It Doesn’t Get Any Better Than This for Aussie property!

There is no doubt that Australian property prices are going higher!

Prices will not only remain strong, but should even accelerate. As the spill-over effect from Sydney and Melbourne begins to take hold, an important historic shift in Australian demographics is also taking place with increasing immigration and foreign investment. Prices around the rest of Australia are set for a potentially sharp upward spike in 2016 as a result.

When you see stories about clearance rates dropping and price rises slowing in Sydney or Melbourne, this is partly due to vendors expecting to win lotto with their sale prices. It is also a function of my previously suggested scenario of Sydney, in particular, having reached a critical price point - point where people will no longer buy at such high levels after an incredibly sharp run up.

Eventually a market reaches a stage where it becomes a little obvious that there is a risk of paying the top of a cycle price. Instead of taking that risk, people decide to get up and move, to buy elsewhere such as South East Queensland.

Neither Sydney nor Melbourne are about to have a sharp correction, in my belief, but the perceived ‘risk' of this is enough to send a lot of people looking elsewhere. Even Sydney will continue to see strong price gains, just not the double digits as has been the case over the past couple of years.

Supply constraints will push prices further

We all know the supply side is going to be less than it would otherwise have been if not for the inappropriate braking system of the Reserve Bank and APRA. Lessened incentive for investors means less supply coming through and, as a consequence, higher prices..

In a nutshell the RBA, APRA and the banks have combined to turn a situation that could have seen Australian landlords renting properties to the Chinese, completely on its head.

Australian buyers now have one hand tied behind their backs, with higher hurdles to property purchases than a normal market situation would have provided. That said, it does mean that those of us who already have an investment portfolio, or the ability to satisfy the higher loan requirements, are in a very strong position indeed.

Less supply, when the domestic economy is picking up pace, as well as the continued incredibly prosperous global economy, all lead to only one possible outcome: Virtually a fresh property boom in 2016.

Last week we saw Australian un-employment again come out at under 6% -just 5.8%. There are some questions being raised about how accurate the data was, but still, the positive trend is undeniable and welcome.

I have been forecasting for a long time that the next move by the RBA will be to hike rates, but only in 12-18 months’ time. This view has been further supported by the un-employment data. While rates should be at 1.5% all throughout his period, we will have to make do with 2.0% for quite some time due to a not-too-bright RBA.

Don’t worry though. When rate rises come, they will be more modest and gradual than at any other time in history, and only when the Australian economy is once again a lot stronger than it has been or is now. So, property price gains and even rents should be matching, and more likely exceeding, modest increases in interest cost.

The Australian economy will continue to under-perform for quite some time, but is getting a small lift just now. Some of this is due to the hard work done by the Abbott government, and some is due to the Turnbull effect - a lift in optimism among business owners and consumers alike. Overall, 5.8% un-employment is still too high. We clearly have to do more as a little nation in Asia.

Yet all of this just combines to confirm increasing demand while supply is being moderated. The result can only be higher prices.

Over the weekend, China data confirmed what I have been saying all along - the economy there is truly strong. Retails sales are through the roof, growing at 11.2% for the year!. Industrial production is up 6.2%. These are very big numbers indeed. With the world’s second largest economy growing at 6.9% at least, there’s a very favourable outlook for on-going demand for Australian property too.

In the US this week I expect the Federal Reserve Bank to raise interest rates. Not scary at all. They are raising rates from just 0.25%, to just 0.5%. The media will of course try to make a big deal about this. Let’s just have a laugh at that really. They have lost touch with reality if they think this is going to be a problem for anyone.

Really this is just confirmation that the US economy is now back to normal and very strong as well. All good.

So to be very honest with you, in terms of the property price outlook in Australia, it just doesn't get any better than this!

Clifford Bennett