Hockey vs Costello – who’s got it right?

Hockey vs Costello – who’s got it right?

Speculation about the Australian Property Market has been kicked around like a political football this week with key commentary in the media from current Australian Treasurer Joe Hockey and former Treasurer Peter Costello and various economists.
The debate so far seems to have two key themes. – “The market is strong, we’ve got nothing to worry about”, or “we’re overheated and the bubble has to burst”.
At Development Finance Partners our team have been through a few property cycles and the market impacts that result. With that experience in mind here’s our take on the market and what it means for developers.

Hockey vs Costello – who’s got it right?

Politics aside, we’re backing Costello’s view over Hockey, simply because as the current Treasurer, Hockey has a vested interest in talking up the economy (and therefore what a great job he’s doing).
Furthermore, Costello isn’t getting paid as an economist by any of the banks etc – economists always have a vested interest too – if they cry out that the sky is falling, everyone will listen to them and panic, which in turn will make the economy worse.

What economists, developers and consumers need to be mindful of

Economists have a direct effect on consumer confidence and therefore investment, so their publicly expressed views can often be misaligned with their real personal views. Our view is to take an economist’s view with a grain of salt.

Some key facts

 

    • Supply is still insufficient in many areas = price growth
    • Supply, particularly inner-city apartments, is increasing rapidly in some areas though = stabilising effect on price growth
    • Demand for new stock, particularly from investment purchasers, is increasing (in the last 2 years, investment home loans increased 19.4%, owner occupier loans increased 10.8%) = price growth
    • But investment demand is arguably off the back of strong yields and low interest rates, so eventually an increase in rental stock = lower yields, then when interest rates increase, most investment properties are going to be heavily negatively geared = many investors may want to sell
    • Unemployment dropped slightly last month, but still trending upwards = should support interest rates being kept at low levels

Markets tend to be poor at predicting the future, being slow to respond, thereby resulting in peaks & troughs in supply, whereas demand and therefore prices tends to react much faster

So what does that mean?

Markets are more than complicated, they are complex – because of this fact, very few economists tend to accurately predict what will happen over the next 5-10 years (or less!), and therefore in the property markets.

Key considerations

Property Developers and investors should always keep in mind key fundamentals when planning a project or investing in one, including:

  • Concentrating on areas with broad range of employment, transport, education etc.;
  • High leverage should be balanced with appropriate risk mitigants, in case the market turns prior to completion;
  • Project timeframes should be compressed as much as possible to avoid potentially dragging out into the next cycle.

If you would like further help, advice or support with your projects, taking into account expected market cycles, one of our advisors would be happy to discuss further.

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