KNOWN UNKNOWNS & KNOWN KNOWNS

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

In my last newsletter, I expressed optimism that favourable credit conditions would offset any negatives from the mining slowdown, and my expectation was Sydney property would be strong.
SQM Research has recently noted that Sydney is seeing price growth of 9-12% for 2013, and they expect this to accelerate in 2014.

Having noted the above strength, I also note that the property market appears to be climbing the “wall of worry”. While there is definitely optimism, there are “the unknowns”, which include:

Interest rates. Up until recently pundits were expecting another cut in November, however what is the RBA now thinking? Are they fretting on some capital city property markets, or is the transitioning economy and a resurgent Aussie dollar still the priority?

Housing policy. I recently read Saul Eslakes analysis “Australian housing policy. 50 years of failure”, and with a new Federal government, there is some uncertainty. Yes Tony Abbott has said he wants to be the infrastructure prime minister, but not much has been said on their housing policy.

The economy. Clearly there has been a global rebalancing away from China and India, and America seems to be resurgent. The resources boom has stepped down a gear. The question is where does Australia stand? Will commodity prices stablise here, and is the patchy economy about to rebound, possibly lead by a strong housing market spilling over into the broader economy.

As Donald Rumsfield would say these are the known unknowns.

However, I think it is equally important to reflect on what we do know.

  • Official interest rates are at a 60 year low of 2.5%;
  • Variable mortgage rates are now below 5%;
  • Housing supply has, according to Saul Eslake, been “constipated” since 1991;
  • Over the last decade our housing stock has grown at a slower rate than the population;
  • Australian housing is at its most affordable level in a decade, and NSW is the Nation’s most affordable market.
  • Australia’s unemployment has recently climbed to a post GFC high of 5.8% [NSW is 5.9%], however by global standards unemployment remains low.
  • The rental vacancy rate in Australia has fallen to less than 2%, and has never been above 5% (over last 30 years). Compare that to the US, where the vacancy rate [per Saul Eslake] has only once been below 5% (March 1979) and has averaged around 9%.
  • As a result, we can reflect on the unknowns (interest rates, housing policy and economy) and the knowns (vavancy rates), and I can only agree with the optimism. With a massive supply shortage, record low interest rates and reasonable employment, the property market is heading higher.

Until next time…..Danny Doff Principal Laing + Simmons Double Bay