Share Market Review
The ASX200 started the 2017 calendar year at 5,773 points and has closed the September quarter at 5,681 points. This is a drop of 92 points or -1.59% over the nine month period. The sideways pattern has been a feature of ASX trading since the middle of May. The index has been unable to break out of a rough 100-point range.
The threat of nuclear attack from North Korea has definitely caused the market to stall as well as uncertainties about global economic growth, domestic economic growth and the shambolic style of the Trump administration in the US.
On a stock specific basis, Commonwealth Bank has also weighed heavily on the market over the three months, dropping 9.1% after facing allegations of breaching rules aimed at preventing money laundering.
Also contributing heavily to the index losses over the quarter was Telstra which has dropped from over $5 at the beginning of 2017 to $3.49 as at 29 September as investors continue to fret about the telco’s dividend prospects and the impact from the NBN.
The mining and energy sectors put in solid performances over the September quarter with BHP up 10.7% and Rio Tinto up 5.2%.
In comparison to the Australian Share market, US markets are trading at record levels with the Dow Jones up 24.16% for the 2017 calendar year. If President Trump is successful in getting his tax plan through we should expect to see the US and Australian Stock markets rally.
Economic Update
The Reserve Bank of Australia (RBA) kept interest rates on hold throughout the quarter (as expected) and reiterated their ‘watch and hold’ position for the months to come. September marked 82 months since the RBA last increased the cash rate.
Last month RBA Governor Phillip Lowe announced that rate cuts have come to an end. However, there was no commitment to a rate rise anywhere in the near future.
Although the RBA hasn’t increased rates, the banks have. Almost nine out of ten borrowers with variable rate mortgages have seen an interest rate rise in the past two years. Interest only borrowers have been hit hardest by rate rises in recent months as regulators push for greater use of lower-risk principal and interest loans.
These out-of-cycle rate rises are a reasonable indication of where we can expect rates to go in the coming years; albeit slowly.
Business confidence is up and businesses are beginning to invest again. This coupled with a declining unemployment rate and continued government infrastructure spending is positive reinforcement that our economy is continuing to improve.
If we see growth in wages over the short term, spurring on consumer spending, further positive growth can be expected. Nonetheless, households are still shy to ramp up spending post-GFC, and the high levels of household debt Australians are bearing is still a headwind to further economic growth.
To boost economic growth we really need an increase in wage levels which generally increases consumer spending and tax receipts for the Federal Government’s budget. Unfortunately low wages growth, higher energy prices and a lack of political leadership has seen consumer spending fall.
Property Market Update
CoreLogic’s Accumulation Index looks at the total returns from the housing asset class factoring in the change in the value of the dwelling and the gross rental return from the property.
The CoreLogic Accumulation Index shows that nationally, total returns from housing are starting to ease. The total returns from the housing asset class over the 12 months to August 2017 were 13.2%. Because the return is calculated from value change as well as the gross rental yield, you tend to find that houses have a superior value growth performance while units offer superior rental returns. Over the past year, total returns for houses nationally have been recorded at 13.5% compared to a 12.0% return for units.
Over the 10 years to August 2017, the annual total returns for housing nationally have been recorded at 8.8%, split between 8.9% for houses and 8.5% for units.
Total housing returns have generally been superior in capital cities to regional markets however, in the 2008 and 2010-11 downturns, returns slumped by a greater magnitude in the capital cities. Over the past decade, combined capital city annual total returns have been recorded at 9.3% with returns of 9.5% for houses and 9.0% for units. Over the 12 months to August 2017, total returns have been recorded at 14.0% for houses and 12.3% for units.
Regional market returns have generally not been as strong as those across the combined capital cities. However, some regional areas are enjoying the benefits of buoyant property market conditions due to housing demand rippling outside of the capital city boundaries into regional towns, particularly coastal regions. The Illawarra region has recorded the largest annual increase in regional home values up 15.8% for houses and 14.40% for units.
Regional market returns have generally not been as strong as those across the combined capital cities. However, some regional areas are enjoying the benefits of buoyant property market conditions due to housing demand rippling outside of the capital city boundaries into regional towns, particularly coastal regions. The Illawarra region has recorded the largest annual increase in regional home values up 15.8% for houses and 14.40% for units.
Hobart has recorded the strongest annual growth of all capital cities over the past year and it also has some of the highest rental yields which has meant it has had the strongest total returns. Total returns for houses over the past year have been above 10% in each of Sydney, Melbourne, Adelaide, Hobart and Canberra. For units, double-digit total returns have been achieved over the past year in each of Sydney, Melbourne and Hobart. Units in Darwin were the only capital city property type to achieve negative returns over the past year.
With capital growth now appearing to have peaked and rental yields at record lows it is reasonable to expect a further moderating of total returns over the coming months. The other important thing to consider when looking at total returns is the calculation of the rental income. Although rents are increasing in many areas, the assumption in a gross rental yield calculation is that the property is occupied for 52 weeks of the year. In some parts of the country this is increasingly difficult to achieve and it can eat into the investment returns.
The total returns data, particularly for the past decade, shows why housing investment has been so popular and hit record highs. Returns have been fairly consistent and less volatile than equities however, the ongoing strength and the evidence of a recent slowdown should give investors pause for thought. With mortgage rates starting to increase for investors, record-high levels of new housing supply and value growth slowing, housing investors shouldn’t assume that the types of returns seen over recent years will continue to be replicated going forward.
Source RP Data & BIS Shrapnel