Commentary

5 May 2009
 
Market Outlook
 
The Australian economy appears headed for a sharp downturn, although conditions are not expected to deteriorate as badly as has happened in a number of major regions around the world such as Continental Europe, the UK, the US and Japan.In summary, conditions in Australia appear to be more like a credit squeeze than the financial crisis that has gripped other countries.
 
Unemployment is expected to climb above 7% and business investment is already showing signs of a steep decline.  This will be offset by government spending at Federal and State levels, although this might not be sufficient to offset the impact of the reduced investment by the private sector.
 
The message to be drawn from this scenario for property investment is that we are now in a period that favours prudent investment – particularly in the residential sector.  Many parts of Australia are now suffering from a shortage of residential stock.  The population is expected to continue increasing quickly due to sustained migration, natural increase and Australian expatriates returning home.  In addition, with weak economic conditions and inflation not expected to escalate past the Reserve Bank’s upper limit of 3% any time soon, the outlook for interest rates is for further reductions.  The combination of cheaper finance and increasing demand would suggest that prices of residential properties will start to increase again in 2010 and continue rising for the following several years.
 
Significantly, much residential property is now below replacement cost.
 
For property investors the message on interest rates is that there will come a time to lock into fixed rates, but we haven’t yet reached that stage.  That should arrive late in calendar 2009.
 
As a generalisation, there could be modest residential property price rises in the second half of 2009.
 
Residential property investors could benefit significantly from a continued shortage of rental accommodation and a subsequent escalation in rents.  Domestic rentals are predicted to rise by 9% in calendar 2009 and by 25% over the next three years.  This will open up opportunities for investors to make residential properties positively geared on an after-tax basis.  In other words, it should be possible over time to have residential investment properties generating positive cash flow for their owners.  This situation has not existed generally in Australia for many years.
 
The outlook for commercial property is that both property values and rents will decrease over the next year or two, but the extent of these reductions will be quite limited.  Reduced building activity means there will be less commercial stock coming onto the market. This should help offset some of the impact of reduced business activity and a consequent lower level of demand for office space. 
 
(Note: We thank BIS Shrapnel, one of Australia’s leading economic forecasters, for providing the information on which much of this commentary is based.)