Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 21 August 2015

3 positives for property in 2016?

Stock volatility

Golly. My word there's some crappy economic data doing the rouinds globally at the moment - the commodity markets smash-up continuing to take front and centre stage, while China's manufacturing activity gauge slumping to a 77 month low for good measure.

The commdity price exuberance was in part an echo of China's own property market largesse. Or if bubbles are your thing - and they seem to be all the rage these days - an echo-bubble of China's property bubble.

With stock markets in the business of tanking anywhere and everywhere from the US to the UK, Australia, China, Japan and...well, pretty much all over the show to be honest...perhaps it's no surprise that real estate is sifting back in favour togiven record low borrowing rates around the developed world.

Aussie stocks are well on track for their worst month since the global financial crisis having wiped close to 9 per cent off their value already in the month of August alone, while UK stocks have already meandered into correction territory.

On the flip side for British investment markets, the UK Council of Mortgage Lenders reported that UK mortgage lending has bolted to its highest level in seven years - since before the financial crisis fallout - at an estimated £22 billion for the month (where is the pound symbol on keyboards these days, by the way?).


This is particularly noteworthy for Australian investors since the United Kingdom introduced macro-prudential measures of its own to its housing market back in 2014 in the form of the Mortgage Market Review (MMR).

Now that the impacts of the MMR are already receding into the rear view mirror - and with interest rates still stuck at rock bottom at the effective "zero lower bound" - mortgage lending appears to be ripping higher again.

The key point here being that while macro-prudential markets may be designed to effectively slow the market, they don't take away the demand for property completely or permanently.

Hometrack noted that Cambridge, Oxford and the English capital city of London are continuing to lead the way in terms of capital growth over the past year, which will come to no surprise to readers of my book Get a Financial Grip from some years ago, of course. 


What's more, the boom could be only just be in its infancy.

Australia - 3 positives for property in 2016?

Despite the implementation of macro-prudential measures in Australia whereby APRA will aim to cap investor lending credit growth at around 10 per cent per annum, there are three other forces which may conspire to see 2016 being a strong year for property.

Firstly, Assistant Treasurer Josh Frydenberg has reportedly flagged that there will no banning of SMSF property borrowing, which could come as something of an upside surprise for capital city property markets, although those without substantial deposits may find real estate investment via their SMSF a tough proposition.  

Secondly, does anyone else think that interest rates are on the "long, slow march to zero"? I can't predict the future, of course, but put it this way - I wouldn't be betting against it! 

The cash rate futures implied yield curve suggests that markets area already looking for another interest rate cut to 1.75 per cent by the second half of 2016.

It's hard to know where to start with commodity prices crash. The iron ore and coal correction, of course, has been one for the ages. Crude futures have hit upon a deadly slick.

"Dr. Copper" is testing 6 year lows and toying with financial crisis depths while lurking below US$2.30/lb. Precious metals are miles below their peaks...and on the list goes.

Ordinarily one might say that this will be bad news for property markets and investor sentiment, yet realistically with mortgage rates falling towards record lows and cash in the bank paying essentially nothing worthwhile after inflation, where else are Aussies going to invest their money?

Into our tanking and resources-heavy stock market? Hmm, not so sure about that.

Thirdly, with APRA targeting investor loans banks and lenders are likely to go all in on targeting owner-occupier lending.

HSBC are already now offering variable rate mortgages from 3.99 per cent, with is just unbelievably cheap. We might expect to see other banks to follow suit. 

CoreLogic-RP Data's index shows that Sydney home values are up by 1 per cent in first three weeks of August alone and a stonking 18.2 per cent over the past year. It's turning into a monster property boom, with Sydney dwelling values now up by more than 50 per cent since 2012.


With Sydney inching closer to its market peak, investors are increasingly shaping up to scope out Brisbane for better value, with investor lending on a 12mMA basis now tracking at its highest level since April 2008.


Sure, APRA's investor lending crackdown will jam a stick in the spokes for a while, but meanwhile Queensland owner-occupier lending has also ghosted past five year highs on a 12mMA basis, after a subdued half decade. 


And remember the Queensland figures are being dragged down by any number of mining towns and regions which are experiencing negative demand i.e. recessionary conditions.

Brisbane could be the one to watch in 2016.