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Stock Markets Crash And Perth Property Hits The Wall – It’s Not Rosy In WA…

Stock Markets Crash and Perth Property Hits the Wall – it’s not rosy in WA…

There is a growing awareness of the headwinds facing WA and it’s causing concern for many families across the state. The ongoing reduction in resource construction spending, China’s economic slowdown and state budget problems are some of the recent issues we feel are impacts.

The following blog is more of a series of information highlights rather than a balanced thesis so please contact us to discuss any questions or further concerns you may have.

Perth Property – Who pulled the plug on WA?

There are many instances of 30% drops in rent when replacing a tenant on Perth investment properties that have tipped previous positive cash flow investments back into the negative.

The following charts show the actual recorded drops in rent (lagging indicator) and the rise in vacancy rate:

 

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Population and construction.

And the drop in rents is likely to continue.

The high level of approvals for construction in recent years (blue line) has seen an ongoing supply of housing coming to the market. But now, as seen in the chart below, the population growth rate has dropped (green line), resulting in a rise in vacancies and a decrease in rents.

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Over the next 12 months we will see a huge amount of units complete construction. With lower earnings on investment properties, one would assume that there would be less demand and the prices might drop.

Given the local buyers have lost their nerves it is fortunate that foreign buyers are taking up the slack, as discussed in this recent Perth Now article.

Why is Sydney booming?

Sydney’s boom in prices seems to defy logic somewhat, but it has come on the back of a strengthening local economic activity, years of under-supply in new buildings and a strong population growth.

Why has the population growth dropped?

For the first time in nearly 20 years the net immigration from New Zealand to Australia has reversed; a symbol of the changing immigration patterns compared to what we have experienced in the mining boom years. The days of professional expats coming over with their families and being put up in company-paid housing at huge rental rates are long gone; as is South Perth’s premium rental rates.

In anticipation of these scenarios we haven’t suggested our clients load up on Perth investment properties. But we can’t wait for the time to come when the opportunity to invest into a normalised market does arrive.

So for some of our practical and energetic clients, buying property renovation projects will become part of their wealth generation plan when the market has capitulated sufficiently.

How is China’s Stock Market Crash affecting Australia?

In recent months there has been strong press coverage of the collapse of the Chinese stock markets and associated discussions of their slowing economic growth rates.

What’s going on?

The Chinese market recently dropped 40%, a reduction from its recent high in June, which seems concerning. Or is it surprising that it almost doubled between November 2014 and July 2015?

We think the fact that it doubled was surprising rather than the recent pull back.

Since 2007, China’s total debt level has quadrupled. According to the McKinsey Global Institute report released in Februaryit’s now 282% of GDP – a higher percentage than that of Germany or the US.

Demand for resources.

It’s common knowledge that the Chinese Industrialisation and associated construction boom led to the surge in demand for bulk commodities like iron ore, but it appears that this construction has started to drop.

What does the future hold?

Without a doubt there are some seismic changes happening in China and WA is feeling the impact of this now, but the new reality will only become truly evident when the LNG mega projects wind down their construction over the next 18 months.

We are just thankful for agriculture, cheaper fuel, lower interest rates and strong birth rates.

Recession in Australia?

There has been persistent commentary about the possibility of a recession in Australia and it feels like it’s happening in WA. However, there is still positive growth reported. Why?

The measure of a recession is defined as two quarters of negative GDP growth. GDP growth is Gross Domestic Product. We can be losing jobs, earning less and struggling to pay our loans but if there are still growing exports of iron ore and LNG etc. then the GDP figure may still be positive.

So, while from a family perspective we may feel all the effects expected with a recession, technically Australia may not have one.

The following chart shows the level of capital expenditure on non-residential housing projects within Australia since 1987. It is one of the most discussed indicators on why we may be in for tough times and reasons for interest rates being so low.

 

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For 15 years construction activity oscillated between 5 to 10 billion dollars quarterly, and then in 2012 it peaked at over 36 billion.

Since then it has come back down to normal levels causing a steep plunge, hence the term “Capex Cliff”.

Concern about the Share Market falls.

Right up until May 2015 the Australian Share Market was performing strongly, largely led by the banks and other high income paying blue chip companies. Since then it has dropped almost 17%; CBA dropped from $96 to $71, Telstra from $6.50 to $5.50 and BHP is down to $23.

The Australian dollar now buys closer to 70 US cents compared to $1.10 a few years ago. This means we have lost 36% of our buying power in America. It also means Australian “stuff” has become 36% cheaper for those in the USA.

What does it mean for us and what should we do?

In each of these instances, whilst the falls have been large, the rises over the last 5 or 10 years have been larger and abnormally large compared to historical averages so what we are seeing is more a normalisation than a collapse. Nevertheless for those over-exposed it is painful.

With the exception of our long-suffering parents and our retired clients, the pull back in prices of property and the share markets is a welcome event given the rest of us are still purchasing our retirement assets.

Are Perth property and share markets screaming a buy yet?

No, but we are certainly still buying quality investments as they present at reasonable prices.

There are many reasons why the markets could lift and many reasons why they may fall in the medium term. This never changes. But having a strategy in place, to reduce the likelihood of having to sell when prices are down, reduces the impact. And being able to buy when prices are down provides opportunities.

Be prepared for opportunities.

Being positioned to add to the Australian shareholdings, the smaller company holdings, residential and commercial property exposure or the international investments depending on which is offering better value at the time is powerful.

We’ve been discussing these issues in meetings over the years, as you may know. The world is a big and diverse place and there are always innovations and trends that offer great investment opportunities for the patient and prepared. Bennett Wealth Group is dedicated to continuing to help you chart the course.

Be fearful when things are buoyant and be bold when things look terrible.

Get in touch.

If you are interested in understanding more about the rise and normalisation of the Perth property market or the impact of the Chinese market or economic slow down on Australia please don’t hesitate to make contact as we devour this type of content regularly and can make it available.

And of course, let’s not forget how wonderful the weather is and how safe we are compared to those living in other parts of the world.

Click on the links below for some further reading you may find interesting:

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