Australia's economy is in its worst shape in 30 years, yet home prices are higher than ever. This blog explains why this strange situation is happening and what it means for interest rates and the economy. Find out why property prices can still rise even when the economy is weak.
What if I was to tell you that the Australian economy is in the worst shape it's been in for almost 30 years, but prices are at an all-time high across Australia?
It is an absolutely warped world, and I want to make sense of it here in this blog.
If you're interested in what my thoughts are, definitely keep reading…
The latest GDP figures here in Australia are saying one thing, yet property prices are doing a completely different thing.
If we were to look at this just in isolation and just said: “Okay, prices for Australian real estate are at an all-time high, we're going up every single month,” you would assume that the economy is also doing well.
However, on the flip side, if you saw the economy and the numbers on that side, you would think: “Prices were probably tanking.”
That’s not the case. That's why it's so important that you don't just think that what the economy is doing is what the money markets or asset markets will actually do.
An example of this is that when you actually saw in 2020 the numbers for the GDP growth and inflation numbers, you would have said the economy is tanking.
However, prices were actually going up during that time, and there are so many occasions where this has happened over the last 50 years in Australian real estate.
That's why it's so important you just shut out the noise when you see:
It doesn't actually work like that.
Now, yes, sure, there are a few times where those things are correlated, but it's not as simple as saying: “Well, interest rates are so high, people can't spend money, therefore property prices need to go down.”
Why? Because we've clearly seen over the last 18 months that's definitely not what's happened.
So let's go through some graphs and data around:
Australia's economy grew by 0.1% over the first 3 months of 2024, and 1.1% over the year according to the Australian Bureau of Statistics (ABS) national accounts.
Treasurer Jim Chalmers said it wasn't a surprise to see the economy barely growing, but Australia is still doing well compared to other countries.
“The primary cause of this very weak growth was high interest rates combined with moderating but persistent inflation and ongoing global uncertainty,” Chalmers said.
“But any growth is welcome in the domestic and global circumstances we confront.”
What we can see is a high of 3.9%, and ever since then, it's just looked pretty depressing.
I'm going to go as far as to say the next quarter we should see this number go into the negative, and this would be the first time we go negative since late 2021 and previous to that it was during the lockdowns.
That’s why it's such a big deal because you can't have the economy collapsing and then say: “Well, interest rates need to stay higher for longer,” because although we know the RBA looks at inflation between 2% and 3%, you also need to have an eye on the GDP.
Why? Simple.
If you have the economy shrinking, and you have high levels of inflation, we go through something that's called: Stagflation.
This is not welcomed at all. But what's even more interesting is that this number is not really accurate around what's happening in terms of a reflection of the economy.
What we need to be looking at is: a per capita basis.
All this means is basically, the GDP divided by the number of people that are in that country.
Why is the GDP still holding up? To be honest, it's because we've invited so many people into this country.
So let's look at that GDP relative to the number of people in that country.
"For the fifth consecutive quarter, economic activity declined on a per capita basis, and the 1.3% decline over the past year is the largest Australia has experienced in 33 years, excluding the pandemic."
Okay, so this gives a more accurate reflection because what this suggests to us is that the economy is only recording a positive number, or be it 0.1%, because we've invited so many people via migration.
So when we think about housing solutions or solutions for the housing crisis, we often go straight to: “Well, just cut immigration. It's pretty simple.”
However, if we were to cut immigration, what do you think happens to the GDP number?
As this GDP number goes into a recession, which is two consecutive quarters of negative growth, it could then find itself in a depression, which is four consecutive quarters of negative growth.
When you have this, you better believe the RBA is going to be under pressure to cut rates very, very quickly.
Now have a think about this: If your interest rates are higher than they were 2-3 years ago, it means that you have less in your pocket to spend on going to cafes, buying things, and retail is basically in the toilet.
This is what I've been saying for the last 6 months: “Look, maybe we need to cut interest rates earlier rather than later.”
Yes, it's not very popular, especially when inflation is so high, but you also have to look at trends.
I talk about this a lot when it comes to property investing.
So you look at a property and you go: “Oh well, okay, it's grown by 5%, but what's the trend look like? Has it been growing by 5%, 10%, 12% or has it started to slow down?”
You also need to look at trends when it comes to supply. So if you go: “Oh well, there are only 200,000 available in this place, and now there are suddenly 20,000 available?” This means that we could find ourselves in severe undersupply very shortly.
That's why it's really difficult being a politician or working at the RBA because they almost take a snapshot of what's happening right now, but they won't really calculate what the trend looks like and start forecasting to make that move moving forward.
A classic example of this is during the lockdowns where you started seeing inflation start to pop up, yet interest rates stayed at record lows for a lot longer.
It was around that time that the former RBA Governor Philip Lowe came out and said: “No interest rate increases till 2024,” but in the meantime, inflation kept increasing.
Right now, we have inflation decreasing when it comes to quarter on quarter, yet we have interest rates at a really high level relative to the last 5-year average.
This is why it's important to pay attention to trends.
Another example of this would be: when you go out to buy a property and you look at vacancy rates. It's essentially looking at a suburb and seeing how many of these properties are vacant and aren't tenanted right now. If this number is below 1%, you have a rental crisis.
Now, a lot of places, especially in and around Perth, have areas that are at pretty much 0 or less than 0.1%.
A 3% number is where a balanced market occurs, and that's what I was acclimatised to when I started investing in my early 20s.
Now we're at a point where 1% is the norm. We have a rental shortage and an overall housing shortage.
If I'm a retailer right now, the one thing that I'm scared about is if immigration falls because if we suddenly have the government cut immigration, although this might put easing pressure on the housing market, it won't really do much for retail sales.
This graph here shows a really bleak picture.
What we can see is that retail sales are at the lowest point on record from what I can see, and that is scary because when you have these numbers come out the way they are, it means that:
Now, what's interesting is unemployment is a number or metric that the RBA is actually looking at.
They said that they want 4% unemployment and once they get there, they'll reconsider their stance when it comes to interest rates.
In my opinion, based on what we're seeing so far, we could be closer to interest rate cuts than most think, and the media will throw you into a frenzy saying: “Well, no, inflation is so high. Let's focus on negative news, because transactions are low, nobody's buying property. Let's just kick the can down the road.”
However, on the flip side, while everyone's getting really excited that migration is going to get cut, we could find ourselves with the economy just spiralling down, where there's no growth anymore, and that's when they're going to have to stimulate the economy.
The big takeaway from this blog is: do not get this mistaken—if you simply think that the economy slowing down means prices should slow down, the opposite could occur and it could catch you by surprise.
If you're interested in getting help with the right people and the right team, then definitely reach out to our team at Search Property.
We would love to help you:
I hope you guys have enjoyed this blog and I'll catch you in the next one.
Thanks, guys!
.png){kind=icon}
.jpg)
.jpg)
.jpg)
.jpg)
%20(1).jpg)
.jpg)
