Experts say you never know whether economic downturns will be mild or severe until they are over. This one, however, is different - it's about as bad as it gets. Two industry experts give their opinion on the overall market trading conditions for 2009
Experts say you never know whether economic downturns will be mild or severe until they are over. This one, however, is different - it's about as bad as it gets. Two industry experts give their opinion on the overall market trading conditions for 2009
Challenger's general manager for residential and commercial lending, Steve Weston, feels there are both positives and negatives in the year ahead for house prices. "There is no doubt that enough ammunition exists equally to craft an argument for property prices doing well in the next twelve months, or for them doing poorly," he says.
On the positive side interest rates are already falling and all indications are that they will continue to do so. "This is always a positive for property prices," he says. Another upside is government making it easier for first home buyers to access the property market by increasing the First Home Owners Grant.
Also expect the significant undersupply of housing in Australia - particularly, says Weston, in NSW - to react with the strong flow of migrants into the country and push rental yields upwards. "As they have in the last couple of years and will likely continue to do in 2009," he says.
Share market investors looking for other, higher return, asset classes will recognise rents increasing and loan service costs coming off, and they'll be likely to view the prospect of residential property investment with renewed interest.
"This is the argument those on the positive side are crafting," Weston says, "and you know what; they are right."
Credit rationing
Others think Australian property prices will fall in the next couple of years. For a variety of reasons.
Firstly, Australians carry higher levels of debt than others in the world and many who are already heavily borrowed will proceed into a period of de-leveraging, or paying down their loans.
Secondly, many might opt to save up for the deposit required to purchase a home rather than take the high LVR product, which will effectively take them out of the market in the short term.
Thirdly, property demand will fall off as the unavoidable effect of a slowing economy; increased levels of unemployment, spreads. "The retail sector is the biggest employer but you'd expect that numbers in that sector would run off as people re-size their business to fit their adjusted revenues," Weston says.
Fourthly - still an unknown quantity - but if banks begin tightening credit, as they have in some of the other developed nations around the world, the house market will bare the brunt of it and property prices will cool.
Weston feels credit rationing is debilitating since it excludes many peoples access finance for new homes. "If credit tightening occurs it will force property prices down," he says.
Then there's the confidence level of ordinary people and business owners in the street. It is unlikely people will be in the market for new homes in 2009 if they are unsure whether they can sustain their income levels through the year.
"That confidence could decay if we begin to hear more bad news come in from overseas," warns Weston.
In the end he's calling a little more downside on property than upside in 2009, but adds that the fundamentals are all in place, so he'd 'not be surprised' if property prices actually increased by a small margin through the year.
Unemployment will increase in 2009, as it is at present. Weston points out that the high employment rates historically have been a reason for property defaults being so low in recent years. So coming off almost full employment puts Australia at a slight risk now.
His outlook for both interest rates and inflation is that they will come off in the short term. "And as the slowdown in the economy continues into the future there is likely to be extended downward pressure on overall prices, which will assist with the inflation," he says.
Competitive economics
Anticipating how competitive the market will become is an interesting challenge. More consolidation in the banking sector and having fewer non-banks around, obviously, will have a negative impact on competition.
First off expect the economics of writing new loans, sustainable in the long term, to prompt banks to claw back more margins on mortgages.
Then expect non-banks to get back into the game. "To make sure that the banks don't have it all their own way. However, there is no doubt that the fewer player you have, the more relaxed the competition will be," Weston says.
Whether the lenders who have left will return, or whether additional lenders are likely to exit the market is more difficult to predict. Not that there are too many more to go, mind you.
"At the moment it is tough for those who don't have deposit bases; particularly for those who are not well capitalised or have access to investors who are willing to invest in your bonds," Weston says.
No one will be surprised if the market sees more bank consolidation. "The government guarantee on deposits and wholesale funding may have deferred what would have happened earlier," he says.
And some may have every intention of returning if they have the funding capability. But if they have left and they have upset brokers and borrowers on the way out, getting back in might not quite be as easy.
"If they hadn't been all that supportive and simply ratcheted rates and margins and treated people ordinarily, like some have, then it won't just be there decision on whether they will return and re-enter the market," Weston says.
In good shape
Craig James, chief equities economist at Commonwealth Securities, feels that this sustained market volatility is a first for Australia.
"In October 1987 there were enormous swings in the sharemarket, but they were largely confined to October and November rather than spread over more than a year," And he adds that the savagery of the de-leveraging process has been startling.
But while he says the Australian economy is fundamentally in good shape, there is a risk that people will over-react to the gloomy sharemarket news, "and cut spending, investing and employment when there is no real need to do so,"
If not, expect the economy to grow 2.5% in both 2008 and 2009, "Below the speed-limit of around 3%," he adds.
Like Weston, James believes the rental market is the tightest in thirty years and rental yields are soaring. "The population is rising but we aren't building enough homes," he says.
Expect the shortfall to be addressed during the course of 2009. And with more investors shifting from shares to property in the year he pegs house prices to rise by between 4% and 7%.
Unemployment will edge higher and top out at around 5% to 5.5%. "However businesses still say that the challenge is to attract and retain staff," James says, "and those that have spent most of the past six months complaining about lack of staff are not going to suddenly axe the same positions."
He expects the cash rate to fall to between 4.5% and 5% by early 2009. And that inflation will ease in line with a softer economy, with underlying inflation near 3% late in 2009.
James expects credit markets to ease and interest rates to continue to fall over the next three to six months. "And competition levels will gradually intensify over the next year as financial conditions improve," he says.
Silver lining
Weston says that there is no doubt that some brokers will look at their monthly commission cheque and find it's not as big as it used to be.
The size of the lending market has shrunk so there are fewer opportunities to go around. But he says that for those left there is still a big part of the cake. "And it is growing," he adds.
But, he says, the value proposition for brokers has never been stronger than it is now, since people taking out loans today might not be sure where to look anymore.
Some lenders are putting up rates and some are reducing them. Some do it before the RBA's announcement on rates and others don't.
"And what about the standard variable rate that the banks quote - is it really the rate that you get, or is their something else that comes off that - how do I know?" Weston adds.
And if a borrower goes to just one bank, they'll only be offered that bank's products.
So he expects that broker percentages will increase going forward. And good performing brokers will do well. But he's quick to add that they will need to focus more on complimentary revenue opportunities - "Its not all doom and gloom."
Tightening the belt
Weston says in spite of the slow-down in the economy, Australia remains the envy of the developed world.
Firstly because commodity strength has made our economy so much more resilient than the others. And because we have a strong banking system. "Most other developed nations in the world will give their right arm to have a banking system as profitable and as strong as ours," he says.
Tightening credit standards indicate that the banks have taken views that the economy is slowing. The government guarantee will get them to lend to each other in the wholesale market, but getting banks to lend to the mums and dads and business leaders will be more of a challenge.
However Weston warns that credit tightening in a slowing economy has the propensity to become somewhat of a self fulfilling prophecy. "This is a major challenge that the entire global financial system is facing," he says.
However he is quick to add that as prudent lenders the banks should be taking a view on the economy, and if they anticipate it will turn down they naturally do need to tighten credit standards. "This is an effect which we have already witnessed, and we've seen the government step in with measures to stimulate the economy to keep it active," he says.
But the question remains: how will the government bail out give ordinary individuals and business people the confidence to go and invest and to buy when they also think that economy is slowing. "When they think their employment, or bonuses and overtime may be in jeopardy, they might decide to hold off spending and sit back and wait and see," he says.
