19/10/2011 - 10:43

Back to the future for property market

19/10/2011 - 10:43

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Two reports, if read together, offer positive signs for home0wners and investors.

Waiting for residential property prices to rise has become a painful affair for homeowners and investors justifiably confused by conflicting signals from the market. But, if two recent reports are correct (and read together), the wait could soon be over.

Winning the most headlines, thanks to its optimistic forecasts, was a study released last week by economic research firm BIS Shrapnel, which tipped a 20.2 per cent rise in Perth residential prices over the next three years.

A little earlier, but largely overlooked, was a somewhat different but equally important analysis from ratings agency Moody’s, which looked at “mortgage stress”, a subject that might appear to be particularly gloomy.

The trick, which some early-bird speculators have spotted, is to marry the two documents because one is telling them that we’re close to the bottom of the price cycle (or have actually reached it), and the other is telling them where to look for bargains.

What is interesting about this process of combining two sets of data, is that one is historic (and accurate). The other is about the future, and less accurate because it calls for assumptions, best guesses and a quick glance into a crystal ball.

Take the Moody’s backward-looking study first because it singled out Western Australia and Queensland as the states with the greatest level of mortgage stress, a discovery described as a paradox but is really quite easy to explain because mining, the industry driving the resources states, is never a big employer, but is an industry which produces boom-bust economies.

In other words, homebuyers (and investors) rushed into the property markets of WA and Queensland in expectation of higher prices but quickly found that rising interest rates destroyed housing affordability and that the mining boom in WA was not what was promised, and that in Queensland a promised tourism boom had been strangled by the rising value of the dollar.

So, available today from Moody’s is a map which shows where bargains are to be found with the agency thoughtfully using colour coding of green for minimal mortgage stress to red for very stressed.

In WA that means the south-west corner, including Margaret River and Dunsborough, is one of the most stressed regions. Inner-western suburbs are the least stressed.

For anyone interested in the good life down south, and assuming BIS Shrapnel’s forecast of price rises ahead is correct, then now could be a perfect time to start house hunting.

Another property market factor, which has also become clearer over the past year and which might add to the confidence of property buyers, is that the price slump through which we have been passing has an historic explanation.

According to seasoned market watchers, property prices eventually mirror movement on the stock market, but, generally, after a delay of a year, or more. 

After the 1987 stock market crash interest rates plummeted to help revive the economy, while also helping keep property prices up, with the property crash delayed for about two years.

It’s been much the same this time around. After the Lehmann Brothers crash triggered the global financial crisis, governments around the world slashed interest rates which kept the property price crash at bay for a year, or so.

The global economy is not yet safe from the after-shocks of the GFC, but the building blocks are falling into place, with the Moody’s mortgage-stress analysis representing a useful road map for bargain hunters and the BIS Shrapnel forecast- adding to confidence that the property worm is turning.

Coal bonanza

Australia’s new carbon tax might be designed to reduce dependence on fossil fuels such as coal, but in the real world it seems that demand for coal is booming like it has never boomed before.

In time, and if a recent forecast by one of the world’s top minerals consultants is correct, Australia will be in the ironic position of attempting to slow its own use of coal while feeding a global addiction for the stuff.

Bernard Guarnera, chairman of US-based Behre Dolbear, told a conference in Sydney last week that coal consumption (and prices) would continue rising thanks to demand from China, but with India about to assume the role of the world’s biggest coal importer.

Over the next 20 years, demand for coal would rise by 53 per cent, outstripping by more than 1.5 times the total combined growth rates in gas, oil, nuclear, hydro and other renewables.

A useful measure of coal demand is China’s requirement to build an electricity-grid the size of Britain’s every year for the next 15 years if it is to successfully provide housing for 20 million people moving annually to cities from rural centres.

By 2025, according to Guarnera, Australia will be exporting an additional 70 million tonnes of coal a year, second only to Indonesia, which will boost exports by more than 110 million tonnes a year.

Home alone

WA, at first glance, has absolutely nothing in common with Finland. Look a little closer and you find an interesting economic parallel because Finland is shaping as the cuckoo in Europe’s nest.

Just as WA does from time-to-time when the secession question is raised, Finland is starting to think about walking out of Europe.

Like WA, Finland is strong enough to stand alone with a healthy trade surplus, a strong and growing domestic economy and a government with modest levels of debt.

In theory, Finland could walk away from Europe doing itself minimal harm, but ringing alarm bells across the continent – just as WA would cause a panic attack in Canberra if it opted to separate from the slow-growing eastern states.

Blackberry juiced 

Steve Jobs, the mercurial brain behind the rise-and-rise of technology company Apple, did not live long enough to see what could be his greatest win, the destruction of his smart-phone rival, Blackberry.

Just as VHS destroyed Beta in the video war of the 1970s so too is Apple’s iPhone outpacing the Blackberry of Research in Motion, a point reinforced last week when the Blackberry network crashed in some countries for three days, just as Apple hit the market with a new version of its phone.

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“Experience is the name everyone gives to their mistakes.”

Oscar Wilde.


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