GlobalX Legal Solutions-White Paper-June 2014

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White Paper June 2014

Dissecting the Australian property market: Analysing the environmental factors at play

Australia has witnessed a property boom over the last couple of years, however this is set to cool. Cycles in the property market are historically heavily correlated with a set of key variables and influencers. In this analysis the respective elements at play relate to changes in the unemployment rate, cash rate, consumer confidence, foreign investment volume, population fluctuations and the political landscape. It is important to understand how these variables, individually and collectively, influence the market at the macro level. Analysing the environmental factors that influence the property market assists stakeholders in forecasting trends and potential market fluctuations.

Overview

“…boom fueled primarily by high demand stimulated by foreign investment and record low interest rates”


The Unemployment Rate

Unemployment is a key factor used to predict changes in the Australian property market. After an increase in the unemployment rate from 5.6% in April 2013 to 6.2% in January 2014, in April of this year, the Australian Bureau of Statistics reported a decline to 5.8% (Australian Bureau of Statistics, 2014). Following the 2014 federal budget, the Government predicted a rise in unemployment, which was anticipated to stabilise at 6.25%, the forecast increase was largely attributed to cut backs in the public sector and falls in resources investment (Australian Government, 2014). May figures released in June have revealed that the unemployment rate remained steady at 5.8%. Whilst unemployment is a known indicator of influencing change in the property market, it is unlikely that the current level of unemployment will influence the market.

What are the factors driving the property market?

Interest Rates

Arguably the factor with the greatest influence on the property market is interest rates. The official cash rate, set by the Reserve Bank of Australia (RBA), has been at a historic low of 2.5% since August of 2013. Due to this low rate consumers are now borrowing at the lowest interest rates in over 15 years. The RBA met on 3 June 2014 and for the 10th consecutive month left rates on hold. Slowing mining investment in the resources sector (due to falling commodity prices) coupled with a forecast rise in unemployment, is believed to be the rationale underpinning the board’s decision. Despite a slowing in mining investment the RBA’s Governor Glenn Stevens stated in June that, “Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion.”

Australian Unemployment Rate Percentage of the Labor Force

Source: www.tradingeconomics.com | Australian Bureau of Statistics

Source: ABS; APRA; Perpetual; RBA

Australian Housing Lending Rates Average interest rate on variable-rate loans


Deutsche Bank chief economist Adam Boyton stated that, “The pace of growth in retail sales, housing, finance and building approvals has been weakening in the past few months (Sydney Morning Herald, 2014).” Despite increases in housing price growth, the increased supply of cheaper financing and subsequent lower repayments on loans has resulted in an increase to housing affordability. The sharp fall in first home buyer activity however still suggests that housing remains unaffordable for many Australians. Low interest rates are integral to supporting housing finance, building approvals and retail sales and will continue to have a stimulatory effect on housing markets.

Consumer Confidence

The index that measures consumers’ attitudes and perception towards the overall health of the economy is a key decision maker to investors across the nation. Consumer confidence has reached the lowest level since 2009 as consumers digest the “tough” 2014-2015 Commonwealth budget. According to the ANZ head of Australian Economics Justin Fabo (2014, as cited by Sydney Morning Herald, 2014) “the reaction had come primarily in response to the federal budget.”

“Low interest rates are integral to supporting housing finance, building approvals and retail sales”

Source: ANZ - Roy Morgan


This data is supported by Dun and Bradstreet’s quarterly Consumer Financial Stress Index highlighting that financial stress is set to worsen in the next months as a result of slowing in wage growth, high household debt and costs of living inevitably impacting on consumers back pocket (Dun and Bradstreet, 2014).

Consumer confidence and the housing market are highly correlated, with the graph below highlighting this correlation; when consumers are confident market demand rises, pushing values higher (RP Data, Westpac Melbourne Institute 2014).

“Consumer confidence and the housing market are highly correlated”

Source: Dun and Bradstreet

Consumer sentiment vs. Dwelling sales

Source: RP Data

Consumer financial stress: Australia


The Westpac-Melbourne Institute consumer sentiment index for May further found that attitudes towards the housing market slowed. Bill Evans from Westpac explains, “The index tracking assessments of ‘whether now is a good time to buy a dwelling’ fell by 6% and is now at its lowest level since November 2010, when the Reserve Bank had been lifting interest rates, and 25% off its highs of September last year.” Concerns over high prices and limited affordability are likely to be the key reasons behind these trends.

