Welcome to our Steward Wealth quarterly outlook video, a brief overview of where we see markets now and how we’re positioned.
The latest statistics coming out of the Australian residential property market indicate we’re seeing a remarkable rebound, with approvals and finance applications soaring and prices likely to follow. For now, the real driver is free standing houses being bought by owner occupiers.
Record construction approvals
Approvals to construct new houses jumped 15.8% in December to a record high, with strength seen right across the country. CBA’s economics unit pointed out that compared to December 2019, housing approvals rose “an incredible 55%” – see chart 1.
Chart 1: Dwelling approvals were strong across the whole of Australia
While apartment approvals are nowhere near as impressive, being 19% below a year ago, they are still 44% above the low point reached in June last year when the market had been crushed by national COVID lockdowns and forecasts were for housing markets to collapse.
Residential propery prices expected to follow
While CoreLogic reports that national home prices have risen a relatively modest 1.5% compared to a year ago, with Sydney up 2% and Melbourne down 2.2%, those markets that have enjoyed less COVID disruption were stronger: Perth was up 3.7%, Brisbane 5.3% and Adelaide 6.7%.
However, given weekly auction clearance rates and loan applications tending to be a reasonable leading indicator for house prices, the outlook for prices, especially for free standing homes, appears to be very positive. Clearance rates have roared to a four-year high – see the chart 2 below – and the value of new housing loan commitments in December jumped 9% to hit a record high of $26 billion, putting it 31% higher than a year ago.
Chart 2: Auction clearance rates have hit a four year high
Chart 3: Owner occupier borrowing has shot up
UBS forecasts Australian house prices will rise by 10% in 2021, while CBA is calling for an 8% increase.
What we’re seeing is the culmination of various factors that, when combined, amount to a huge tailwind for the property market.
Interest rates: the Reserve Bank has cut cash rates to an all-time low of 0.1% and indicated they have no intention of raising them any time soon. Borrowers could have two to three more years of super low interest rates up their sleeve.
In addition, the big banks are benefiting from the Reserve Bank’s Term Funding Facility that enables them to borrow a total of $200 billion for home lending at the same rock bottom rate of 0.1%.
Banks have responded by offering fixed rate loans as low as 1.75%, with no fewer than 25 different loans currently below 2%. Not surprisingly, fixed rate loans now account for 40% of new loans, up from 15%.
Relaxed lending standards: In October last year the government announced the removal of the bank regulator’s responsible lending laws, which required banks to undertake thorough due diligence on a borrower’s capacity to repay a loan. The Treasurer said at the time the move was aimed at providing easier access to credit to help Australia’s recovery from its first recession in more than 30 years.
Stimulus spending: the stimulus packages announced in the wake of the COVID pandemic by the Australian government added up to 13% of GDP – newly created money shoved into the economy. That saw household savings jump to an almost 60-year high in June last year – see chart 4.
Chart 4: Household savings hit an almost 60-year high
HomeBuilder Grant: the Federal Government also announced grants of $25,000 to qualifying borrowers who were either buying or renovating a home to live in. By the end of 2020, 75,000 applications had been received, blowing past the government’s forecast of 30,000. The scheme has been extended until March, although it’s been reduced to $15,000.
Stamp duty concessions: New South Wales and Victoria announced stamp duty concessions of between 25-50% on residential property purchases up to $1 million.
Job security: thanks largely to the stimulus juicing the economy, the NAB Business Survey shows business confidence and business conditions have rebounded to be well above their average for the last 30 years. That’s in turn prompted the labour participation rate to jump to a 35-year high and the underemployment rate to drop to its six-year average, while job vacancies are at the highest for at least 12 years.
Not as great for investors
While property prices are tipped to do well over the course of 2021, rental markets are not looking as promising for property investors.
Nationally, CoreLogic reports rental rates went up by just over 1% for the year to the end of January 2021. That means they failed to keep pace with property prices, meaning the yield on an investment property, already notoriously low in Australia, was even worse.
Rents in apartments were markedly worse, possibly reflecting a sharp fall in international students and immigrants. In Melbourne, unit rents dropped 8% over the past year while in Sydney it was 6%.
- For those looking to buy a home, the market looks set to rise over this year.
