Which property types and locations are overperforming?

Low interest rates working?

A survey of 23 economists this week showed all 23 of them to believe that the interest rate easing cycle is over, albeit few are expecting hikes any time soon.

A key reason for that is doubtless that lending rates have actually been falling independently of official cash rate decisions made centrally by the Reserve Bank.

Personally I still wonder whether this will be enough, particularly when viewed in the light of an iron ore price which has crashed by 35% in 2014 and a stubbornly high Aussie dollar.

On the flip side, there is some evidence to suggest that low interest rates are having an impact in other areas of the economy in spite if the declining terms of trade.

Consumer confidence is set to rebound above is long term average, retail sales are expected to resume their upwards trend by growing by 0.4% in July and yesterday's capex survey showed that away from mining and resources there are signs of life in the larger services sector of the economy.

For the time being at least interest rates will be stuck on hold until further evidence comes to light.

Financial Aggregates show investor credit growth

The Reserve Bank released its Financial Aggregates data for July today which revealed that easy monetary policy is gradually impacting credit aggregates.

In the year to July 2014 total business credit has spluttered 3.4% higher and personal credit has increased by 0.8%.

Housing credit rose by another 0.5% in July to be a strong 6.5% higher over the year, clear evidence that cheaper credit is set to drive housing markets higher.

The gradient of the red line in the chart below shows that housing credit for investors has been outstripping that of credit for owner occupiers over the past year:

In terms of annual percentage credit growth the data shows that the housing credit growth rebound has been driven largely by investor credit which has increased by 8.8% over the past 12 months as compared to a 4.8% increase in owner occupier credit.

When smoothed on a rolling annual basis below, the data becomes clearer with the red line denoting a strong uplift in investor credit.

Of course, percentage credit growth is nowhere near as high as it was in decades gone past, but since it is the transaction of dwellings at the margin which drive the market property prices have rebounded very strongly since 2012 and are heading higher still.

As a percentage share of housing credit, investor credit has ticked higher again, now representing 33.8% of the total. Interestingly this is exactly the same percentage share of housing credit in the RBA's Financial Aggregates data that we saw a decade ago in July 2004.

Outperforming property types and location

The data continues to imply to us that the property types which will ultimately outperform in this cycle include those which are strongly favoured by investors, particularly well-located properties in Sydney. 

Our previous analysis of rolling 12 monthly investor loans by state has clearly shown that Sydney will be the king of price growth in this period of the cycle:

When you factor in the increasing demand from offshore or Australian real estate which is not well captured in reported data, the bias in favour of Sydney becomes all the more compelling.

The latest statistics from Juwai denoted that the favourite locations for Chinese buyers fall in the following order: Sydney, Melbourne, Brisbane. Perth and the Gold Coast.

As the terms of trade have declined dramatically we expect the Australian dollar to fall further from its current elevated point, which may drive significant further demand from offshore.

In this property market cycle, we are following that demand and have thus focused on Sydney real estate. 

Recent property market forecasts from analysts have suggested that the currently property market cycle has another two years to run which fits in tidily with what we have heard from major developers. 

BIS Shrapnel recently forecast price growth of 6 percent per annum for Sydney apartments through to 2016.

You can visit AllenWargent property buyers (London, Sydney) or Pete's blog.

His latest book is 'Four Green Houses and a Red Hotel' .