To see what’s coming in 2018 and prepare ourselves in the best possible way, we’ve got to understand the context. So as this year comes to a close, let’s take stock of 2017 with a view to look ahead at the year to come.
Perhaps the biggest single global economic event to happen in 2017 actually started in 2016: on 8 November 2016, and to the surprise and cries of many, Donald Trump was elected President of The United States of America.
Back in November 2016, the Dow Jones Industrial Average was trading around the 17,880 mark — but has since then climbed and climbed, posting a record high of 23,563 on 8 November 2017.
This climb has largely been fuelled by the policy changes announced by Trump during his election campaign. From an economic perspective, he has promised to reduce government waste, increase infrastructure spending by up to $1 trillion over the next 10 years, slash tax rates, and a raft of other measures designed to try and “Make America Great Again”. These policies have not been fully costed, however — they could add trillions of dollars to the over $20 trillion US Government debt. Moreover, these policies don’t even have the full support of his own party. That has not seemed to deter The Donald though!
One of his first executive orders was to withdraw from the Trans-Pacific Partnership, which would have opened up a range of free-trade agreements — including with Australia.
He has also talked tough on the North American Free Trade Agreement (NAFTA), renegotiating the terms in August 2017 with Canada and Mexico. On 2 September, 2017, Trump instructed aides to withdraw from the US trade agreement with South Korea.
These protectionist policies may have serious consequences for the US and the world, especially if China becomes involved in a trade or currency war with the United States.
As for actual wars, Syria and North Korea dominated the headlines in 2017 and look likely to continue to provide geopolitical uncertainty well into 2018.
During the year, and under the stewardship of Janet Yellen, the Federal Reserve continued what it ended 2016 with, continuing to try and “normalize” its balance sheet and official interest rates by lifting the cash rate from rates of near zero to current rates of between 1% to 1.25%. New Federal Reserve Chairman Jerome Powell will no doubt be keen to continue to lift rates into 2018 if the economy remains sufficiently robust to allow this to occur. However, we are seeing stubbornly low inflation numbers around the world, despite low unemployment in the US. This may make the task harder than the current economic outlook may suggest.
Back to China, where the 40+ year social re-engineering experiment continues to power on at above 6% GDP growth rates. However, the debt that has been used to fuel much of this growth over the last decade appears to be losing much of its stimulatory effect. GDP growth is dropping, despite higher and higher levels of debt — specially corporate debt largely funding this growth. We will continue to monitor this and how well the Chinese authorities manage this debt burden in 2018 and well beyond with much interest.
Back at home, this year’s events have been largely political in nature as opposed to purely economic.
We have endured the citizenship fiasco, watched decades of political incompetence push power prices sky high, and finally celebrated the year with the overwhelming YES vote to Same Sex Marriage (SSM), fairness and equality. Neither political party have been particularly inspiring, effective, or worthy of the positions they currently hold; we can only hope that in 2018 they finally step up and lead from the front with policies and agendas that actually serve, and provide higher levels of prosperity and well-being for all Australians.
The RBA remains stuck between a rock and a hard place. High levels of household indebtedness, a stubbornly high Australian Dollar and low levels of inflation and wages growth restrict its ability to lift interest rates any time soon. As such, these low interest rates continue to provide support for higher asset prices, including property prices.
Therefore, it has been up to the Australian Prudential Regulatory Authority (APRA) to step in to try and curb excessive property price growth, largely in Sydney and Melbourne, via macroprudential tools. Since 2014, APRA has asked the lenders to restrict investment lending to less than 10% pa, curb Interest Only (IO) loans to less than 30% of all loans and tighten up on their serviceability metrics, including interest rates, net income buffers, and high Loan To Value (LVR) loans.
So let’s perform a SWOT analysis on 2018:
The global economy appears to be slowly recovering after the years of economic malaise brought on by the Global Financial Crisis. The International Monetary Fund (IMF) has forecast global growth to rise to 3.6% in 2017 and to 3.7% in 2018.