- While capital gain for investors is always attractive, there may well be risks in finding a tenant at current market rates.
- Qualifying borrowers can still benefit from the federal government’s HomeBuilder grant until March.
- For those looking to borrow to buy a home, rates are at all-time lows.
- For those already with a mortgage, now is a great time to refinance.
Looking to buy a residential property or refinance your existing home?
Call Steward Wealth today on (03) 9975 7070 to find out how we can help you achieve a highly competitive home loan rate.
This article appeared in the Australian Financial Review.
After news of a promising COVID vaccine hit financial markets on 9 November, those sectors that had been shunned like last week’s fish dinner while economies were at risk of ongoing lockdowns suddenly became flavour of the month.
Investors pounced on the stocks that should benefit from people returning to ‘normal’, which saw sectors like energy, banks, retail property trusts, hospitality and travel shoot up. At the same time, the companies that had starred during lockdown, that benefited from people shopping, working and exercising from home, surrendered some of their astonishing gains.
This has left smart investors facing the usual challenging questions: has the market already priced in the return to normal? Should you be erring on the side of caution and selling into these strong markets?
We continue to advise clients to remain fully invested in the allocation to growth stocks their risk profile allows.
Strong outlook for the economy
There are several indicators pointing to the possibility of a strong economic environment in the year ahead. First, the Australian government injected stimulus equivalent to 13% of GDP in the form of JobKeeper, JobSeeker and other direct payments. The $34 billion worth of early super withdrawals added another 2.5% to that.
A lot of that stimulus has already been spent, which was the whole idea, but much of it has been saved, with Australia’s household savings ratio hitting 19.8% in the June quarter, almost eight times higher than a year ago and only 0.5% below its peak of the last 60 years. That’s a serious amount of spending power.
And spending is exactly what it looks like Australian consumers are doing after confidence levels jumped to 10-year highs. The Commonwealth Bank reports its credit card data showed spending in the week to 13 November was up 11% compared to last year. Restaurants in New South Wales enjoyed seated dining numbers 55% higher than a year ago, while Queensland was a whopping 79% and even shellshocked Victoria was up 54%.
Retailers will be eyeing off that pool of savings in anticipation of a bumper Christmas and companies in general should expect a lot of that money to work its way around the economy for a while yet.
The US is in a similar position, with a 13% stimulus package pushing the personal savings rate to almost double what it was at the start of the year. Although a fresh stimulus package has been trapped in a political standoff for the time being, it is expected the new Biden administration will make it a priority. Meanwhile, record low interest rates have ignited the housing market, with home values at record highs, homeowners’ equity at record levels and monthly new home starts challenging their all-time highs.
If the new vaccines are as effective as they appear, the Chinese economy has shown how quickly things can bounce back. China’s manufacturing and services sectors have rebounded strongly, pushing annualised GDP growth to 5% and retail sales are almost 5% higher than a year ago.
What about the markets?
Whoever would have thought the US share market would already be at a record high the day a COVID vaccine was announced? Let alone that it would hit that high amidst COVID cases being reported at record rates across the globe. And that strength is being seen in stock markets around the world, with 52-week highs in China, Europe, the emerging markets and even Japan is at 30-year highs.
2020 has been a great reminder that share markets do not necessarily follow economies, so it’s entirely possible we will see an economic rebound and poor markets. And there are plenty of sceptics ready to point to elevated valuations as a warning signal.
So how do those valuations stack up? Australia’s ‘forward PE (price to earnings) ratio’, so based on earnings forecasts for next year, is at 19 times compared to a 32-year average of 14, and the MSCI World Index is at 21 times compared to 16.
On the face of it, that makes shares look pretty expensive. However, I’ve argued for a long time that low inflation supports higher PE ratios. 30 years ago, Australia’s inflation rate wasn’t far off 10% and it’s been trending downwards ever since. So, with inflation currently below 1%, it makes perfect sense that the PE ratio would be higher. In fact, comparing today’s PE ratio to any period as far back as 40 years ago, when inflation peaked at close to 18%, is like comparing the proverbial apples and oranges.
Further, high growth companies such as the tech sector have defied any gravitational pull of lower PE ratios. I’ve argued before that it makes little sense to value a software company whose earnings can grow exponentially without requiring any further capital outlay the same way you’d value a company whose earnings can only grow in proportion to how much they spend on building new factories.
