Quarterly Review July 2016

Posted in Wealth
21/07/2016 Level One

Share Market Review

The final quarter for the Australian share market for the 2015/2016 financial year was negative with the ASX200 closing at 5,233.40 points on 30 June 2016. The ASX200 finished the previous financial year (30 June 2015) at 5,459, which equates to a drop of 225.6 points or 4.13% over the twelve month period.  This is the first negative return from the ASX200 in 4 years.

The market has been a mixed bag with Energy (-24.9%) and Banks (-15.7%) the worst performers and Autos (+28.5%) & Pharmaceuticals (+27.9%) the best performers.

Overall, it has been another challenging year, but one that should provide satisfaction for Australian policymakers. Economic growth has lifted, not slowed. That is despite the transition from the once-in-a-century mining construction boom to mining production and housing-driven growth. The inflation rate has eased, in line with global experience.

Cash rates were cut to record lows in May. Iron ore and oil prices fell, but then rebounded. The US lifted interest rates for the first time in nine years. And the financial year ended with considerable volatility following the UK vote to leave the European Union.

Whilst uncertainty has dominated the market over the last 12 months there are a lot of positive signs including:

  • Record low interest rates.
  • Falling unemployment now at a three-year low of 5.7%, while the EU is at 8.7%.
  • 225,000 jobs have been created in the past year.
  • The value of our homes has risen for three years.
  • Building approvals in the pipeline are at record highs.
  • Consumer confidence hit a two and a half year high in June.
  • Business conditions were at a reading of 10, when the long-term average has been 6.
  • We’re growing at 3.1% while the US is at 1.1%, the British at 1.6% and Europe at 2.4%.
  • Our Government debt to GDP is about the lowest in the Western world (although climbing at a rate mush faster than most).

The market has rebounded positively since the initial panic reaction seen in the days after the Brexit vote. The US market has hit record highs while in Australia the ASX200 is up 4.16% since 1 July 2016 but is still 20.69% below the market high from 1st November 2007 of 6,873.20, which is now over eight years ago.


Economic Update

Happy New Financial Year!

The New Year was born with volatility, uncertainty and confusion, which is not the best start and was evident in the financial markets around the globe. Britain’s historic vote to leave the European Union (affectionately known as ‘BREXIT’) has taken centre stage, as well as our most recent federal election. No one can blame you for that feeling of despondency you may be carrying around. Nonetheless, with all new beginnings come fresh opportunities and the potential for positive change.

The Reserve Bank of Australia (RBA) lowered the cash rate to 1.75% in May 2016, where it has remained since. We are still at historic lows especially when compared to eight years ago where the cash rate was 7.25%. In his announcement this month Governor Glenn Stevens again echoed his previous statements about the economy continuing to grow, albeit slower than expected, sluggish commodity prices, low inflation and low terms of trade. The RBA has however left the door open to further rate cuts this year, potentially as soon as next month, and advised everyone ‘to watch this space’.

GDP grew by 1.1% in the March quarter, taking growth through the year to 3.1%. Employment has strengthened ahead of output. But that now suggests a slowing of employment growth until the economy picks up momentum.

Housing investment recorded strong growth over the past three years. However, the emerging (or now apparent) oversupply in most states and a crackdown in lending to investors will see a small decline eventuate over 2016/17, with larger declines expected in the following two years.

Household consumption spending grew by 2.9% last year and is expected to record similar growth over 2016/17, although slower growth in real household disposable income means households are saving less in order to maintain moderate spending increases.

For non-mining business demand is sluggish, profits are weak and investment subdued. Firms are reluctant to invest until they see certainty in demand. Recovery in business investment will require real investment in plant and equipment as well as investment in soft assets including research and development and in computer software.

The story for our economy going into our first quarter of the New Financial Year is continued uncertainty but there are positive signs for recovery. We remind everyone that this is the time to be patient, look for opportunities in the market and not to make rash decisions.


Property Market Update

Building Approvals

Dwelling approvals dropped in May 2016, a year after they hit a record high. According to the data released by ABS there were 19,276 dwellings approved for construction over the month. Despite a monthly fall in approvals, they remain at historically high levels however, and they are now -9.1% lower than their all-time high achieved in May 2015.


High Rise Approvals

The chart below shows the proportion of total dwelling approvals that are for high-rise unit projects over time for the major states.  This chart further illustrates the increasing prevalence of high-rise unit development.  The chart also shows how the tide is turning somewhat with relation to high-rise unit approvals with the proportion starting to fall in most states and territories.  Over the past six months, the average proportion of total approvals for high-rise units has been recorded at: 46.6% in NSW, 24.4% in Vic, 30.3% in Qld, 10.1% in SA, 10.8% in WA, 0.0% in Tas, 21.6% in NT and 32.0% in ACT.  If we go back 10 years and look at the 6 month averages they were recorded at: 19.1% in NSW, 5.6% in Vic, 11.4% in Qld, 7.0% in SA, 3.3% in WA, 1.5% in Tas, 22.4% in NT and 17.1% in ACT.

There are inherently many more risks associated with building higher density unit projects.  More pre-sales are required to secure finance in order to commence construction, more things can go wrong during construction of a larger project and settlement can occur several years after the contract is signed when market conditions may be significantly changed from when the project commenced.  The higher risk environment and subsequent diminishment in confidence and tighter lending finance for development is starting to result in a slowing of approvals for high-rise unit projects.

Dwelling approvals have eased from their record highs of a year ago but on an historic basis remain at very high levels.  We expect that an increasing number of these properties, particularly in the unit segment won’t be built in the current housing market cycle.  With a record high number of units set to settle over the next two years we would anticipate developers and lenders will become more cautious around unit projects.  Especially given that construction costs are reportedly increasing and population growth and transaction volumes are slowing.


Rental Yields Have Continued to Fall over the Past Year

Based on the CoreLogic May monthly rental review, while rents increased slightly by 0.1% in April, overall, capital city rental rates edged lower, falling 0.2% over the past 12 months.


Auction Clearance Rates

Auction clearance rates in bad times can be as low as 40% – 45%. More recently we have seen Australian clearance rates over 80% and the table below shows that clearance rates have fallen particularly in the key NSW & Victorian markets to approximately 70%.


Stamp Duty Hikes for Foreign Buyers

Stamp duty will be doubled for foreign buyers of a median priced Sydney house under changes introduced in the NSW State budget.

NSW Treasurer Gladys Berejiklian announced that foreign buyers of residential property will be slugged with a 4% stamp duty surcharge on top of the current stamp duty payable by domestic buyers and they will also pay an extra 0.75% land tax from 2017.

The stamp duty surcharge will apply from the June 21 state budget, while the land tax surcharge will take effect from January 1, 2017.

The surcharges will not apply to Australian citizens, permanent residents of Australia or New Zealanders who have stayed in Australia at least 200 days in the last 12 months.

Based on the Sydney median house price of $995,804, the stamp duty bill for a foreign investor will increase by almost $40,000 – from $40,305 to $80,137.

Source RP Data & BIS Shrapnel


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