Broad-based upward revisions in the Euro area, Japan, emerging Asia, emerging Europe, and Russia more than offset downward revisions for the United States and the United Kingdom.
Unemployment rates in the major economies had been at their lowest levels for a long while. Spare capacity in the labour market appears to have been fully absorbed in Japan, the United States and Germany; however, some spare capacity appears to remain in other parts of the Euro area.
Australia, which has recorded the longest streak of uninterrupted economic prosperity, continues to be pulled along largely by the success and growth of China and our other major trading partners throughout the ASEAN region. Chinese GDP growth has been revised up for the September 2017 quarter. The RBA and Treasury both forecast GDP growth, wages growth and inflation to return towards long-term average progressively over the next few years.
2017 has seen relative strength in jobs creation with over 300,000 new jobs created in Australia, many being full time. The $70 billion commitment in the last budget toward essential infrastructure items may continue to help Australia continue towards this return to long-term trend by 2020.
Strong population growth will likely continue to provide support for property prices into 2018. Furthermore, given that approvals of new dwellings peaked in late 2016, and tightened lending conditions for developers have persisted throughout 2017, it is likely that demand will continue to outpace supply in the medium term, keeping property price growth in most of Australia’s property markets positive in 2018, albeit potentially significantly lower than we have seen in 2017. The Perth & Darwin markets appear to have seen the worst of it, and look likely to see positive growth in 2018.
Inflation numbers remain stubbornly weak, despite the low unemployment numbers for most of the advanced economies around the world.
Monetary policy also remains largely accommodative around the world, and may drag on Central Banks returning interest rates towards pre-GFC levels in the near term. In fact, “lower for longer” will probably be the mantra for most of the advanced economies around the world. Chinese debt (especially corporate debt) remains an inherent risk for global stability.
There are also concerns that the combination of low interest rates and low volatility in financial markets is promoting excessive risk taking via a search for yield.
High levels of household indebtedness are a significant risk factor for the financial stability of Australia. However, according to the most recent RBA Financial Stability Report, “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years”.
OPPORTUNITIES & THREATS
I will speak about opportunities and threats as one, because in most cases when one door closes another door opens. At The Property Mentors, we are neither property bulls or bears; we know money can be made in any market and we have strategies to suit.
As reported by the Australian Financial Review at the recent Sohn Heart & Mind conference, Raphael Arndt, Chief Investment Officer of the Future Fund, says there are five mega trends driving economies and markets at the moment:
- The end of the leveraging tailwind as global debt levels peak. With less debt in the world, asset prices will have less support.
- Declining populations. As debt levels have risen, so too has the world’s population — supporting growth. But as that peaks, once again economic growth and asset prices will lose support.
- Income inequality. The impact of globalisation, technology and low interest rates have made the rich richer and lifted incomes in the emerging markets. But the working class in the developed world has lost out, and that will result in more populist policies that are bad for growth.
- The workforce is changing. Millennials account for a third of the workforce and by 2025 they and those younger than them will account for two thirds. They consume, interact and work differently than previous generations.
- Technological adoption is changing. Consumers are embracing new technology, which is accelerating disruptive effects.
As a result of these economic conditions, well-positioned properties should continue to see positive support into 2018.
However, as always some areas and property types will simply outperform others into 2018. Additionally, strategies that focus on adding value (Armchair Developing™/Wholesale Property Trust™), and/or increasing income or cash-flow (Armchair Developing™/Become The Lender™) may outperform again in 2018.
We trust that you will have an amazing Christmas break surrounded by your friends, family and loved ones, and that 2018 will continue to provide you with amazing opportunities to help move you closer to your goals and dreams.
PS Our last online training for 2017 will be an expansion on the themes outlined in this blog post, as we take a deep dive into the future of the property markets in Australia. Join us for our online workshop, Will The Property Markets Boom or Bust in 2018?
Click here to register now!