Welcome to CoreLogic’s housing market update for December 2023.
While there was plenty of concern about potential geopolitical and economic crises at the recent ASFA conference, at least one senior industry figure was upbeat.
Peter Jolly, NAB’s Global Head of Research, was one of the more relaxed experts to attend and speak at the recent Association of Superannuation Funds of Australia (ASFA) conference. Here he explains the five reasons he’s “optimistic” about Australia’s medium-term economic future.
Nations such as the US and UK started seeing post-GFC green shoots in 2010. As Jolly observes, there’s “a strange narrative”, particularly in the US, that every seven years we must have a recession. But recessions don’t just happen because the clock strikes seven years.
“Recessions are triggered by imbalances in an economy,” he says. “Typically, that’s inflation rising too quickly causing central banks to lift interest rates sharply.”
As Jolly points out, for now inflation in Australia remains benign. Its corporate debt is low and while government debt is higher than it has been, on a global basis the fiscal position is still in “reasonably good shape”. Granted, its household debt is the second-highest in the world but, overall, there don’t seem to be many danger signs.
“I don’t see any obvious imbalance that looks set to implode,” Jolly says.
“Throughout 2017, the parts of the economy and country that have been strong – services and states such as New South Wales and Victoria – have stayed strong,” he continues. “Those that had been weak – the resource sector and Western Australia – are presently experiencing a good turnaround.. All that suggests that we will continue to carry on enjoying reasonable growth even if the Reserve Bank of Australia begins to lift interest rates modestly in the second half of 2018.”
“Australia has been adding a Canberra-sized amount of people every year,” Jolly says. “That’s flowing into strong growth in real estate and all the other sectors that benefit from a rising population.”
This growth also raises the question of whether such rapid growth is incubating the kind of anti-immigration backlash that’s been erupting across the world.
Characteristically, Jolly is untroubled.
“Australia’s population growth is 1.6 per cent overall[i] and in excess of 2 per cent in Melbourne,” he says. “I believe Australians worry about immigration for infrastructure rather than xenophobic reasons. It’s not surprising that if people are stuck on the roads for longer and finding housing more expensive there will be a reaction. There needs to be a big catch-up on infrastructure provision in Australia. Among other benefits, that investment in infrastructure will have a significant and enduring impact on economic growth.”
Jolly points out that there’s no such thing as a single Australian housing market. Rather, there’s a collection of housing markets, all of which are behaving much as expected given the interaction of supply and demand.
“Everyone focuses on the craziness in Sydney and Melbourne,” he says. “However, the price rises we’ve seen there are a predictable result of, chiefly, the decline in interest rates, strong growth in household formation, and a lack of dwelling supply.
“Over the same period prices have been rising strongly in those markets, they’ve been gently declining in Perth and Darwin, as would be expected given reduced demand. After strong growth in dwelling supply in recent years there are now emerging pockets of oversupply, particularly in apartment markets. Brisbane apartment prices have already corrected lower and this may continue into 2018 given the larger amount of new stock being added there, but Sydney and Melbourne should be fine.”
While it’s true Australians have been enduring a period of record low wage growth, there’s also plenty for them to be happy about in terms of low unemployment, low inflation and businesses such as Amazon offering them low prices. “It’s quite unlikely we’re going back to the halcyon, pre-GFC days, but my sense is that Australians are going to stop feeling like they are in recession-like conditions in 2018,” Jolly says. “At that point, consumer confidence and retail spending should pick up.”
Jolly also believes a more bullish mood across the world will lift Australian spirits.
“It’s been a long, slow healing process but it’s now been a decade since the GFC,” he says. “The tenor of the conversations bankers and policy makers are now having is very different from what it was even a few years ago. Banks are lending again and Governments spending again. 2016 was the turning point. Things improved in 2017 and my suspicion is the next few years will be even better.”
Jolly isn’t so optimistic as to not worry about geopolitical developments making a mockery of his predictions. He’s particularly concerned about what will happen on the Korean peninsula. “Benignly or otherwise, that’s a situation that looks set to be resolved within the next 12 months,” he says.
However, after 26 years of growth, he’s less concerned about external shocks derailing the Australian economy than many foreign observers.
“There are always geopolitical risks that have the potential to stop growth,” he says. “To take two recent examples, many argued Brexit and the election of Trump would do that. They haven’t. In fact, things are getting better, there’s an underlying economic momentum.”
Speaking of momentum, the one piece of discouraging news Jolly is prepared to deliver is that the party is ending in relation to “the phenomenal returns we’ve seen in asset markets”.
He says this is because growth in many economies, along with big declines in interest rates, will slow. Jolly observes: “I’m not saying the equity, credit and property markets are going to collapse, but if interest rates start to edge up, the returns we’ve seen in recent years will be hard to repeat.”
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