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Property markets don’t just change overnight, they need events that will alter or change their course. Some changes will affect all markets across the board, things like interest rate fall and rises, a global event or change to government policy. Others are more localised like infrastructure, migration and tourism. It’s important to know the factors that could or would have a positive or negative effect on the areas you are looking to purchase in before you do so. In this blog, we take a look at what some of those positive and negative factors are.
Tax Incentives:
Federal and state governments need Mum and Dad property investors to ease the demand on government supplied housing. To do this they incentivise regular people to buy property as part of their investment strategies, with things like:
- Negative gearing, a tax concession that allows you to claim the cost of holding and maintaining your investment property against your taxable income.
- The property needs to be negatively geared i.e the holding and maintenance costs exceed the amount of rent received
- If the property is positively geared, i.e the cost of holding and maintenance is less than the rental income received, the surplus rent will be included as income and taxed in line with your taxable income
- Capital gains tax is payable on any investment, be it the sale of a business, shares, or an investment property. It’s not a separate tax, however, forms part of your income tax in the year you sold the asset. The Australian Taxation Office (ATO) gives capital gains tax concessions depending on your particular circumstances, encouraging people to purchase investment properties.
A change in tax legislation, such as scrapping existing tax concessions or introducing new ones will soften or fuel the market.
Consumer Confidence:
When we (human beings) have confidence in the economy, interest rates, our government and job security - we are happy to spend more on small and large ticket items (like property). If consumer confidence falls, meaning we are worried interest rates will rise, the weekly groceries will become more expensive or your job might not be safe - we have less confidence and are more likely to be reserved and not buy things (including property).
Business Confidence:
Much like consumer confidence, business confidence is when businesses or business leaders have the confidence or lack of confidence in the government, consumer spending and the economy.
The Media:
I rant about the media a lot in my blogs, the reason being they have the power to affect property prices and need to use this power in a measured and factual approach, which unfortunately they don’t always do. Why? Because boring stories don’t sell newspapers, make people click on an article or watch a news program.
Media outlets make a very large portion of their revenue from advertising, this revenue is dictated by the number of people reading the newspaper, viewing the article online or tuning into the TV program. How do they get your eyeballs? With scandalous headlines and stories. These stories would have everyday folk believe there is a huge bubble that is about to burst or fear they won’t be able to repay a mortgage.
These headlines can cause a number of reactions; one being panic, causing people to rush out and buy a property in fear that if they don’t they will never be able to, AKA #FOMO (increasing demand). Reporting the government is going to change a tax policy, causing investors to reconsider investing in property (limiting demand).
They have the power to change consumer confidence, which in turn has the power to positively or negatively affect the property market. Know the facts, research the data, don’t rely on these ridiculous headlines and stories to make a property purchasing decision.
Foreign Investment:
Foreign buyers, mainly Chinese nationals made up 25% of purchases of new dwellings in NSW in the May '16 - May 17' period. These investors have cash and lots of it, pushing up demand and property prices. As we have seen in the recent federal budget the government has made subtle measures to slow down foreign property investment in Australia.
Less foreign investment has softened the housing market particularly in cities like Sydney and Melbourne. How could this further affect the property market? Harsher laws passed down by state and federal governments or a change in the law in the home country of the investor.
Federal Government Policy:
As mentioned above, state and federal government policy has the power to affect property prices. Things like first home owner grants, tax concessions, zoning, infrastructure spending, foreign investment policies and media laws to name a few. Some measures other countries have successfully introduced to tackle housing affordability issues are:
- In 2013, Singapore limited mortgage payments to 60% of a borrower's monthly income
- Hong Kong introduced a number of measures including an anti-flipping tax of 15% on properties resold within six months and increased real estate taxes.
- This saw their markets cool by 0.6% and 3.7% respectively, after sustained years of capital growth.
- In 2016 the Reverse Bank of New Zealand introduced a regulation that all investors need to have a 40% deposit to obtain an investment property mortgage.
- The Vancouver market peaked in 2016 with an influx of foreign investment and in 2016 British Columbia imposed at 15% tax on foreign home buyers. The impact was fairly immediate with agents reporting a drop of almost 40% in sales in January 2017 compared to the previous year and a decline in capital growth of -3.7% as of February 2017.
Global & Local Events:
Global and local events, be it financial, a natural disaster or acts of terrorism can affect our property market in Australia. We look at events like 9/11, the GFC or cycle Debbie, these events cause business and consumer confidence to falter, impacting property prices. Or in the case of cycle Debbie a small peak as builders flock to areas and rent properties during the rebuilding and construction phase.
Stock Market Crash:
If people are highly leveraged on the stock market and there is a correction or crash, typically they need to sell assets such as homes - and fast. This brings about extra supply at a discounted price. Also impacting on consumer and business confidence.
Industry:
Certain regions are very reliant on particular industries, like Western Australia for mining or Tasmania for Tourism. Industries create employment, which brings people, money and services. An upturn or downturn in an industry can have a positive and negative effect on that region.
Case in point is Western Australia where regional centres and cities have suffered a huge downturn in prices and vacancy rates due to the downturn in iron ore being ordered by China. Or the ceasing of car manufacturing in South Australia and Victoria as they can be manufactured cheaper in other countries.
Infrastructure:
Much like industry, infrastructure projects will stimulate regions. When a new hospital, airport, roads or schools are being built, these large projects require workers and those workers require housing, whether buying or renting and they stimulate the local economy. Periods of large infrastructure projects will boost an economy and when those projects are completed the economy will return to normal or could decline.
Interest Rate Rises:
The Reserve Bank of Australia (RBA) set the Official Cash Rate (OCR). In short, if the OCR goes up or down, so will your variable interest rates. The RBA will use interest rates to curb and stimulate inflation, these interest rate drops or gains dictate how much your monthly mortgage repayments will be. A drop in interest rates will lead to a more buoyant market. A rise in interest rates would usually lead to the market cooling.
Migration:
Population affects supply and demand, more people moving to an area will create a shortage of housing. It will also increase development projects as communities build homes and infrastructure for the increased population. This, in turn, increases employment and consumer and business confidence. However, a downturn in an industry and the completion of infrastructure projects can see migration slow, subside or even go backward as we have seen in mining towns due to the downturn in the resource sector.
Re-Zoning:
When large land banks are released and rezoned, be it by the government or private sector for housing developments. Similarly when industrial areas or single dwelling blocks are rezoned in established areas making way for large hi-res developments. More properties mean more supply.
Supply vs. Demand:
The number of properties for sale vs. the number of people wanting to buy. Simply, a limited supply market means people pay more to secure a property and a market with little demand means property owners will need to be more realistic about their price expectations as buyers have plenty of choices.
All the above factors influence supply and demand. In any property cycle, there will be limited demand, causing property prices to peak. Governments will change policy to deal with the housing shortage, and developers will build more properties to cater to the demand. The supply issue subsides and we’ll typically see the pattern reverse with more homes than buyers, causing prices to drop or stabilise. The population then grows, more people need housing and the cycle starts again.
The Australian property market moves in cycles, there is always a point the cycle will peak, moderate and decline. At Milk Chocolate, we work with Data Scientists to look at the Australian property market from a macro to micro level, gathering all the data and information from the hundreds of free and paid sources available so we can make informed purchasing decisions for our clients.
Milk Chocolate was founded seven years ago by Richie Ragel and Michael Cleary, to purchase residential and commercial property in Australia on behalf of our clients, looking for a home or investment property. To see how we can help you get in touch here.
Thanks, Michael
Bloomberg / Quartz / UBS Global Real estate index / Australian Taxation Office / Herron Todd White.
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