Understanding the next business cycle

The big question for those wanting to invest in property has always been: "Is there enough time and space in the market place for me to be able to buy and sell an investment property before the next cycle turns, or should I be out of the market now?"

While no one can perfectly predict the economic cycles, there are some indicators we can look to which help us to make an informed assessment of how the market is likely to track.

What we need to remember is that the regulatory framework for business seeks to maintain economic activity levels within certain set of parameters. So these institutions, whether it’s the Reserve Banks or Treasuries, try to maintain inflation at around 2-3% and to ensure unemployment doesn’t go above 6%, but ideally remains around 4 to 5%.

These institutions are actually pulling levers all the time in response to their perceptions of how the economy is faring and attempting to guide it down the right path.  So to some extent, we are all shadow boxing in this game, trying to understand how things might look in the next 2 or 3 years time.

Now MacroPlan's thinking on the matter is that there is enough time in this current cycle to move in and move out of the property market, and there are some signals which inform that view.

Firstly, the bond rates have kicked up and that tends to increase the cost of funds for the banks.  Banks fixed mortgage rates have increased quite significantly by 60 to 80 basis points, and late last year there was a deposit war where banks were having to pay more for deposits.

This has led some people to ask: does this mean that without the Reserve Bank increasing the cash rate that interest rates will actually increase? The answer is yes.  Because if you add all those things together, it tells you the banks are going to want to charge more for interest.  This will result in a moderating of the cycle, but MacroPlan don’t believe it will result in the beginning of the next economic cycle.

It’s simply a financial response to a market place.

So the next question is: if this resulted in a 100 basis points increase in interest rates, would it have a material impact on the market place?  And again, the answer is yes, it would, although we would still have stimulatory policies by the Reserve Bank responding to this.  We believe the Reserve Bank would keep the cash rate lower for longer in this scenario.

What’s likely to happen as people react to this increase in interest rates and stop wanting to take out investment loans is that demand will drop for these loans and the banks will bring the interest rate down a bit to encourage purchasers back into the market. At the moment banks are becoming increasingly unwilling to fund investors in response to terms of oversupply and consequential reduction in housing prices.

The economic cycle depends on underlying capital investment in the economy - which is still dropping - and it also depends on jobs and jobs growth.  Apart from Victoria, the latest jobs growth figures for the rest of Australia were negative.  Last year there were only 100,000 new jobs, while typically there would be 200,000 jobs created in Australia annually. The overall economy remains soft.

So, perhaps what we have here is a window of investment opportunity.  Listings have halved, retail interest rates are increasing when the cash rate is not increasing, and economic conditions remain subdued.  But there are very good demographics with a substantial number of people still coming to the country.  This could be a good time to buy with some favorable terms and discounts, and with a view to possibly moving out of the market place in 24 months. So a relatively short investment horizon.

One of the things to look out for in terms of market indicators will be our exports.  At the moment, the Reserve Bank is really focusing on Australia’s export potential.  The reason for that is, in the absence of labour market reform and other federal government policies which could stimulate the market. Export is the only real mechanism which would stimulate the economy.

Our advice would be to watch what happens to Australia’s export performance.  It’s very positive now, but if it becomes even more positive, that tells you the window for investment is less risky.

Get in touch:

To understand more about Australia's business cycles, key indicators and export market, please contact Amy Williams, National Marketing Manager on 02 9221 5211 or amy.williams@macroplan.com.au.