Is the glass half full

Published in the REIA, August 2012 by Jock Kreitals

Much has been discussed about the economy lately with terms such as “patchwork”, “two-speed” and “the glass is at least half full” being used by politicians, economists and commentators. 

What is happening? Why do many feel unsure of the future and indeed what is the future? And, importantly, what can be expected in the housing market?

Australia avoided a deep downturn during the Global Financial Crisis (GFC), when most countries did not and the current economic aggregates are sound with GDP growth of 4.3 per cent over the year to March, inflation is under control – the RBA’s measure of core inflation is a little over 2 per cent, employment has been growing – at the rate of 25,000 per month over the year to May with much of that growth in NSW and Victoria, and because of the resources boom we will see business capital spending reach a 50-year high over 2012/2013. 

At the same time because of the euro zone problems there is uncertainty about the global environment and within Australia not every sector is experiencing the growth the aggregates suggest.

Growth is not, however, concentrated solely in the mining sector. 

The non-mining economy has grown at about 2 per cent over the past year with the largest increase being in the ‘health care and social assistance’ sector, in which employment rose by about the size of the combined fall in manufacturing and retailing employment. 

In his Glass Half Full speech, the Governor of the Reserve Bank (RBA) said that “the dispersion of unemployment rates by statistical region is no larger today than has usually been the case over the past 20 years. 

Hence, while there are clearly multiple speeds, the total speed seems to have been one of reasonable growth and low unemployment”.

Changes have been occurring in household expenditure which has implications for those sectors of the economy dependent on household spending including that on housing. 

These changes may help explain the feeling of uncertainty about the future.

Household spending grew faster than income up to 2005 and that correspondingly the rate of saving from current income declined. 

In deed, the saving rate had been on a long-term downward trend since the mid 1970s.

Between 1995 and 2007 gross assets held by households more than doubled with the value of real assets increasing rose by more than 6 per cent per annum in real, per capita terms. 

The large part of this increase in real assets came from rising house prices. 

With the increase in asset values – primarily real estate – households borrowed against these and increased the ratio of aggregate household debt to gross assets to about 20 per cent and gross debt relative to annual income rose from 70 per cent in 1995 to around 150 per cent in 2007.

This historically high increase in asset values allowed spending to increase at a greater rate than income with subsequent growth in many sectors of the economy including retail.

With the onset of the GFC this changed. In the period June 2009 to March 2012, real consumption per head grew an annual rate of 1.5 per cent which is 40 per cent lower than the growth rate from 1995 to 2005. 

This coupled with a shift in the composition of spending away from goods to services has had a major impact on retail.

Australians are now spending more on services than they do on goods. 

The growth in online sales has exacerbated the situation for retailers.

Click to see the image in full size

Associated with the decline in asset prices – housing, shares and superannuation balances – real household assets per head today are about the same as they were five years ago.

For real estate agents and related businesses, as seen in the graph on the right, these changes have seen the rate of dwelling turnover decline markedly to about one-third less than it was on a decade ago.

What does this mean for real estate agents in the future? 

Households by saving more are again building wealth and once debt levels are seen as acceptable will again purchase real assets. When this occurs, rises in house prices are expected to be more moderate than those in the past.

Saul Eslake, of Bank of America Merrill Lynch, predicts that rises will average 3 to 4 per cent per annum over the next decade. 

A view supported by many other economists and analysts. 

As the graph shows, periods of more modest house price growth, such as between December 2003 and December 2006 when prices increased by an average of around 2 per cent per annum, provide for greater stability in turnover rates.

It is for the reasons above that the Governor of the RBA stated that “for Australians, the glass is well and truly half full”.

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