Residential property and living in Australia
Bank runs happen and combo of social media + electronic banking means when this is front page stuff, the feedback loop will cause volatility. Every central bank knows you can never let this happen so will always guarantee deposits. Bernanke literally wrote the OG paper on this in '83. Depositors will always be made whole. Moral hazards for bond and equity holders an issue outside of making sure the system doesn't collapse, the sky isn't falling.
Let's ignore all the US banking stuff for a moment, what's happening on the ground in Australia?
Aussie jobs data was strong to say the least. Population growth rates back to pre-covid levels (as a %). Annual level of net overseas migration is just below all time high (Dec 2008) and suspect we will blow past it next quarter. And why not, Aus is an attractive place to live. We whine about it, but the reality is there aren't many places in the world with clean air, clean water, absolutely cracking weather, is exceptionally safe, strong social security, and a high standard of living. Net migration is not slowing down any time soon and there is no longer an argument about a big or small Australia. Big and getting bigger.
But this throws up a few issues, perhaps not long term but more in the short-medium term due to current market conditions. Yes, there has been good infrastructure build in the last few years but fundamentally where does the additional migration live? Even take half of this, 200k migrants each year of which 70% odd come in through the skilled migration program. High educated, high-income earnings individuals, (rounded up) 150k each year, 85% of which end up in either Sydney or Melbourne.
Shed a tear for the property developer? Well, not really. But can see this becoming an issue as I'm observing resi developments either falling over or just not going ahead any longer. Lending is restrictive due to credit availability (higher rates, lower approvals) and this is tightening the market up for new construction builds. There is a lag between increased population growth and dwelling approvals. Dwelling approvals in Australia are no where near all time highs yet there is so much structural demand for housing.
Maybe the 3 levers available to push around to change the outcome are:
- Property Valuations – we either need to see this drop sufficiently to make new developments economic OR need the expectation of rising values to come back. But no forced sellers in market and as long as credit availability remains tight, this doesn't change substantially in either direction.
- Interest Rates – Rates will either keep rising due to structural inflation, strong jobs, and wage growth. OR rates fall because the economy is screwed. Goldilocks scenario is rates remain stagnant for the next 12 months and banks improve credit availability. Big-4 already reducing fixed rates. And guess what? Market is now pricing in the story of the 3 bears.
- Incomes – Incomes need to go up to justify higher property valuations. This is perhaps a realistic scenario as jobs numbers remain tight in the near term and we're seeing the best wage growth in over a decade.
From the above 3 levers, the market now thinks cash rates might be relatively stagnant for the next 12 months and income likely continues rising with strong structural wage growth. Do those 2 factors have the ability to inadvertently push the property valuation lever?
Low dwelling approvals, strong net migration, stable interest rates, high wage growth = ???