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The media abound with mixed messages on the state of the economy, commentators are picking over the drivers of house prices, and there’s plenty of talk around the ‘two-speed’ economy. What’s really going on?
EVER SINCE Standard & Poor’s cut the United States’ prized AAA credit rating back in August, news headlines have been peppered with a series of mixed reports on the state of the global economy.
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Several European countries are experiencing a debt crisis, while in Australia consumer confidence has been low since the Reserve Bank’s ‘Melbourne Cup rate rise’ in November last year.
And according to AMP chief economist Shane Oliver, confidence will remain low for some time. Indeed, many Australians have been left wondering if the next global financial crisis is just around the corner.
An initial line of defence would include interest rate cuts from the Reserve Bank, expected to commence as early as October, Mr Oliver says.
“The positive effect of low interest rates will offset the negative impact of a slight rise in unemployment and continued uncertainties internationally,” he says.
“Things will be a little bit softer in the short term, but then we’ll start to see stronger conditions in the residential market from mid-next year.”
A series of rate cuts will certainly not cause a surge in positive consumer sentiment immediately; it will take some time before Australians feel confident spending like they used to.
The chance of a house price crash is minimal, and there is a 20 per cent risk of another recession for Australia, Mr Oliver adds.
“Three things are necessary to get a serious 20 or 30 per cent collapse in house prices,” he says. “The first is an abundance of supply, and that’s not going to happen.
“The second is some sort of major mistake where the RBA raises interest rates too much, but the odds of that happening are close to zero now.
“And the third is if China collapses, leading to a huge loss of national incomes and a sharp rise in unemployment, but the odds of that happening are quite low as well.”
The future of the Australian residential property market seems safe for the time being, provided a lack of supply continues to offer a floor to house prices.
Australians still have high aspirations to home ownership, while several external factors are helping to stabilise the housing market, including interest from overseas investors, especially Asia.
“Of course there are some restrictions on overseas investors, but we are certainly seeing a lot of investment, particularly from China, in the Australian residential property market,” APM senior economist Andrew Wilson says.
“I think this reflects that Australia is regarded as a resilient housing market compared to what has happened in similar housing markets, such as the US and UK, and there is always that regard for ‘bricks and mortar’ security, particularly from Asian buyers,” he says.
In Australia, different markets are performing at different rates, with Sydney showing the most resilience over the past 12 months.
Where housing markets such as Perth, Brisbane and Melbourne have suffered falls, Sydney has been flat by comparison.
“Sydney has the strongest prospects of any of the capital markets for growth, and that does reflect the fact that there is a significant shortage of housing in this city,” Mr Wilson tells us.
“It still has a robust economy and there is still an underlying confidence in the property market there.
“Certainly, in terms of buying, Sydney offers the best at the moment – as it usually has.”
The acid test will come, however, as we move into the spring selling season, traditionally the busiest period for residential property sales.
Perhaps a new season will breathe new life into the Australian housing market.