Bond yields have also been steadily declining and, likewise, it’s well established that falling bond yields underwrite higher equity valuations. The typical way to value a share is by working out what a company’s future cash flows are worth today by applying a ‘discount rate’, which is normally based on the 10-year bond yield. The closer bond yields get to zero, the more valuable are those future cash flows in today’s money.
With interest rates at levels designed to punish savers and prospects of a vaccine unleashing a post-COVID spending spree, it’s little wonder global equities just saw the biggest week of inflows ever. Now is not the time to be sitting on cash.
2021 is shaping up to be a year of strong economic growth, and, right now, the indicators are looking good for financial markets as well.
- The government response to the COVID shutdowns was swift and big. In total, the federal government is spending $272 billion, equivalent to 14% of GDP, and the states $122 billion. All that newly created money has to go nowhere.
- Early on, households saved a lot of the extra cash. The June quarter savings rate hit 19.8%, 8x higher than the year before and only 0.5% below the 60-year peak set in 1974. The Commonwealth Bank estimates households will have about $100 billion of savings, or 5% of GDP, that has been accrued between the start of COVID and December.
- To that you can add $34 billion of super withdrawals so far, with Treasury estimating an eventual total of $44 billion.
- After a record plunge to 76 in April, consumer confidence has now had 11 consecutive weekly gains to 108.
- It now appears Australians are spending those gains. Commonwealth Bank reported credit card spending jumped 11% year on year in mid-November. Restaurants in New South Wales enjoyed seated dining numbers 55% higher than a year ago, while Queensland was a whopping 79% and even shellshocked Victoria was up 54%
- Retailers have seen record spending in the Black Friday sales, prompting Gerry Harvey to say, “This is like the greatest boom I’ve ever seen in my lifetime”.
- The US fiscal package injected 13% of GDP and pushed the personal savings rate to almost double what it was at the start of the year.
- Low interest rates have ignited the US housing market, where prices are now 10% above the pre-GFC levels. Homeowners’ equity is at a record high and the increase in the pending sales index is parabolic.
- More than 80% of stocks in the S&P 500 are trading above their 200-day moving average, a sign of positive market breadth that has only been seen twice in the past 20 years.
- We are seeing 52-week highs in share markets across the world, from China, to Japan, to Europe, to Australia.
- Global equities have seen a record inflow post the COVID vaccine announcements.
While the indicators are stacking up well, there are, of course, no guarantees that markets will play ball and they sure do have a way of wrong-footing us. However, it’s noteworthy that nothing in the economy was ‘broken’ going into the pandemic downturn; there was no particular sector on the cusp of being crushed by excessive debt and while valuations were not cheap, they were certainly defensible.
Now is not the time to be sitting on lots of cash.
The 2020 Federal Budget (postponed from May), has been characterised by spending and bringing forward tax cuts to get the economy moving again. Make no mistake, the numbers are big! However, COVID has been seen as a great a threat to the global economy has faced in a very long time (many suggest since The Great Depression), and so requires equally strong and unprecedented measures.
The Treasurer, Josh Freydenberg has said that once the economy recovers and unemployment falls comfortably below 6%, he will then look to tackle the deficit. This is forecast to be in 2023-2024.
Unlike other budgets where we find major changes to superannuation requiring more strategic assessment and planning, this budget is relatively straight forward.
- Personal tax cuts have been brought forward 2 years. This means many of you earning over $50,000 pa will have at least an additional $41 per week in your pockets. This will be back dated to 1st July 2020.
- Further support for pensioners, low income earners and job seekers. This includes two cash payments and incentives for employers to hire unemployed workers.
- Making it easier to choose a super fund. There will be an interactive online comparison to assist you in making a decision on where to invest your super, as well as making it easier to have your new employer contribute to your existing fund.
- First home buyer purchase caps lifted to assist an additional 10,000 first home buyers.
- Business tax changes for small business including immediate tax write-off, and applying tax losses from 2019 – 2022 against previously taxed profits.
- Increased business investment with $1.3bn for initiatives in ‘modern manufacturing’ and $5.7bn for new and accelerated infrastructure projects.
The attached article provides a comprehensive summary from Westpac Economics.