Since mid-2019, we have been discussing the expected impact of a number of major changes to the property market and broader economy. As we know, the coronavirus pandemic interrupted things quite a lot, but that has only caused more fuel to be added to the fire.
In the past 15 months, we have seen the RBA cash rate decrease from 1.5 percent to 0.25 percent. Pundits widely expect this to drop to 0.1 percent during the RBA’s meeting next Tuesday, or perhaps the following month. This has led to an increasing number of lenders offering mortgage interest rates below 2 percent… great news for landlords with rental yields at 4 or 5 percent. Last week, we found out that the federal government plan to further fuel economic recovery by rescinding responsible lending laws. This is expected to create easier access to credit for both businesses and households. Quite ironic, given the Hayne royal commission only finished up 18 months ago.
The economic climate that we now find ourselves in is a peculiar one. Unemployment is still high, meaning government revenue from income tax has decreased. Government debt has skyrocketed as initiatives are funded to maintain output. Obstructions to consumers obtaining finance are all but vanishing. I can’t help but wonder if part of the government’s goal is to pay back their mounting debt with property taxes. You see, property taxes are linked to the price of the underlying asset. Therefore, higher property prices mean more government revenue.
Of course, high property prices are also beneficial to people who own property. The vast majority of people who read this blog fall into this category (or are about to), so things are looking promising for you. On the other hand, stable growth in our assets is preferred to booms because it enables sustainable management of housing supply, as well as responsible government policy. When it’s too easy to sell property, some developers will take shortcuts. There are some famous examples of this in recent memory across our major capitals. This is one reason why our research model is so important to us.
In summary, recent revelations are painting an increasingly encouraging picture for property prices in the wake of the pandemic. You should be mindful of being swept up into the impending mania, just as we were warning you about in Sydney a half-decade ago. In the wise words of Mark Twain (apparently), history doesn’t repeat itself, but it often rhymes. Invest mindfully.