What Australia's GDP growth in 2013 will mean for property investors
What is “growth”?
So
The forecasters expect
Over time as a nation we have consistently been becoming wealthier and average household income has far outpaced inflation over a long period of time.
What GDP actually includes
The measurement of
Of course, the number can never be completely accurate for some transactions officially never take place! For example, a drug dealer won’t be declaring his or her sales to the Australian Taxation Office.
GDP also attempts to avoid double-counting. The example of a car is often used: when calculating GDP we don’t want to include the components of the car as well as the final sales price of the vehicle. What we really want to know is the GDP on a value-add basis.
So a GDP figure will never be perfect, but it’s the best we have got. And it is the trend in GDP, the percentage movements from year to year, which interests economists: are we growing, stagnating or going backwards?
It is worth taking note in the financial press of whether the figure quoted is real of nominal GDP, for real GDP growth is a measurement which strips out inflation.
The individual segments of GDP
The four segments of GDP are:
- Consumption
- Investment
- Government spending
- Net exports
Government spending could account for less than 20% of its GDP, but a number of European countries have national health services that are funded by governments and thus the percentage can be much higher (which is bringing its own problems in European in the form of unsustainable government debt levels).
In countries such as the
Mining boom
One major trend that we have seen in
A major challenge for
A consequence of this is that we are likely to see a prolonged period of low interest rates as the Reserve Bank aims to stimulate the other sectors of the economy to plug the mining investment gap.
There are some other limitations to the GDP measurement. One is that in does not take account of the level of inequality of a country so GDP may be growing but whether or not the wealth flows down to the population with great inequality is not considered.
What next for our investment markets?
It might seem unusual given the amount of anxiety around at present but there is a consensus that now is likely to be a good time for owners of stocks. Britain, the US and Australia all saw positive returns in 2012, and this is forecast by most commentators to continue.
Why is this? One reason is that interest rates are so low that savings accounts, particularly in the
There also is some fear that bonds could be well overvalued at present on a global level, and as and when interest rates are ratcheted up there could be a major correction. This might seem esoteric to you but if you don’t self-manage your superannuation do you know where your super fund manager has invested your pension?
As for property markets, historically lower interest rates have shown a strong correlation with price appreciation. The major banks have clawed back a fair chunk of the recently delivered interest rate cuts in order to cover funding costs, but mortgage rates have steadily dropped with the cash rate to historically very cheap levels.
The governor of the Reserve Bank in Australia has warned Australians that a return to very strong property price growth would be imprudent, which is a sure sign that there is concern that low interest rates could fuel a return to growth. Most forecasting houses are predicting a return to moderate property price growth in 2013.
Property price growth needs population growth and growing wealth
Through 2010 and 2011 I was lucky enough to be able to travel 26,000 kilometres around
What is evident is that for property prices to grow, a country often needs to see population growth and to be growing its wealth.
I went to see the famous Sphinx and the pyramids, one of the seven ancient wonders of the world. The city of
When I finally made it to
Strangely, although property prices in the
And while
In
Sure, we’ll face some challenges, but then if you look back through the financial press over the decades you will discover that in fact, this is always and everywhere the case.
Pete Wargent holds a range of finance and property qualifications and is the author of Get a Financial Grip – a simple plan for financial freedom.