With every new year comes new predictions for the twelve months ahead. It’s human nature to want to know what is in store, long before the ‘store’ opens. It’s also human nature to focus in on commentary that supports our own beliefs, psychologists call this confirmation bias.
Naturally, 2018 is no different, with a multitude of forecasts – from the rational to the absurd – so now is a great time to look at some of those projections and sort fact from fantasy.
The Big Bubble
In the modern Australian property market, the loudest prediction is, of course: “the bubble is about to burst”. In fact, it’s been ‘about to burst’ for at least the past eight years. There is little doubt that there is a housing affordability problem in Sydney, where it is one of the hottest topics of daily conversation. In Melbourne however, the market is somewhat more realistic. Growth has been more moderate – though still highly favourable – and with that comes greater sustainability. Auction clearance rates for houses remained above 70% at the end of 2017, and Melbourne recorded its seventh consecutive year of growth. In the Real Estate Institute of Victoria’s latest report, its President Richard Simpson noted that, “Demand for houses in the city’s most exclusive suburbs continues to outstrip supply, with increased competition delivering exceptional results for vendors in these areas.” It’s not only the prestigious inner city suburbs that have benefitted either. “Regional cities and towns within commuting distance of the CBD have certainly benefitted from strong price growth in Melbourne with a number of these areas now recording median house prices higher than those in the outer ring,” said Simpson. Continued low interest rates, a stable economy, and above average business confidence would all suggest that the so-called ‘bubble’ will survive another year, and so will home-owners.
Australia’s Economy is About to be Trumped
The world’s biggest economy is about to get a ‘huge’ boost thanks to President Trump’s reduction of the US corporate tax rate from 35% to 21%, but does that mean a mass capital flight from Australia (where corporate tax is still 30%) and a hit to local investment? In theconversation.com, Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW flags the US’s tax reform as a legitimate and important risk to our economy, however he also reminds us that the UK and Singapore already have corporate tax rates below 20%. Our economy has bubbled along nicely despite this. What’s more, unlike Australia, US corporations also pay state taxes and, as a recent analysis by ABC News Business Editor, Ian Verrender points out, when matters such as Australia’s tax concessions and depreciation rules are taken into account, Australia’s effective tax rate is actually: “just 10.4 per cent, way below America's even after the tax cut.” Factoring this in, the Trump administration’s domestic economic policies will probably have little significant effect on our property market in 2018.
Even seasoned economists can’t really agree on this one. Respected ABC business reporter Michael Janda wrote recently that experts are divided on whether there will a cash rate increase in 2018. The consensus however is that, if the RBA does raise interest rates this year, it will most likely be a single increase sometime around November or December. “The market is pricing in a 62 per cent chance of a rate rise by the end of next year, amid strong jobs growth this year, especially in full-time work, signs that the mining bust is near an end and business investment in other sectors is finally picking up.” Even with a 0.25 per cent rise, the highlighted factors of full-time jobs growth and increased business investment should be enough to keep Victoria’s real estate market robust, resilient and very rewarding for homeowners and investors alike.