How will the election impact the property market?
Many investors are waiting eagerly to see what effect the federal election outcome will have on property markets throughout the country.
While there has been a boost to the market provided by low interest rates, investor confidence still remains at an all-time low in the lead up to the election; there is still a level of uncertainty around who will lead the next term and the effect it will have on the country’s economy.
Recently, research analysts RP Data and onthehouse.com released their separate findings on the market movements in capital cities following previous elections.
The findings provided some interesting insight as to what could be in store for the national housing market in the coming months.
RP Data found that Coalition election wins in 1998, 2001 and 2004 were all followed by increases in house values over the following 12 months.
The most recent two elections – 2007 and 2010, when Labor took power – saw house price fall over the following 12 months.
This doesn’t necessarily mean we should associate growth with a Coalition government – Labor had to deal with the GFC during the last two terms. House prices in capital cities have risen 4.9% in the 12 months to July this year, according to RP Data. With the election imminent, the market appears to be in a positive position.
Although the winning party is not yet a sure bet – based on the current interest rate environment, expectations point to housing markets continuing to strengthen amidst renewed consumer confidence and increase investor activity.
Seen once every four years, this pre-decision marketplace offers the savvy investor an ideal opportunity to secure the very best picks, whilst the majority sits on the fence.
BHPB CEO paints positive picture for investors
Encouraging comments from BHP Billiton’s CEO along with the release of two research reports on the Australian resources industry, have provided a positive outlook for the sector and the performance of mining town property markets.
Challenging sentiment that Chinese demand for iron ore is waning and prices are on a downward trend, BHP Billiton CEO Andrew Mackenzie was optimistic last week regarding China’s ongoing demand for iron ore, following a meeting with China Premier Li Keqiang.
Amid media reports that Chinese steelmakers are reducing their output, forecasts of oversupply and a projected falling iron ore price, BHP was reassured of China’s continued growth through urbanization and ongoing need for resources.
At an event in London last week Mr. Mackenzie said: “There was a very clear signal, as far as [China Premier Li Keqiang] was concerned, this is the only way China’s success can continue on a relatively unbroken path of increasing urbanization.
“[Li Keqiang] said ‘I do reassure resources industry we do need more’.”
With China being the biggest importer of Australian iron ore, this is positive news for the industry, and the Pilbara towns that support it.
The BHP CEO Remains upbeat about the medium to longer-term balance between the supply and demand of bulk commodities, particularly iron ore, a key component in the development of steel.
At the same as his comments, the Port Hedland Port Authority released data showing exports of iron ore to China from Port Hedland – a strong indicator of Chinese industrial activity – surged 21 percent in May, from April, to hit a record high. The port is used by BHP, Fortescue Metals Group and Atlas Iron.
Year-on-year, total shipments were up 24 percent with total iron ore exports expected to exceed 200 million tonnes this year.
Mr Mackenzie also reiterated the global population growth forecast – expected to rise by as much as a third by 2050 to more than 9 billion – and the projected Chinese growth rate of 7 per cent per annum over the next five years, saying,
“Only if we deliver steady, sustainable growth in commodities – from steelmaking, through to metals, energy and energy transfer, to food – can we be sure that by 2030 the global middle class could grow to 5 billion, up from 2 billion today.
“Popular opinion is that our industry is fundamentally unsustainable because the world, they believe, is running out of resources,” he said. “Popular opinion is wrong.”
The comments follow two recent reports released by US research group Wood Mackenzie and the Australian Bureau of Resources and Energy Economics (BREE) which also support a positive outlook for Australian resources.
US research consultancy Wood Mackenzie says it expects resource sector investments in Australia to peak in 2013 at $85 billion, dominated by spending in gas, followed by iron ore and coal. The high investment levels will be sustained over the next three years, surpassing the previous three year period.
Regionally, it says Western Australia and Queensland dominate, making up 83% of total capital expenditure in 2013, driven by large gas and iron ore projects. Investments in iron ore will push resource sector investment in WA to record levels. Committed capital spend for the seven LNG projects that are under construction will ensure that investment remains high for the next three years at least, particularly in WA and Queensland.
The BREE report ‘Resources and Energy Major Projects – April 2013’, stated that over the past 10 years, around 390 resources and energy major projects have progressed to the ‘committed stage’ (i.e. they have passed final investment decision with many now in construction) with a combined value of $394 billion. $268 billion in projects are still under construction and not yet complete.
113 projects have been ‘publicly announced’ with a combined planned capital expenditure spend over the life of these projects of between $121–171 billion. At the feasibility stage, the stock of planned capital expenditure is estimated at $232 billion from a total of 174 projects.