June figures released reveal that consumer sentiment had stabilised after the sharp fall post the budget, with figures showing a rise of .02% from 92.9 in May to 93.2 in June. Consumer views on housing are showing some intriguing shifts. The June figures show the index tracking assessment of ‘whether now is a good time to buy a dwelling’ rebounded sharply in June rising 11.4% after recording substantial declines over the previous three months. The improvement is tempered by a significant mark down in price expectations.

Foreign Investment

The increase in derived demand for Australian property from foreign investors, specifically the Asian market, has, over the past two years, lead to an increase in property transactions. There are some concerns that the increased foreign investment may have negative effects, however for the Australian property market this is largely a very positive movement. The RBA stated that foreign investors may be contributing to the increased prices of some Australian homes, but are probably not crowding out the market. Residential foreign investment is 5 to 10 per cent of market turnover, and last year the government approved $17 billion in property investment from overseas, with most of the money funding the purchase and construction of new homes (Sydney Morning Herald, 2014).

According to investment bank Credit Suisse, Chinese investors alone are expected to invest over 44 billion dollars into Australia’s residential market over the next seven years. This interest from foreign investment is pushing pricing on the property sector upward with concerns that affordability barriers are already being witnessed. This concern has resulted in an inquiry being commissioned; on the 19 March by Treasurer, The Hon Joe Hockey MP, to inquire and report on Australia’s foreign investment policy as it applies to residential real estate.

Population

Australia’s population grew by 1.8% during the year ended 30 September 2013 (ABS, 2014). The Australian Bureau of Statistics states the natural increase and Net Overseas Migration (NOM) contributed 41% and 59% respectively to total population growth for the year ended 30 September 2013. This meant that all states and territories recorded positive population growth in the year ended 30 September 2013. Western Australia continued to record the fastest growth rate of all states and territories at 3.1%. Tasmania recorded the slowest growth rate at 0.2%.

“The Australian Government approved $17 billion in property investment from overseas”


Technological change in the Market

Change is in motion for the way in which properties are settled for conveyancers and legal practitioners. Electronic conveyancing is set to revolutionise the conveyancing process and property market in 2015, as the capability for transactions to be facilitated digitally is introduced. PEXA stands for Property Exchange Australia; a purpose built system that brings property exchange into the 21st century. PEXA will support the exchange of property nationally through the ability to perform lodgments and property settlements online in a simple transaction. This includes new mortgages, mortgage discharges, transfers of ownership, settlements, caveats and notices in one easy to use, intuitive, online platform. The Australian Institute of Conveyancers National President, Jeff Stevens expressed that, “This is the biggest reform to our industry since the introduction of the Torrens system more than 150 years ago.”

Source: Australian Bureau of Statistics

“…the biggest reform to our industry since the introduction of the Torrens system more than 150 years ago”- Jeff Stevens, National President, Australian Institute of Conveyancers


“GlobalX will deeply integrate the PEXA platform into our leading online conveyancing, legal and practice management solutions”

- Peter Maloney, COO, GlobalX Legal Solutions

It is predicted that by 2020 electronic settlements will account for over 80% of the property settlements in Australia. This shift from manual to electronic conveyancing will significantly reduce error, settlement time and cost thus increasing the number of properties able to be settled. While this development will not directly affect the volume of property transactions, it will increase the efficiency and speed of settlements, thus allowing a greater capacity to do a larger number of transactions. Leading technologist and innovation lawyer Andrew Perry said, “Embracing technologies like electronic Conveyancing that enable us to complete transactions more accurately and efficiently, at any time and from anywhere, will not only help practitioners’ bottom lines but also increase client satisfaction and the likelihood of referrals and repeat business”.

Peter Maloney, GlobalX Legal Solutions’ Chief Operating Officer explains that, “As the first sponsor to sign with PEXA, GlobalX will deeply integrate the PEXA platform into our leading online conveyancing, information search and practice management solutions (Open Practice) for practitioners across Australia. We have invested almost $11 million in future proofing our technology, people and client base to ensure we are best placed when conveyancing switches online next year with the Property Exchange Australia (PEXA)”. This investment is deeply focused on integrating PEXA into GlobalX’s solutions and enhancing leading practice management software Open Practice. Mr Maloney said that the introduction of electronic will have a ramp up period and it is imperative that practitioners are supported by solutions that can facilitate both manual and electronic settlements.

