“I feel that luck is preparation meeting opportunity.” – Oprah Winfrey
I’m sure it has dawned on many people of late but just watching the news this morning I came to realise, what will the media talk about when COVID is no longer a feature!? How many ways can they pass on the same message. Anyway, as per any media story it’s eventually always replaced by the next shiny thing – perhaps another COVID variant. I hope not. The reality is however, that COVID is effectively ruling every part of our lives for now and dictating future economic policy.
This week the Reserve Bank Board chose to go ahead with the taper of its weekly bond purchases from $5 billion per week to $4 billion when the QE2 $100 billion program expired in the first week in September. Comments from the July board meeting suggest that “Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time, rather than a commitment to a specific rate of purchases over an extended period.”
No surprise here but the Governor acknowledged that GDP was expected to decline materially in the September quarter and the unemployment rate would move higher but was emphatic that “the economy is expected to be growing again in the December quarter and is expected to be back around its pre -Delta path in the second half of next year. Despite all the negative news, Westpac have revised their growth forecasts for 2021 and 2022. We expect that the economy will contract by 4% in the September quarter; recover slowly in the December quarter by 1.6%; but surge over 2022 by 7.4%. While that number for 2022 might seem excessive recall that the economy expanded by 9.6% in the year to June 2021.
Further afield in China, the effects of COVID-19, significant structural reform in the property market and the precarious financial position of Evergrande, one of China’s largest developers, has seen fears over the sector and the economy grow rapidly. While aggressive action will have to be taken to resolve Evergrande’s predicament, COVID-19’s threat to the sector and the economy looks to have already receded. Meanwhile, we believe the structural changes being implemented by authorities are a positive for 2022 and beyond.
Turning to Europe and the ECB. President Lagarde and the Governing Council were non-committal on asset purchases at the September meeting, deferring the decision on a formal taper program to the December meeting. However, as of today, they judge “that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters” and “will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions”. Further, if “favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope… the envelope need not be used in full”. In other words, we may see a small reduction in purchases before the December meeting to gauge how quickly purchases can be reduced thereafter. Very clearly, the ECB Governing Council have the confidence they need in the recovery to take these steps. GDP growth is seen at 5.0% in 2021, 4.6% in 2022 and a still above-trend 2.1% in 2023. From a structural perspective, 2021’s 5.0% gain will be sufficient to take GDP back to its pre-pandemic level; thereafter, given potential growth in Europe is circa 1.5%, if the ECB’s forecasts are achieved, GDP will quickly converge back to its pre-pandemic potential path.
The key take away from all the anecdotal evidence is, that despite the disruption to everything caused by COVID, economies around the world will bounce back stronger than before. Whilst this may be hard to understand, that is the reality that awaits us.
So, this week, just for interests’ sake and because it is relevant to interest rates, I thought we could look at the current state of the housing market, particularly Sydney.
Sydney houses are the most expensive in Australia and have been for many decades. Not only that, but property values in Sydney have been increasing at a much greater rate than wages have.
For example, the cost of an average house in Sydney today would have bought 2.5 houses in 2000, and 5.2 houses in 1970. In 1970, the average house in Sydney was worth 4.5 times the average income. Last year, the average house in Sydney was worth 12.2 times the average income.
If you are a property investor, the one thing you will be focused on is profit – particularly if you’re planning to flip property over the short term and want to know the best regions to do it in. Here are the Sydney LGAs with the highest and lowest median profits as of June 2021.
Our RBA (Reserve Bank of Australia) governor just recently made some truly relevant comments in this regard, and he does not see interest rate increases as the main tool to slow down housing. He stressed that instead changes to tax rates, town planning and regulations would be better. This once again underlines our point that interest rates will not move up for a long time!