All Ords Report 17 January 2018

Property ‘experts’ warned that a correction in house prices would occur three years ago and once again they’re beating the same drum. But as they failed to predict the price rise over the past three years, should we listen to them now?

‘Experts’ rarely get it right in predicting when and the degree of a rise or fall. History demonstrates that prices don’t rise in a straight line and that the market will pull back from time to time, however, if the ‘experts’ keep forecasting a turn eventually they’ll be right.

As short term data indicates that investors, who represent around 35 per cent of the market, have been pulling back, we are likely to see prices soften. However, the current slowdown in demand appears to be more a factor of the availability of credit in Australia as banks have set greater hurdles to get a loan.

I believe this action demonstrates that the banking sector is being proactive in pulling levers to curb any potential future correction, which effectively ensures there will be another boom after the slowdown.

One thing is for certain, the economy, our debt situation and precious credit rating will be under close scrutiny by the World Bank in 2020. While I believe that house prices will soften short-term, a correction is unlikely until around then.

An interesting point to note is that research by the International Monetary Fund (IMF) focussing on highly leveraged households and financial stability reportedly indicates that Australian household debt has risen above 100 per cent of GDP, well ahead of other advanced economies where the ratio is much lower at around 60 per cent.

Now before making a decision to buy or sell any asset, therefore property or shares, the most important consideration is not what the ‘experts’ say, it’s the answer to this simple question, ‘what is my risk?’

In the case of property, first understand historical house prices and how far they fall when the market eventually pulls back, which can be sourced from a Government website such as the Australian Bureau of Statistics or a reputable real estate site.

Now with shares you have a more highly regulated market and therefore this data is more reliable as all transactions are captured and it is much easier to get data for shares than it is property. I believe that all property sales data should be declared publicly.

If building wealth is important to you, it’s vital that you have exposure to both property and share investments. Choose to learn more about the share market today. A good way to get started is with the Investment Pack. It’s a great introduction to the share market and we give you knowledge and techniques you can apply straight away to keep you profitable and safe in the market.

What do we expect in the market?

Talk about ‘in the nick of time!’ In the last week of December the All Ordinaries Index (XAO) traded up to the edge of target zone (6,200 to 6,400 points) I set for 2017 and continued to rise into the New Year.

This week the market has so far traded to a high of around 6,256.5 points, well within the before-mentioned zone where the market is likely to turn, at least temporarily. January can be a volatile month and therefore the market is likely to take a breather around this time. That said I would like to see the market trade beyond this zone to between 6,370 and 6,450 points in the first quarter.

Important times for our market this half of 2018 are mid-February/early March or late April/early May. Turns often occur in the latter period when the market has been buoyant into the New Year.

Remember too, the Australian market is yet to break through the all-time high at 6,873.2 points in November 2007. There is approximately 10 per cent upside for this high to be achieved.

Trump tax cuts continued to push the US market higher into January and this optimism flowed through to the Australian market with solid rises in Energy and Materials stocks.

That said it is important to continue to manage risk while waiting for a further rise in the first half of the year.

Global news

The Dow Jones Index (DJI) is currently trading within the most recent target zone set for the market of between 25,000 and 26,000 points. However, there exists the potential for the US market to trade to around 28,000 in 2018.

Strong rises on the US stock market typically occur over a period of 12 months to between 2 and 3 years. That’s not to say that this rise cannot exceed this, however, I prefer to work with what’s most probable, based on history. Given this, I would like to see the market soften in January before it pushes higher in 2018.

It is exciting to see the Hang Seng (HIS) rise to challenge its all-time high of 31,958.4 points in 2007. At the time of writing it was trading just below this level. You may recall I made mention of this market in a previous report and I explained how the Australian market has more closely resembled the HSI than the US market over recent years. This adds weight to the current view that the Australian market is likely to follow suit and trade up to challenge 6,873.2 points.

On behalf of the Team at Wealth Within Happy New Year!

Dale Gillham is Chief Analyst at Wealth Within