What 2012 has in store for Australia’s property markets

It looks like the Australian housing market will be a “tug-of-war” this year with low interest rates pulling hard on one end of the rope and economic uncertainty joining forces with subdued prospects for economic, income and employment growth at the other.

I expect the economic side of the equation to win out in the near term, influenced in the first half of 2012 at least by continuing global financial turbulence. This is likely to cause the RBA to drop interest rates once or twice in the first half of the year, and this should underpin our property markets.

However, renewed economic strength is likely to return in 2013, and with it higher interest rates.

Among all the bad news, there is always good news…

While I can see value of some properties falling further in the first half of this year (2012 is likely to be another bad year for top-end and holiday property), prices have stabilised in some suburbs and they haven’t stopped rising in others – in particular Sydney’s inner-suburban market.

What’s ahead?

The long-term trend of our property markets is fuelled by the fundamentals of supply and demand (and this will be driven by our population growth) and our ability to pay more for housing (which will be underpinned by a nation that is going to become wealthier as the resources boom takes hold.)

However in the short term, market sentiment will affect our property markets, as it always does.

Last year ongoing economic uncertainty, the worry of rising interest rates for much of the year, decreasing affordability and political uncertainty were a volatile mix that stalled the property markets.

So here are the factors that will affect our property markets that I’m going to watch out for this year.

1. The European situation.

Every time it seems that our friends in Europe have reached agreement on a deal to solve their problems another bogeyman jumps out from the shadows.

If the European Union breaks up or the region slumps into a prolonged recession, the consequences could be:

•A further dampening of general business and consumer confidence

•A knock-on effect to other economies including the US and China, which both export a significant amount of goods to Europe. The eurozone only accounts for less than 10% of Australian exports, but we could be affected by the impact on our trading partners in Asia.

•Effects on the global financial system. It is possible that it will be more difficult to get loans from Australian banks because international inter-bank lending could freeze up as it did at the beginning of the GFC.
What this means is that now may be a good time to top up your financial buffers while you can, even if you don’t intend to buy more properties this year.

Topping up your line of credit shouldn’t cost you anything, and of course you don’t pay interest on your unborrowed limits.

Wise investors use these lines of credit to buy themselves time. Maybe that’s what you need, just in case 2012 pans out to be a difficult time for Aussie banks.

2. A slowing in China

China’s growth and its requirement of our resources have bolstered the Australian economy.

China’s economy is slowing down now and catching its breath, and this won’t be helped if Europe falls into recession.

By the way, it looks like the US is turning around and should strengthen over the year (with a US election looming), however unforeseen global events could slow the US economic recovery.

3. Interest rates

Interest rates are likely to remain low worldwide, and I expect the Reserve Bank to try and bolster both consumer and business confidence by dropping interest twice more in the first half of this year.

This plus flat property prices should underpin housing affordability and put a floor under property prices.

One question many are asking is: will the banks pass on all of these rate cuts?

4. Inflation

One of the reasons the Reserve Bank lowered interest rates is because inflation sat within its “safe range”, and local inflation should again remain under control for much of next year.

However, our improving economy and the ongoing resources boom may cause inflation to take off again over the next few years, which could make things more difficult to live with if you’re in the “low-speed” non-mining part of the economy.

The time may come to lock in some of your loans and take advantage of fixed interest rates when they are historic low levels.

It may also be a good time to get set for the next stage of the economic and property cycle and buy the right type of property – one that will be a good hedge against inflation.

5. Watch out for the X factor

Many years ago I learned from economist Don Stammer that we need to allow for an X factor: the big influence that had not been generally predicted or allowed for but that comes out of the woodwork and has a marked effect on the economy and our investment markets.

This means I’m going to allow for uncertainty and surprises throughout the year.

What does all this mean?

There’s no sugar-coating it: last year most of Australia was in the slump stage of the property cycle, but this year the cycle will move on, as it always does. And the next stage is the stabilisation phase of the cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising.

And I expect more buyers to return to the market this year when they realise prices won’t fall any further.

By the way, the stabilisation phase is a great time for savvy investors to get set for the upturn stage of the cycle.

This year may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.

(by Michael Yardney for propertyobserver.com.au)