The Budget’s Secret Bonus For Property Investors – Michael Yardney
Did you pick the hidden surprise in the horror budget of the 13th May?
In my view there was some was some good news for property investors buried amongst all the spending cuts and tax hikes and I’m not taking about the fact that negative gearing was left untouched.
I guess if you’re like most Australian’s your probably thinking, “how will last week’s budget affect my pocket?”
Of course there’s also the big picture questions of how the budget will affect the economy and whether the treatment of people at the bottom, middle and top is fair? But if you’re like many homeowners or property investors you’re probably wondering: “what does all this do to property values?”
Well…as I see it the good news for those who own property is that the government is relying on continuing low interest rates and more consumer spending to help grow the economy.
You see… since the Global Financial Crisis, despite an unprecedented resources boom, our government debt has nearly tripled growing faster than debt in Europe where many countries endured a full blown economic disaster. This means if Joe Hockey wants to rein in and pay down this debt without increasing taxes the government is going to have to limit it’s spending.
But there’s another issue…
Our economy has been growing at below its medium-term trend rate of about 3 per cent a year, which is the rate that keeps unemployment steady. And the economic forecasts from the RBA suggest that our economy will remain sluggish.
However the problem is that with a mining led slump in business investment and public sector spending being capped by constraints in state and federal budgets, unemployment rates are slowly edging higher.
At the same time our relatively expensive Australian dollar is stifling tourism, manufacturing and non-mining exports.
So what can our government do to boost the economy?
There is little option the government other than relying on low interest rates and asset prices rising further for GDP growth over the next few years.
Fact is: the government is hoping for a construction led economic boost and more consumer spending. The budget papers explain:
“further gains in household wealth are expected to support a further modest decline in [household] savings ratio, allowing consumption to grow faster than income.”
As you can see from the graph below, since 2008 (the GCF) we’re back to saving again, with the average household stashing aside around 10% of their disposable income.
At the same time our household wealth has grown thanks to higher house and equity prices at a time when we’ve been curbing our liabilities.
What this means is property values will keep rising…
Low interest rates, strong population growth and new household formation creating pent up demand, increasing household wealth and greater consumer spending means the outlook is good for our capital city property markets.
Especially since all this is happening on a backdrop of relative affordability of housing because, despite rising property values, our historically low interest rates and rising wages is making housing as affordable as it has ever been over the last decade.
Different markets will be affected differently.
Of course different segments of the property market will be affected differently with middle Australia and the prestige end of the market likely to outperform the lower end of the market where first home buyers and Aussie battlers will be challenged by some of the budget cuts.
The bottom line…
It is likely that interest rates will remain low for some time to encourage us to spend up and this is good for our property markets.
Now I recognise that this will have some naysayers jumping up and down saying this will lead to the property bubble as households take on more debt than they can prudently handle.
And I agree that counting on rising asset prices to support economic growth is not necessarily a great way to manage the economy. But the government has decided to tighten its belt and count on us to build more homes, in part because of the positive spin off effect of new home buyers spending up big on appliances, carpets etc.
Of course this property cycle will eventually come to an end when interest rates inevitably rise, but that’s how property cycles work.
In the mean time property investors should take advantage of the prevailing markets and buy wisely building up their asset base, while at the same time maintaining a financial buffer for the more difficult times that will catch up with us down the track.
Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you’ll receive a free video training – The Golden Rules of Property Investment.