Three Positive Signs for Global Growth in 2019

The Australian property market has remained weak coming into 2019.

Many investors in 2018, particularly at the end of the year, were worried the global economy was slowing and that it might slide into recession.

The concerns contributed to the weakness in share markets at the end of the year, along with a bit of uncertainty about the US Federal Reserve’s rate hike agenda and worries about the US-China trade war.

But our view is that 2019 won’t see a recession. Global growth this year will likely pick up again, which will provide a positive environment for investment markets.

There are three tentative positive signs that help convince us that 2019 will be a better one for investors.

1. Fresh Stimulus

The first, which I’m a lot more confident about, is that we’re seeing increasing signs by central banks and policymakers globally that they are willing to provide more assistance to the economy.

In the US, the Federal Reserve has paused its rate hikes and said it is mindful of market volatility and slowing global growth. China has also signalled further stimulus to offset the impact of the US trade war, and we’re likely to see more stimulus coming out of Europe with the European Central Bank and German government under intensifying pressure to roll out stimulus.

2. Towards Trade Resolution

The second issue is trade. We need to see ongoing progress towards the resolution of the trade dispute between the US and China.

On that front, so far so good. It looks like they are heading in the right direction. The two countries agreed to pause further tariff increases until March 1 and President Trump has said that could be extended if talks with China are progressing. Chinese President Xi said the talks had so far “achieved important progress”.

Obviously, that progress needs to continue. But at the end of the day, if Donald Trump wants to get re-elected, he can’t have the US sliding into recession. He needs to resolve the trade dispute to help ensure that won’t happen.

3. Stronger Economic Data

Finally, while data from China and Europe indicates slowing growth, when you look at the US, we can see some positive signs with the ISM index, a survey of business conditions, picking up in January, and jobs data remaining strong. The US has also averted a return to the partial US Government shutdown which will remove a threat to the economy and add to confidence.

The three positives above are not all ticked off but they’re heading in the right direction.

Decent Returns

So far this year we have seen pretty good gains from share markets.

But I don’t think markets are going to go in a straight line upwards. In fact, history tells us that when you come down like we did last year, it’s very rare to go straight up again.

It’s quite possible we will have volatility and setbacks along the way and we might get a setback soon.

Despite that volatility, with stimulus, a resolution to the trade war, and an eventual improvement in global growth indicators, the broad trend in share markets will be a lot healthier than we saw through 2018 and we will end up with decent returns for investors in 2019.

CoreLogic data shows property prices fell in all the major cities, except Canberra, in January. National capital city prices fell 1.2 per cent and are now down 7.8 per cent from their September 2017 highs.

The weakness continues to be led by the previous boom cities of Sydney and Melbourne. Sydney prices are down 12 per cent from their highs and Melbourne is down nine per cent.

We’re also seeing ongoing weakness in Perth and Darwin as the impact of the mining investment slump continues to weigh on those cities, while the other cities are showing weakness but not too much.

So when will the market bottom?

More Downside

We see more downside this year. It’s impossible to be precise, but top to bottom, we expect property prices to fall around 25 per cent in Sydney and Melbourne, which implies falls of another 15 per cent or so (possibly a little more in the case of Melbourne) to come.

As for the rest of Australia, property prices will be affected by some of the factors driving prices down in Sydney and Melbourne, but they are probably a bit better placed – either they didn’t have a boom, and therefore probably won’t have a bust or in the case of Perth and Darwin the bust has already happened.

Top to bottom, we’re looking at national prices falling another five to 10 per cent, again, with most of that concentrated in Sydney and Melbourne.

Five Key Factors

A combination of five factors are driving prices lower:

  1. Tighter lending conditions triggered by the actions of the banks in response to the Australian Prudential Regulatory Authority (APRA) over the past year or so. Bottom line, it’s harder to get a loan but I don’t see the release of the final report of the Royal Commission into misconduct in the banking, superannuation and financial services industry adding to that tightening.
  2. An increase in supply, particularly of units in Sydney and Melbourne.
  3. Reduced foreign demand because Australian authorities have made it harder for them to buy. (Chinese real estate investment in Australia has slumped 70 per cent since 2015).
  4. Uncertainty about tax. Labor, if elected, is proposing to change negative gearing rules by limiting it to new properties from a yet-to-be-announced date after the election. They also propose to halve the capital gains discount for all assets sold after that date.
  5. Uncertainty caused by some investors being forced to switch from interest-only loans to principle and interest loans.

All those things are coming together to give us falls, but again they’re particularly concentrated in Sydney and Melbourne where you have a much bigger investor base and where you have also seen a much greater increase in the supply of housing.

Clearly Negative

A weak housing market is quite clearly going to be a negative for the economy for two reasons.

Firstly, residential construction activity looks like it’s going to fall this year.

And secondly, falling home prices act as a negative wealth effect. Even if they are not forced to sell and their losses are only on paper, Australians – particularly those who bought relatively recently – will feel poorer and likely spend less, therefore there will be a drag coming through.

Where’s the Bottom?

Investors are now asking the obvious question – what will cause the property market to bottom out?

It’s going to be a combination of several factors. Firstly, improved affordability as prices come down and owner occupiers and investors start to see value.

Secondly, lower interest rates later this year, with the bulk of cuts expected to be passed on to the buyers by the banks, will also help.

Ultimately, we see the softness in the economy prompting the Reserve Bank of Australia to cut interest rates a few times this year. We think the cash rate will be around one per cent by the end of 2019.

On top of that, it’s possible the next federal government, whether it’s Labor or the Coalition, will introduce another first home owners’ grant scheme.

All of these factors should see property prices bottom out late this year, or more likely sometime in 2020.

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Source: Written by Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital, February 2019.

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