Australia officially not in recession
Australia has escaped falling into recession – technical or otherwise. Wall Street is roaring ahead and the Australian share market is up around one third since it’s low point in May and Australian property markets are recovering.
The good times are here again! Well, not so fast …
At best we face a turbulent time for the rest of the year and or we could still have two quarters of negative growth and a technical recession later in the year. Or, and this could we worse, we face several years of slow decline followed by several years of no growth. One thing is for sure, nobody knows
Just so that you are clear, a recession is defined as when an economy stops growing and has 2 or more consecutive quarters of negative growth. Of course recessions are part of the normal economic cycle and most countries have a recession every seven to ten years. Australia has been an exception recently and hasn’t had a recession for about 17 years. So, I guess it was due one.
So as of now Australia has avoided one – but let’s be honest, if we forget the technical definition, Australia is in recession and probably has been in one for about 6 months. People aren’t spending, businesses are closing down, the property markets are flat, and jobs are being lost. So the real question is not whether Australia is going into recession or not, but rather, when is Australia going to come out of it. When will we see growth again.
So how does this affect you and me as real estate investors?
During difficult times like we are experiencing now around the world, people are scared of making big financial decisions. They don’t buy new cars and they don’t buy, sell or upgrade their homes. They also hold back from investing in property and this translates to fewer people buying property, which usually leads to a fall in prices. In other parts of the world this has caused a significant drop in values, with prices falling between 10 and 30 per cent in the USA and UK.
This hasn’t occurred in Australia. By and large property values have held up well due to the severe shortage of properties and more recently due to lower interest rates and increased demand from first home buyers (thanks to the FHOG).
There is still going to be more bad news in the press; unemployment will rise and more businesses will go bust. So don’t be surprised if you hear mixed messages from the media – sometimes about the green shoots of recovery and at other times about our troubles. The fact that we are getting mixed messages can mean we are at a turning point in the cycle, but maybe it’s just because nobody really knows. I for one think that the so-called green shoots in the US economy will fade soon, I think there is more pain to come, a lot more, particularly in the US and UK. However, I don’t believe it will end up with property values declining significantly in Australia.
The gloom and doom reports in the media for the last nine months almost caused Australians to talk themselves into recession. And some celebrity economists who predicted property values would drop 30% scared many homeowners and property investors, forcing some to sell their properties and others to hold off making buying decisions. However, those drops have not materialized; the fundamentals for the Australian property markets are sound.
Australia is experiencing the biggest migration boom in history, with 253,415 migrants arriving in 2008. Australia’s overall population grew by 1.91 per cent over the year – the fastest rate of growth in almost 40 years. Yet at the same time Australia is facing an undersupply of properties, historically low vacancy rates, rising rentals and low interest rates. Ok, the rent rises are slowing down and will probably stop soon, but interest rates won’t move up anytime soon considering the global outlook and demand for properties is here to stay.
In time the economy is going to recover, interest rates will then eventually increase and inflation is expected to return, most likely quite aggressively, due to the Australian government borrowing money and pumping it into the system.
The net effect of this is that investors who have parked their money in the safety of bank deposits will start looking for a new home for their funds. A safe haven that is a hedge against inflation. Many will turn to well located residential real estate and then property markets will really take off.
So, as far as I am concerned, there is a window of opportunity open NOW! A chance to get into the property markets when everyone else is still nervous and working out what is going on.
But don’t just buy any property. You need to have a long term focus and buy well located properties with an element of scarcity, in areas that have outperformed the long term averages.