While 100 per cent of projects never progress to completion, it indicates a strong pipeline of future activity and paints a positive picture for investors regrading the sustainability of the nation’s resources sector and its associated property markets.
Stock market volatility highlights benefits of property investment
Greater confidence in the global economy has seen a sustained improvement in the Australian stock market over the last several months with the S&P/ASX 200 breaking through the all important 5,000 mark this month.
However, this positive development was followed last Thursday by the market’s biggest one day drop in nine months which saw more than $35 billion wiped off its value.
The market has since recovered but the ongoing volatility of the asset class and its hyper-sensitivity to global events highlights to investors the importance of balancing a portfolio with more stable asset classes.
Property, historically shown to be less volatile than shares, is a solid option. When the Australian share market crashed during the GFC, 54% was wiped off its value. In comparison, property values and rents overall remained relatively steady, with house prices falling less than 5% from peak to trough (RP Data).
The debate over which is the better performing asset class will always be a popular one but according to the ASX’s 2012 report on long-term investing, shares and property have actually produced similar returns over the last 10 years, when taking into account tax and costs. But property did come out on top.
It returned the lowest and highest marginal tax rate for the 10 year period with returns of 7.2% pa and 5.8% pa respectively.
Shares achieved 6.5% pa and 4.6% pa at the lowest and highest marginal tax rates, respectively.
Both assets have their pros and cons.
Shares are more liquid making it easier to access your cash if you need it. They can deliver more capital growth over shorter timeframes – but investors need to be aware that gains can be lost just as quickly.
Property on the other hand is less liquid but will typically deliver more stable growth. And as the sole owner, rather than part owner, as is the case with shares, you have complete control over the management of your asset giving you the power to improve it and increase its value.
Investing in the share market without the expertise of a financial advisor can also be challenging – many investors simply find property easier to understand.
Regardless of your personal preference and appetites for risk, what is key is a well researched strategy, a diversified portfolio to reduce risk and a long term view to ride out any booms and busts.
Invest Outside the Box to get ahead in 2013
It’s a tradition every January for real estate experts to give their predictions on the outlook of the Australian property market and pick hot spots for the coming year.
2013 is shaping up to be a very interesting year globally with all indications pointing towards the Australia property market during 2013 mirroring similar trends which occurred during 2012.
Property prices in most capital cities are expected to remain relatively subdued with marginal increases in rental returns, with the exception of Perth which is expected to benefit directly from the on-flow of growth from the WA resources sector in the second half of 2013.
In contrast, the standout performers for 2013 are expected to be the resource towns.
With property markets in major mining towns during 2013 remaining buoyant and investors achieving rental returns in excess of 10% PA in most locations.
The fundamental drivers that have underpinned the property markets in mining towns throughout Australia still remain the same in 2013 as they did in 2012 – Strong international demand for Australian resources, high ore prices, limited housing stock and a rising demand for accommodation, all contributing to strong trends in the Pilbara region of WA.
For property investors who have traditionally focused on investing in major capital cities, I challenge you to think and invest outside the box for 2013, as this year will be a game changer for the Australian resource industry and those investing in towns that benefit directly from it.
In particular, property investors should understand that the factors supporting the housing dynamics including rental returns and capital values in mining towns are long term trends with extremely positive futures both for the country and these regions in general.
Considering trends over the past 10 years, the median price of a house in Port Hedland, for example, has increased on average by 18.2% each year, twice the annual rate for Perth at 9.8%.
Interestingly taking a 15 year perspective, the annual median price of a home in Port Hedland has risen on average by 13% PA making it a high returning ‘blue chip’ investment using any independent criteria. In Karratha, property investors have achieved on average an 11.4% increase in the median prices per annum over the last 15 years.
The constant hype about boom/bust trends in mining towns should be placed into and considered with this long term perspective.
For those investors looking for the next hot pick and fast movers of 2013, there are specific mining towns in which real estate is currently undervalued and primed for future growth.
During the coming year, I believe the mining towns of Newman in Western Australian and Moranbah as well as Gladstone Queensland will be star performers for investors.
These three mining towns are set to benefit from continued new investment during the coming year, which is expected to place further pressure on the local supply of housing leading to an upward pressure on rents and capital growth.
Diversity is the key to any well balanced portfolio and helps to ensure that the investor is protected through both up and down markets. If your strategy has been focussed on negative or capital city properties, make 2013 the year you invest “outside the box” and add the strength of an income generating property to your portfolio.