What Global Uncertainty Means for Property Prices

Source:REIV

What Global Uncertainty Means for Property Prices

The unthinkable has happened last Friday when Britain’s voted to leave the EU and really shows the importance of voting. To everyday Aussies this means very little but its the after affects that I’m concerned about and the cracks have already started to appear.

Sharemarkets around the world plunged on Friday and over the weekend with futures pointing to severe downturns. The Australian share market on Friday was down 167 points which may not mean much on the surface. In affect we all became poorer overnight as our Super Funds decreased in value. For those with aggressive exposure to overseas stocks, best not look too closely because things aren’t pretty.

Where to from here? The cost of funding is my main concern. Finance institutions still need overseas money for lending and experts believe this latest turn of events will increase the cost of borrowing money, therefore interest rates here go up!

Everyone who has been hoping for a property downturn might just begin to see their wishes come true, the only problem is that the average Mr and Mrs Joe won’t be able to afford to buy anything due to higher funding costs. Tenants look like being stuck in the rental cycle for life should lending rates begin to rise.

Those that know me and have been reading my blogs for while have certainly felt my change in sentiment lately, unfortunately these concerns appear to becoming a reality. Basically if you have been thinking of buying or selling and don’t have cash to pay for your new purchase my view is to get in before rates rise.

Source: Shuttesrstock

The Brexit win means an increase in global uncertainty which ultimately affects superannuation nest eggs and confidence here in Australia. Experts believe that there are still a number of fragilities in the international system as a result of the last financial crisis in 2008. Most governments don’t have the capacity to respond to further downturns because interest rates are already too low. There is already talk that the UK could split further creating more uncertainty and increasing the possibility of the country going into recession.

A petition with more than 3 million signatures requesting another referendum hoping to reverse the Brexit is gaining momentum but is it all too late? The 28 per cent who didn’t vote are possibly rethinking what just happened to their country and their future.

On the plus side, the Australian dollar rose substantially as a result of the global turmoil. And as a result on Friday financial markets were tipping a 100 per cent chance of a further rate cut  by the Reserve Bank when they next meet in July.

Despite the doom and gloom there seems to be have been little or no impact on Melbourne’s property market over the weekend which recorded a 71 per cent clearance rate according to the REIV again on high volumes.

Street Advocate Market Wrap

This weekend saw another substantial rise in properties for sale for this time of the year on the expectation the Election Day July 2^nd will be a quieter day for property.

 The two schools of thought on what could happen to our property market are interesting and contrasting. 

I listened with great interest over the weekend to one major franchise group spouting the latest share market collapse as good news for the property market. His reason, a mass exodus or reduction from shares and increased investment in property, in particular in Self Managed Super Funds. This would be good news but don’t hold your breath.

The second contrary argument is that the cost of funding will rise and so banks will independently increase rates outside of the RBA’s moves. 

What this means for real estate is that most of the blue chip suburbs will hold steady and if there is a fall this will only be marginal. The suburbs most vulnerable are those with owners/investors already experiencing or close to experiencing mortgage stress.  Those investors and owners who have little or no equity in their homes and have purchased a non-performing asset in a low or no growth suburb are most exposed to a downturn.

But these concerns are not just leveled to outer suburb blue collar areas as one would expect. A recent article in the AFR showed the largest concentration of apartment ownership was in Elwood (88.2%) followed by Brunswick West (86.1%) and Carlton (83.4%), surprisingly for some.

We would need to look closer at the supply levels for these type of properties and demand by tenants before making the final decision on risk but on the surface such high investor concentrations for a particular type of asset are not ideal. Furthermore such high investor levels in these suburbs make these areas a “renters market”. AFR article

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