During 2016, 2 profound events occurred which will influence our world and local economies for at least a decade to come. In 1985, the State of Western Australia was producing 28% of Australia’s beef production, 30% of Australia’s wheat harvest, 40% of Australia’s mineral exports and had an unemployment rate 2% below the national average. WA was the last frontier on our Continent and anybody who wanted to work could find a job, particularly in the resources sector. In the September quarter of 2016, the unemployment rate in WA was 1% above the national average and if South Australia hadn’t got in its way, it would have been the highest in the Country. It is now official. The Resources Boom (RB) in Australia is over.
It was only the RB that allowed Australia to avoid the Asia crisis in the late 1990s and the GFC in 2008. A negative GDP figure in the last quarter of 2016 will confirm only the second recession since the worldwide recession of 1991 and that will surely send the political pygmies in the Labor Party running for the exits. For the first time in 25 years, the Australian Economy will be totally exposed to world economic events. When the world sneezes, Australia will get a cold. Exporters will rejoice, however, it is not good news for importers nor inflation and any counteracting rise in interest rates could lead to a period of stagflation (inflation without growth).
The second event was the final surrender by the economic traditionalists in America, Europe and Japan that the exercise of Quantitative Easing has not worked. Redeeming Bonds and flooding the world with cheap money has not ignited dead-pan economies. Sub-par GDP figures and inflation rates under 2% are indicators that World Economies are now operating in a new paradigm where the monetary manipulations of the past have simply not worked. Low interest and inflation rates are the new normal and with that comes a new pattern of investment behaviour, particularly by Baby Boomers as they reach retirement.
Overlaying these two significant events is the black cloud of DEBT. No better way to explain what I mean than by this example. In Times Square, New York, there is a ticker that displays 14 digits. The first 11 digits from the right are a blur, the 12th is decipherable and the 13th and 14th, when I last saw it in May this year, had the figures 1 and 8. This ticker is showing the current level of private debt in America and it is expected to hit $20 Trillion by early 2017. The level of private debt in America in year 2000 was $5 Trillion, in 2008 $8 Trillion and it has doubled again in the last 8 years. This means that ….private debt in America is growing at 9% per annum compound…. whilst the inflation rate over the same period is well south of 3%. By 2024, private debt in the US will be at $40 Trillion and with inflation now less than 2%, that is not sustainable. In order to avoid a worldwide depression, interest rates cannot be allowed to rise to levels which will bankrupt the private sector.
As we move into 2017 and beyond, we are going to have to endure a period of continuing volatility and uncertainty. The unemployment rate in Australia is at a tolerable level, however, within those numbers is the consistently high shift away from full-time jobs to part-time jobs. The catch phrase of ….“underemployment” will be heard loud and clear from now on. Underemployed Australians will be denied the ability to upgrade into a second more ultimate family home and first home buyers will be denied ownership at all. Currently, the first home owner only constitutes about 6% of the buyer market compared to more than double that rate pre GFC.
In a low interest rate environment, many of the well-founded retirement plans of Baby Boomers will be challenged. Evidence is already clear of Baby Boomers selling up long held real estate investments in order to firstly, capture the shift in the superannuation contributions over the next few years but also to supplement a diminishing “kitty” that is required to sustain a no-longer affordable standard of living. For a generation of people who have never had to suffer with unemployment or investment opportunities, Baby Boomers are about to be dealt a blow. Don’t give up your day job if you can possibly avoid it.
Low inflation rates mirror a low interest rate environment but that in turn has been a saviour to the Real Estate Industry, at least for the last 5 years. Firstly, yields on rental properties have become more competitive as the interest rate environment cuts into the bank deposit rates and dividend yields of shares. The low interest rate environment is also reflected through the lower 10 year Bond Rate and in turn the capitalisation rates that are applied to passing rents on commercial and industrial properties. Rents on these types of investments have dropped between 20-30% in the last 5 years but the lower cap rates have allowed capital values to remain reasonably constant. If interest rates rise sustainably then that little honeymoon will be soon over. In summary, there is little to suggest that the property markets in South Australia will do anything but waddle along for at least another year or two.
But it is Christmas time and it is time to be Merry. And we can finish on a happy note when we advise of our recent success in upgrading those “unsaleable and unrentable 40 year old units and flats”. We have developed a fantastic team of tradespeople who support Jackman & Treloar’s Property Management Department and with them we are turning many a sow’s ear into a silk purse. The formula in upgrading a down and out unit in original form to something more vibrant to include a new kitchen, paint and maybe carpets, will deliver a higher sale price of $2 for every $1 spent. In this way, we improve the marketability of the property, reward the effort associated with the upgrade but also can say that even if that does not occur, you at least have a property that has a new life and will encourage a better tenant at a higher rent and you have all the tax benefits to enjoy in the upgrade of your property. It’s a great story to tell and Jackman & Treloar is unique in what we are doing for our clients in this way.
From all of our staff and people associated with Jackman & Treloar, we thank you all for your loyalty and support. In answer to the question that is often asked as to how is business going, our standard reply now is “we are doing the best we can with what we’ve got”. And we will continue to do that through 2017.
Wishing you all a very Merry Christmas and a Happy and (tolerably) Prosperous 2017.