07 Jan Affordability will influence market sentiment – Louis Christopher
Louis Christopher believes that, amongst other things, there will be pressure on affordability and a focus on helping first home buyers this year which will influence how the market develops.
Kevin: Last week on the show we caught up with Louis Christopher from SQM Research for a reflection back on 2018. Well, here we are now in 2019. Louis joins us again. Hi, Louis.
Louis: Hello there, Kevin.
Kevin: Much changed in your sentiments from the last week? Or are you still … We spoke last week about your thoughts for 2018, and I guess it’s sort of reflected where you thought we might go in 2019. Is there going to be a bit more pressure do you think on affordability and first home buyers?
Louis: Yes, look affordability will improve this year. Namely because we think in Sydney and Melbourne in particular the market still has got a little bit to fall yet. So our forecast for Sydney and Melbourne is that prices will fall between 6 to 9% this year. Look, yes affordability will improve. For first home buyers, it will remain a buyers market, most likely. There is a caveat and one x factor here is what the Reserve Bank of Australia does. There is a chance that the Reserve Bank may well cut rates in our view, or there may well be other relief from the market in the form of perhaps some looser lending by the banks once again. We think that’s probably more of a remote chance, that the greater chance is that the Reserve Bank will eventually respond to this downturn and they cut rates. We will see, of course.
Kevin: Of course, the big unknown is what’s going to happen towards the middle of the year around May when we have a federal election. If in fact Labor get in, you touched on this last week in the show, Louis, Capital Gains Tax and negative gearing are both going to be on the agenda, clearly.
Louis: They are. Your listeners should be aware, though, that okay if Labor get up in May we will not see on the election night the repeal to negative gearing concession.
Kevin: That’s right.
Louis: What will likely transpire is that Labor will call a mini-budget, probably in the second half of the year maybe around August, where they will announce the measures. Even then, I don’t think the measures will immediately kick in. It’s likely that they will want to give the ATO some time to adjust. We think there’s absolutely every chance that Labor will bring these measures in some time, maybe say 1 July, 2020. That’s our bet. Of course, you just never know with politicians what they could do.
Kevin: Yeah, we don’t also know what the outcome of the election is going to be, just how close it’s going to be as well.
Louis: That’s true. It probably will narrow up as we get closer to it. But of course, I’m a housing analyst so I need to look at current probabilities as they stand and you’d have to say the probability is still with Labor at this point in time.
Louis: So our forecast … We’ve run a number of scenarios and basically three of the scenarios … Three of the four scenarios were that Labor would get up. One of them is that Liberals manage to hold onto power. But one of the key variables we think is, okay what the Reserve Bank of Australia may well do. Will they respond to this downturn? Or will they let it run for awhile yet.
Kevin: What’s your view?
Louis: Our view is that there is an increasing probability they’ll respond later in 2019. Look, this downturn will have an impact upon the greater economy, and at that point in time if the Reserve Bank of Australia sees there is an increasing recession risk, that’s when they’ll respond.
Kevin: Mm-hmm. We’ll, we’re very early in 2019 and I guess the banter is going to really start to ramp up now as we head towards the election. It’s going to be interesting to see what people do, how they respond to the likelihood of a Labor government, whether we’re going to see a rush on property to try because they’re foreshadowing the fact that if they do bring something in, it’s going to be grandfathered as well.
Louis: That’s true. And it may well be a little bit of a run, but we think it will be tempered because we think many investors will see through that run, that potential run. Of course, let’s just keep in mind that APRA still have quite a clamp on property investors with the restrictive lending. So I just don’t know whether it will be such a great surge. But it would not be without precedent; there was actually a surge back in 1999 and 2000 just prior to the GST on property. So yeah, it could happen. I think it will be tempered though with people looking through the other side of this in terms of once it’s actually enacted.
Kevin: Okay, this time next year let’s fast forward to the start of 2020. What do you think we’re going to say about 2019? Or is it going to be pretty much what you just gave us?
Louis: Well, I think we’ll be talking about effectively another year where prices have fallen in Sydney and Melbourne. But potentially other cities not looking too bad; Perth bottoming out, Brisbane being flat lined overall, Adelaide being more or less flat lined, and Hobart having another good year albeit a slower one. Canberra doing … Slowing down overall but not falling in prices.
Louis: Then we’ll be talking about effectively what it will mean for negative gearing to be repealed mid-year, potentially a little bit of a minor surge happening. So 2020 it’s really too hard to call at this stage of call, but there are certainly some key variables on the horizon that we’ll be increasingly focusing our attention on.
Kevin: Well, it’s going to give us plenty of fodder to talk about during the year no doubt, Louis, and we look forward to sharing your thoughts with our listeners as well. Thanks again for your support, and look forward to working with you this year. Thanks, Louis Christopher from SQM Research. Thanks, Louis.
Louis: Thank you, Kevin.