World financial crisis: Questions & answers relating to Australian Property

In 1987, investors shifted from shares to property. Could the same happen?

Certainly. The Reserve Bank has already slashed the cash rate from 7 per cent to 6 per cent but monetary policy still remains tight. The cash rate could fall to previous lows of 4.25 per cent set in 2001 when the US was last in recession. Clearly inflation is the least of our concerns at the moment.

If interest rates come down, investors will be attracted to move into the property market. Demand for property is strong but supply hasn’t kept pace. As a result rental markets are the tightest in 19 years, rents are rising and so are house prices.

In response to slowing economic growth unemployment is likely to rise in coming months. However unemployment is lifting from “full employment” – unemployment rates near generational lows.

People only sell up their homes if they have to. And for the majority of Australians there is no need.

Unemployment is still low, and if you sold up, you would still have to live somewhere. Given the tightness in the rental market, it is hard to find affordable accommodation, let alone in the area you want to live.

Some analysts are worried about household debt levels. But as the Reserve Bank has been at pains to point out, higher real incomes have caused more Australians to take on debt. And while debt has risen, so have assets.

The other key factor is rising population growth – the fastest in 18 years, boosted by record immigration. The International Monetary Fund said that migration was the key reason why Australian house prices are not overvalued: “if country-specific factors, particularly the impact of long-term migration on housing demand, are taken into account, the results do not produce evidence of a significant overvaluation of house prices.”

Should I move my investments into cash?

Moving investments from shares and property into cash is not without its costs and is a short-term decision. It also represents an attempt to “time the market”. And countless studies show that it is near on impossible to time the sharemarket.

A widely quoted study in the US tracked sharemarket movements from 1963 to 2004. It found that 96 per cent of market gains occurred on only 0.9 per cent of trading days. (Towneley Capital Management study undertaken by Dr H. Nejat Seyhun). The bottom-line being that if you move money out of the sharemarket and then back in, you would have to be either extraordinarily astute or lucky to get the timing right.

If you are aged below 55, you no doubt will experience more events like we are experiencing at present – although hopefully not as significant. Corrections occur regularly, reflecting the “animal sprits” that underpin investor behaviour. In short, we all get over-confident and over-pessimistic – fear and greed.

How is Australia placed?

The Australian economy is probably the strongest major developed economy at the current time. Unemployment is just above 33-year lows, the economy hasn’t had a recession in 17 years, government debt has been paid off and the budget surplus stands at $20 billion.

The Australian banking system is amongst the strongest in the world – ranked equal second by the World Economic Forum behind Canada in a recent survey.

Australia is more dependent on China rather than the US, UK or Europe for trade and economic growth. And China continues to expand strongly.

Clearly Australia is not insulated from the world’s problems. Our banks need to raise money on global markets and are forced to pay higher interest rates. If the US, UK and European economies slow then they will buy less goods from China and China will demand less raw materials from Australia.
But Australia’s Reserve Bank has plenty of room to move to cut interest rates and stimulate the domestic economy. If the job market were to slow markedly, then the Government would revise down its immigration target.

The dramatic fall in the Australian dollar – while bad news for overseas travellers, represents good news for Australia’s exporters, especially in the farm sector and foreigner investors who effectively had a 20%-40% “discount” on Australian property prices because of the lower dollar.

In short, Australia has plenty of options available and plenty of safety valves to shore up growth – something which clearly can’t be said for many other developed nations.

Source - Craig James,
Chief Equities Economist,
CommSec