Cost of Living

The Consumer Price Index (CPI) provides a general measure of price inflation for the household sector as a whole and is used by the Reserve Bank of Australia (RBA) as the official measure of inflation for evaluating monetary policy (ABS, 2014). Quarter 1 2014 witnessed the annual CPI advance to 2.9%, up from 2.7% in the previous quarter as the rise in the “standard basket of goods” comes close to exceeding the RBA’s 3% target. This means that the cost of living is slowly creeping up whilst wage growth appears to be slowing.

Source: www.tradingeconomics.com | Australian Bureau of Statistic

Australian Inflation Rate Annual Change on Consumer Price Index


The Australian Bureau of Statistics December report indicated the Wage Price Index (WPI) over 2013 was the slowest on records that date back to 1987 (ABS, 2014). The downward pressure on both the public and private sectors has resulted in a slowing WPI. The WPI, produced by the Australian Bureau of Statistics, shows that wages rose by just 2.6 per cent last year, lower than the inflation rate of 2.7 per cent (The Age, 2014). That means many workers are actually suffering wage declines when you take into account the rising cost of living. A weaker than normal labor market, due to softer economic conditions, is present where employees have very little bargaining power amid speculation surrounding job losses.

Property Volumes

RP Data shows that there have been 302,678 capital city homes sold over the 12 months to October 2013, which indicates sales volumes in October were 11.1% higher than one year earlier (RP Data, 2014). For the first Quarter of 2014 RP Data reported 82,051 house sales and 30,417 unit sales (Property Observer, 2014). The March quarter for 2014 recorded the strongest volume of house sales since 2009, and additionally the strongest unit sales since 2010 (RP Data). A strong correlation exists, historically, between the volume of sales and actual property valuations. Therefore as a rule, demand usually dictates the price, for example if demand is greater, higher volumes of property will be transacted and it is likely that the values of these transactions will rise accordingly. Alternatively, if the market has few buyers, selling conditions become harder and values will decrease accordingly to meet the market demand.

Source: RP Data

Rolling quaterly number of house and unit sales nationally

Source: Commonwealth Bank, ABS

Unemployment rate Wages


The Australian property market is currently highly competitive with medium to long term overall benefits expected. Although this competitive environment is driving increased property valuations, it is important to remember that the market is always evolving and many influencers are at play. A factor like unemployment, though being a known indicator of influencing change to the property market, is actually unlikely to influence the market at current rates. It is believed that strong growth witnessed in late 2013 and early 2014 has peaked and although values are likely to keep rising, they will most likely do so at a more moderate pace. This tapering off is largely due to affordability constraints becoming more prevalent in the market. Fluctuations in investment are due to influence growth, as investors are subject to lower returns and capital growth potential in current market conditions. Adding to this is consumer sentiment, which has been trending lower post the Commonwealth budget. Interest rates however are set to remain low, providing a stimulatory effect to the housing market.

Transactions volumes of city house and unit sales in the capital cities are, over time, relatively unchanged with current figures showing only a 2.7% increase on the 5 year average. It is evident that the ever evolving Australian property market will be regulated by the political, economic, social and legislative environmental factors at play. However it is technology that will transform the property market in 2015; the major change that is apparent is the way in which property transactions will be settled for future generations. Technology and innovation has propelled the need for electronic Conveyancing and is set to revolutionise the way in which property is transacted, inevitably benefiting practitioners and end consumers alike.

Conclusion

Visit the GlobalX e-Conveyancing hub to stay up to date with the latest news and events, information and

insights on electronic Conveyancing from GlobalX Legal Solutions.

To find out how GlobalX is advancing productivity and effectiveness for legal practitioners and associated

industries across Australia contact us today on 13 5669 or visit globalx.com.au

http://www.globalx.com.au/products-services/conveyancing-legal-support-services/e-conveyancing-hub

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GlobalX Legal Solutions-White Paper-June 2014