Real estate needs to stay on the boil

Real estate needs to stay on the boil
Real estate needs to stay on the boil

The GDP contraction by 1.2% in the March quarter will, over time, be seen as either an economic blip or a sign that the Australian economy is no longer the star student at the World College for Economics. While the Queensland floods and Cyclone Yasi were unavoidable, it is becoming most clear that Australia’s annual growth rate is struggling to break through the 1% barrier (not to be construed as a natural disaster, rather an economic disappointment that requires greater scrutiny).

Although it is just not property prices that are caught up in this winter stew, it’s relevant to note that Australia’s housing market has a $4.2 trillion capital value. For this reason it is important that property remains on the boil, or at the very least, appetising to consumers. From 1985 to 1998, house prices doubled, then more than doubled from 1998 to 2007 (then the Global Financial Crisis arrived).

A recent report by RP Data-Rismark identified that property prices had been declining in “real terms” since 2004. CPI had been running at 3%, although housing growth in Sydney was recorded at just over 2.1%. Households are doing it tough. Spending is on the decline and savings rates are on the increase, moving to 11.5% from 9.7% in the March quarter (a clear consumer confidence indicator).

Household electricity bills are expected to skyrocket by up to 30% by mid-2013 (not including a carbon tax). An estimated $33 billion is the required spend on our ageing and inadequate power distribution networks. NSW is the worst offender. The previous government spent next to nothing in terms of upgrades to the extent that now, NSW electricity infrastructure is in a critical condition. This explains why we are now paying for it again.

Council rates are capped at annual increases of 2.8%, although the Independent Pricing and Regulatory Tribunal approved applications from 23 of the 152 councils to increase rates above the cap rate. North Sydney Council received approval to raise rates by 5.5% until 2018 – the only council to receive a seven-year increase approval.

If you are positioned within the mining economy, the future looks very bright, although in the non - mining sector it is looking very ill. No better example than households having greater concern over power bills than interest rates – an all-time first. Anecdotal data reveals that although households are using less power, bills are much higher.

Discretionary spending has not been under greater pressure since Australia’s last recession in the early 1990s.

Much is written about the Australian residential property markets, which are actually defined in three very different categories. Australia is no different from the rest of the world – you can rent, own with a mortgage and own without a mortgage. For years I have been somewhat mystified as to why these three key indicators are bundled together and not addressed separately. It will be interesting to see how this pie graph changes after this year’s latest census is conducted in August. We are working from data released after the last census in 2007 – for all Australian households.

The Reserve Bank of Australia meets on the first Tuesday of every month (except January) to discuss all things pertaining to monetary policy (an independent body removed from political spin). It should be noted that the RBA and Treasury have not seen eye- to- eye on all things economic for quite some time.

A big week ahead with the release of car sales, lending data and housing. RBA governor Glenn Stevens will discuss economic conditions and prospects at an Economic Society of Australia luncheon in Brisbane, where the RBA’s June quarter economic bulletin will be released.

Will there be any mention of a second June quarter GDP contraction and, if so, what will this do to the Reserve Bank’s interest rate outlook?

The latest Business Spectator Accenture CEO Pulse survey shows a 22% drop in optimism about the domestic economy. Surveyed chief executives who run companies with an average turnover of $100 million or more reported a decline in optimism to 51%, compared with 73% in the first quarter of 2011.

The CEOs' estimation of the government’s performance in managing the economy continues its downward trend, with an overall rating of 3.3 out of 10 – the lowest since the CEO Pulse was established.

It may just be a coincidence that freshly retired Treasury head Ken Henry has accepted a position as economic adviser to the Gillard Government. Given all that’s happening within the Australian economy, it remains to be seen if the NBN rollout and a carbon tax are economically (and emotionally) justifiable at this juncture.

Henry is reportedly the architect of the carbon tax, which is proving much harder to sell than real estate!

Robert Simeon is a director of Richardson & Wrench Mosman & Neutral Bay (RWM) and has been selling residential real estate in Sydney since 1985. He has also been writing real-estate blog Virtual Realty News since 2000. The RWM real estate model has sold in excess of $1 billion in database sales globally.

Robert Simeon

Robert Simeon

Robert Simeon is a director of Richardson Wrench Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has also been writing real estate blog Virtual Realty News since 2000.

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