27 May AMP Chief Economist Shane Oliver: Opportunities & where Interest Rates are heading
In this week’s episode, we’ve got Dr Shane Oliver, chief economist at AMP Capital, giving us an idea of where the property market is headed and if it’s going to crash. Looking at interest rate outlooks, outer cycle bank and interest rate heights, what the implications for property investors are and opportunities for investors, what there is outside of the typical Sydney and Melbourne areas and thinking left field like Perth and beyond.
Dr Shane Oliver, you’ve been talking about the property market and broader market in general, but where is it headed?
It’s a bit dangerous to generalise, but on the east coast, we’re going to see a bit of a slowdown, which has already started. Price increases are already slowing down but at some point next year we’ll see generalised price declines especially in units. The combination of bank interest rate heights will change it.
- As housing has become horribly unaffordable, we will see a loss of momentum in Sydney and Melbourne.
- Perth is close to bottoming out and prices are currently where they were in 2007, but the mining investment downturn is getting close to the bottom. This should become evident by later this year, where the worst of the slump will be over.
- The other cities are in a modest place (Adelaide and Brisbane) but Brisbane has an oversupply of apartments. Hobart is catching up to Melbourne and Canberra is doing well but will slow down.
On the unit stock, do you think there will be a property market crash in those markets?
It’s quite common in Australia to talk about property crashes. If you go back to the early part of last decade, we had a slow down in Sydney until 2004 onwards and in other cities, they’ve picked up.
I think it’s the same, yes property prices in Sydney and Melbourne have run too far, too fast, but I think in the absence of a trigger for a crash it’s unlikely we will see a crash.
- We need to see either much higher interest rates across the board, not as much as they used to go up by, but we need to see a tightening cycle by the Reserve Bank which we haven’t yet seen.
- If we got a recession that could bring on a crash, which isn’t likely at this point.
- Yes, they will slow down, but I find it hard to see a property crash.
In short to medium term, what is your view?
The reserve bank is on hold until the middle of next year then in late 2018 they’ll gradually raise interest rates.
The biggest area of risk is established owner occupied loans with interest only loans. At the end of the day, the rate is driven by the banks and APRA. If you ask where the risks are, there are still some downside risks. We’ve got record low wage growth and consumer spending is low. If the reserve will do anything by the end of the year it’s more likely to be a cut then a hike.
For property investors, do you think those rates are likely to trend up?
There are more upside risks for investors. For investors, we’ve probably seen the best in rates. We do have low-interest rates in the capital cities, but Sydney and Melbourne gross rental yields are ultra low. We are dependent on getting capital growth through to justify your investment.
The more we hear talk about the bubble bursting, this should make investors more cautious.
Bank term deposit rates are low, what opportunities do you see for investors?
There’s still opportunities in the property area you just have to look further afield. If I were buying in Sydney or Melbourne I’d say wait two years until the cranes are gone. Likewise, if you look regional, it’s good.
I’d be wary of Brisbane. But mining related areas you can find properties with good yields on them. Provided you can lease the property out, you can get a good return.
Perth is worth a look at, I wouldn’t necessarily jump into it, but if it does bottom out there are good opportunities for investors. Then beyond property, there’s still opportunity in the share market, the dividend yield is around 4.5%. This is quite attractive compared to rental yields that you’re getting inner city, particularly in Sydney and Melbourne.
- On a property market crash, it’s interesting how people do generalise the oversupplied market. In a market like Brisbane, although there may be 40,000 approvals, there might only be 10,000 commencements.
- Mortgage stress is fairly low, it’s about the balance between RBA rates.
- Lending standards – The mortgage standards haven’t deteriorated in Australia like they have overseas, which is something worth keeping in mind.
- Generalisation – Not all of the Australian property market goes up/down at the same time. While there have been surges in Sydney and Melbourne, prices in Perth are back at 2007 levels, which is good to keep in mind and look at diversification.
- Interest rates and investors – It is likely rates will be on hold but potentially there could be more out of cycle bank phases.
- Investor – Fixed rates, owner occupied, principal and interest repayments.
- Long term – Fixed rates could be a good opportunity for you.