Economic Indicators Affecting Property - John McGrath

People often ask me what’s going to happen in the property market next. I’m happy to share my thoughts and observations, but another way is to simply take a look at the key indicators of the economy.

Of course, the economy isn’t the only thing affecting the market. For example, the market is also affected by social trends, such as the aging population and more people living alone creating higher demand for apartments. Government incentives such as the First Home Owners Grant can also have a big impact. But the fundamental driver of the property market is the economy.

Why is this the case? Because property is an expensive item and people are not about to make major financial commitments when they’re worried about the economy. So here’s a list of economic indicators to watch.
1.GDP – GDP indicates our economic production as a nation, and on a per capita basis, it’s a useful indicator of our standard of living. A growing GDP creates a flow on effect to property because people will generally look to improve their standard of living as their incomes grow.
 
2.Confidence – Demand for property always drops when people are lacking confidence. Check out the monthly Westpac-Melbourne Institute Consumer Index to get a snapshot of market mood. (The equilibrium is 100.) Business confidence is equally important.  When business is suffering, they stop hiring, reduce costs and even reduce prices, thereby resulting in lesser profits. They focus on the bottom line rather than further investment or expansion. When business contracts, so does the broader economy, affecting job stability and incomes.
 
3.Inflation/cost of living – Inflation or CPI gives us an idea of demand and cost of living. The Reserve Bank has a target of 2-3 per cent and factors any movements either side of this into its monthly decision on interest rates. When inflation and cost of living pressures are high, people batten down the hatches and put off all kind of spending decisions, instead choosing to save. Real estate takes a direct hit because without buyers, properties don’t sell! 
 
4.Employment – Jobs are crucial to a stable property market. Nothing will disturb the market more than high or rising unemployment. Without jobs, people can’t pay their rents or mortgages and this can result in increased mortgagee sales and falling prices.
 
5.Interest rates – Nothing will stimulate a property market more than falling interest rates. This is because mortgages tend to be the biggest expense of a household, so when rates go down, households can save significant dollars or buy more property with cheaper finance.
 
6.Household wealth – Strong or increasing household wealth usually makes people want to upgrade their lifestyles with a bigger house or a better location. There are three main ways to increase wealth – get a pay rise, save or invest.  Following the GFC, saving was the preferred avenue to wealth and debt reduction was the primary aim of most households. By the end of 2012, we were saving about 10 per cent of our incomes and our average loan-to-value ratio was just 50 per cent.  Now people are starting to invest again, with almost 1 in 2 new loans in NSW going to investors at the start of 2013.

By no means is this an exhaustive list.  But if you want to do a health check on the Australian property market, at any given time, then these are the economic indicators to watch.

- JOHN MCGRATH
http://oxygen.com.au/economic-indicators-affecting-property/ 

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