolation, so the world’s economic issues will impact us.
Traders and investors have become pessimistic about China, corporate earnings, global growth, and the commodity outlook.
What happens when traders all wake up thinking similar negative thoughts at the same time? They rush to sell their assets and in the process made markets crash, reminiscent of 2008.
All this has, understandably put a dent in Australian consumer confidence.
This will only add to the property market factors already in play at the end of last year and I expect the factors that have driven the recent pullback in housing to persist in 2016, with lower housing price growth.
Looking into the crystal ball, it’s likely that:
- Sydney's property growth will slow, but the party’s not over. We’re likely to see a slower more sustainable market with property values rising in some areas, but falling a little in others
- NSW is our strongest state economically and is creating almost as many jobs as the rest of the country combined leading to strong population growth and buyer demand.
- There is still a relative undersupply of properties in Sydney at a time of continued demand.
- On the other hand…first home buyers are likely to find Sydney expensive and rather than move out to the sticks, they’ll rent where they want to live and invest their money into property where they can afford to.
- The proportion of investors buying into Sydney is likely to fall as APRA has its way.
- Melbourne is likely to outperform all other capital cities.
- A strong economy, more jobs and strong population growth will underpin property price growth, but this will be much lower and more fragmented than the last few years
- There is an oversupply of CBD apartments and this will spill into some of the middle ring suburbs where the level construction of new apartments is ahead of demand.
Also read: Australia's housing boom is over
- Brisbane’s property market will pick up, but it won’t be the next “hot spot” like some predicted in the last few years.
- The mining slowdown and lackluster population growth held back Brisbane’s property markets over the last few years.
- The low Australian dollar and improved tourism outlook will be beneficial for Queensland
- Strong rental yields and relative affordability will see investors moving to Brisbane in 2016
- There is an oversupply of apartments looming in the Brisbane CBD.
- Don’t count on the Commonwealth Games to boost the local property markets and avoid tourist locations and regional Queensland
- Darwin and Perth property values are likely to weaken further, but could bottom out towards the end of the year
- Adelaide property is likely to keep ambling along as it has over the last few years with few growth drivers to spur it along.
- Tasmania (Hobart) property is hampered by minimal population growth and a sluggish economy. This is not an “investment grade” market.
While there are still many reasons to be optimistic, 2016 is likely to deliver some surprises, but so has every other year.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog.