Well it’s official…Australia escaped falling into recession – technical or otherwise.  Wall Street is roaring ahead and our share market is up around one third since it’s low point in May and our property markets are recovering and will now start rebounding.

Happy days are here again!  Well actually NO!

At least not yet.

At best we face a turbulent time for the rest of the year and at worst we could still have two quarters of negative growth and a technical recession later in the year.

So what does all this mean for our property markets?

Australia avoided one technical definition of recession – two consecutive quarters of negative growth - but let’s be honest, if we forget the technical definition, we are in recession and we have 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 question was never whether we were going to drop into recession, but whether we were about to come out of it. 

While the issue of whether Australia is in recession is partly a matter of semantics, it does have some real world significance.

It will stop the run of bad news that we have been bombarded with lately. No more messages that Australia will be ruined and the end is near. This together with a significant rise in the share market will support businesses and consumer confidence and encourage people to start spending and businesses to take risks.

And that’s just what the doctor ordered.

Just so that you are clear, a recession is defined as when our 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 was the exception and hasn’t had one for about 17 years.

Let’s take a moment and look at what happened over the last few months with news of an impending recession in Australia.

A “recession” pattern of behaviour came over the average person and this started with fear. People were afraid they may lose their job or that the economy was going to go down the drain, so they stopped spending. They took their bats and balls and went home - they stopped playing the game.

However one of the foundations of our capitalistic economic system is the recycling of money through the system.

It works a bit like this…

You earn a dollar so you go out and buy something. The shop owner gets the money and then he goes out and spends the same dollar and buys something else from someone, who again spends some money and the cycle moves on. The problem is that when the first person stops spending their money the recycling of money stops and the economy slows down.

If you multiply this effect by hundreds of thousands of people all doing the same thing, then it ends up as a self fulfilling prophecy – the economy goes into recession because no one is spending. You actually help feed that which you fear the most. That is of course why our government was trying to stimulate our spending with its handouts and fiscal stimulus.

Of course there is much more to our current problems than just lack of spending. The dramatic deterioration of global financial markets has driven much of the developed world into recession.

So how does this affect you and me as real estate investors?

During difficult times like we are experiencing, 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.

Of course 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.

So the news that we are not in recession will be positive for our property markets because this downturn has been all about confidence. If consumers and businesses become confident about spending and hiring again, recovery should be a lot quicker and stronger than most analysts thought possible just a month ago.

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 usually means we are at a turning point in the cycle.

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.

The important thing now is that commentary and analysis of our economic situation becomes more balanced. While the tough times abroad must be acknowledged and the challenges facing Australia must be accepted, the strong position of our economy must be similarly recognized.

The next 6 months will see more pain and more job losses. In some areas things are likely to get worse before they get better. And if the share and property markets go up too far too fast, they will just be setting themselves up for the next downturn.

But as I have mentioned many times in these market commentaries, the fundamentals for our 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 we have a tremendous undersupply of properties, historically low vacancy rates, rising rentals and low interest rates.

This all bodes well for our property markets.

We all know that the lower end of our property markets are hot, in part due to first home buyers rushing to take advantage of the government handouts.

Now there is evidence that the middle sector of our residential markets are also picking up. Home buyers who feel secure in their jobs are taking the opportunity to trade up their homes and investors are returning, taking advantage of the falling interest rates, lower prices and higher yields.

With little stock of quality properties around and renewed buyer interest, auction clearance rates are back at 2007 levels.

In time the economy is going to recover, interest rates will increase and inflation is expected to return, due to our 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, 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 you can’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. And properties to which you can add value.

By the way…

In changing times like we are experiencing, no one can help you through the property maze quite like the multi-award winning team of independent property strategists at Metropole. And remember, we help homeowners too, not just property investors.

We have no properties to sell, but access to every property on the market. If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney or Brisbane. Just click on this link to find out more and reserve your place.

And if you haven’t purchased your own copy of my new book Thriving not just surviving in Changing times, please click this link to find out more about it.

 

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