A property slowdown in China is altering the list of who’s who in China’s billionaire ranks. Property is no longer the top source of wealth for Chinese billionaires, losing out to those engaged in manufacturing-type businesses. Could the same happen in Australia?
The Credit Suisse Global Wealth Report 2012, just published, highlights how significant property investing has been to wealth creation in Australia over the last decade. The median wealth in Australia is currently USD 194,000 - the highest on the planet. And wealth per adult in Australia, at USD 355,000, is the second highest in the world – after only Switzerland.
Putting it simply, Australians are positively loaded and most of this wealth has been generated from property (the Wealth Report notes that 64% of total household assets comes from real assets, like property).
It is surprising that a country with such an abundance of land could have such lofty house prices. But then again, Australia has ridden on the wave of the China boom for well over a decade – and according to researchers at the IMF, a 10% improvement in our terms of trade lifts Australian property by about 5%.
However, what happens when our terms of trade takes a reverse course?
Australia’s trade balance has been in deficit every month now since January this year. Our exports to China have declined by 20% since May – taking $1.5 billion from our export revenue. In August just gone, we recorded our worst trade result in over four years – it blew out to $2 billion, almost three times higher than expectations. Falling commodity prices for iron ore and coal were largely to blame, rather than volumes, which were actually up over the month.
Over the past few weeks TheBull has put the question to readers: is the Aussie property market about to face a profound correction, or has it already bottomed?
Burak Mete, a derivatives investor, agrees that declining exports are a sore point. “The fact that mining glory days seem to be over makes [labeling it] a so-called [property market] bottom a very optimistic outlook.”
I believe that it is dangerous to prematurely call it a market bottom, Mete continues. “Things don’t look so pretty.”
“However we should remind ourselves that worrying about your biggest trading partner, [China], achieving a 7.6% GDP is a worry that all of G20 would love to have.”
Duncan Mcleod, director of MAA Livestock & Property is in the front seat when it comes to assessing property values. He says that rural land in regional south western Queensland has fallen 10-30% depending on the land usage and whether there is gas involved. “We have been looking for a house on the Sunshine coast area from Coolum Beach to Noosa. Values for sub $400,000 have remained strong, $450,000-$750,00 weaker, $750,000-1m weaker again, while above $1m is shocking.”
Agents cite lower interest rates as one factor that will save the property market from collapse. The RBA has dropped 75 basis points from the cash rate since March – and further cuts are likely. Offshore experience shows, however, that lower interest rates can only do so much. The US and European countries have kept interest rates at near zero levels for years while property prices have continued to stagnate.
TheBull reader John Bowman says that the “long term outlook for property is not good.” However he adds that high house prices are really only good for banks (lending of credit), the government (taxation and stamp duty) and real-estate agents (commissions). “Home buyers pay the increase!” he concludes.
Victor Bavaro, also a reader of TheBull, believes that there is more than one property market in Australia. He thinks that interest rates heavily influence property values. “After a period of interest rates going up during 2011, we saw the markets slow again right up-to the early parts to middle of 2012. As interest rates have started to come down again in the 2nd and 4th quarters of this year we are once again seeing higher turnouts at auctions and properties being on the market a lot less time before being sold. As interest rates continue to fall this year and the early part of next year we will once again see prices increase.”
Bravaro thinks that the property market moves in “mini-cycles of 2 to 3 years instead of the normal cycles of 7 to 10 years”.
“I think these mini-cycles will continue for quite a few years to come until the global economy starts to stabilise and recover, “ he says. “These mini-cycles will reduce the effects of a property crash occurring but will also stop prices go through the roof for some years to come, as prices will rise by 10% to 20% (as interest rates fall) and then drop by 5% to 15% (as interest rates rise), as long as the unemployment levels remain stable. The effect overall will be a flat to slight rise in property prices over the next 10 to 15 years.”
Indeed, the factor X for the Aussie property market is maintaining strong employment in the face of a slowdown in China. Unemployment data released this week showed the unemployment rate rising to 5.4%, the highest level in over two years.
>> Click here to read other articles from this week's newsletter