State of Play: Why the Property Marketing is the Place to be Right Now
Published 7:14 am 29 Jan 2021
Hey there and welcome to our state of play. Today I’m going to talk about the property market and why I believe it is the best place and the safest place to be right now because we’re in really choppy waters. So let me join some dots for you. We’ve had a few figures, data announcements in the past couple of days that are going to mean a lot once you understand. So we’re going to pair back and have a look at the big picture. So we had our GDP figures in which shows how our economy is tracking. If we’re a business, it’s like our earnings or our revenue. And what we saw in the March quarter was that our economy shrank by 0.3%. Not a big one, but remember that COVID only really hit its critical mass at the end of March, 26th of March when we went into full shut down.
So what these figures showed was, first of all, they said, look, it was pretty good. We actually had some spikes, but they were panic spikes. So there were some articles out yesterday about how we had the biggest retail sales, we’re the world’s biggest panic buyers. Australian consumers were the quickest in the world to raid supermarket shelves and aisles. And we bought toilet paper and canned soup. And I read that one guy bought $10,000 worth of hand sanitizer, and then tried to take it back for a refund when things died down and he couldn’t move it fast enough. That kind of buying isn’t very economically sound. So it may have skewed our figures a little bit and given us softer figures and probably would have been real had things, just everything just gone normally. And we didn’t have that little spike of panic buying. But at the end of the day, panic buying is a bad thing for an economy.
I excuse figures, it looks people are out spending money, but they’re spending money to go into their doomsday prepper bunkers. And the reserve bank governor, Philip Lowe in his statement that accompanied their interest rate decision, the other day on Tuesday on behalf of the board of the reserve bank said, look, what’s really needed now and what will dictate everything going forward is confidence. So he said in the period immediately ahead of much will depend on the confidence that people and businesses have about the health of their situation and their own finances. That’s because if they’re confident, if they think their house is in order and they’ve got money, then they’re not going to hoard. They’re not going to doomsday prep. They’re going to be out there. They’re going to spend money and support the economy. And as they spend more, then employers need to employ more people. There’s more jobs, there’s more people with money and the economy expands.
So what they’re looking for is consumer and business confidence. And how they’re doing that and what Philip Lowe, the reserve bank governor said is, “We’ve done all we can at a fiscal and monetary policy level”. So the government’s out there spending money for JobKeeper and job seeker and all sorts of things. Banks have given people holidays on their loans and the reserve bank is lending cheap money to banks and they’ve lowered interest rates as low as they can. And what they’ve said is, that should support people and give them confidence in this period. So they’re trying to manufacture confidence by the government spending and cutting everything down to zero, as much as they can. They’re hoping that people have money burning a hole in their pocket and that they’ll go out and spend it. And the more they spend, the more confident everyone gets and we recover a whole lot quicker.
So the bank said that all of the money of the cheap money. So they’ve got a hundred billion dollars set aside to lend out to banks at 0.25%. So remember your bank might charge you 3% or 2.5% on your mortgage. They can borrow that money from the reserve bank at 0.25%. But of the hundred million, only a few lenders, and they weren’t the big lenders. They were small operations had borrowed. So they’d only lend six billion of that money. And they’ve said, we’ve got a longer way to go. And he said, we expect more banks to tap into this overcoming months. Yesterday, Josh Frydenberg, our treasurer, came out and he said, look, there’s been a 0.3% contraction of the economy in March, the March quarter. So that’s January, February, March. So there was bushfires. And then at the end of March, there was locked down.
And when asked by a reporter, are we in a recession? Or are we going into recession? He said, yes. He said that the June quarter. So that’s not finished yet. That finishes at the end of this month. But he said the projections and what he’s been told by treasury is that it’s going to be the worst three month period since the 1930, so since the great depression. And he said, the economic impact will be severe, far more severe than the March quarter. Now a recession is technically two consecutive months of negative growth in an economy. So we had -0.3% just now for the March quarter. And he said, it’s going to be a lot worse. In fact, they’re thinking about 8%. But household savings rose, so people are hoarding more money and discretionary spending. So yes, we have to keep a roof over our head, food, shelter.
We spend what we have to, but there are some items that we don’t have to buy if we don’t really need to. So that’s what they call discretionary spending and that fell. So that’s a real sign of consumer confidence. If you’ve got extra money to burn, to go out and buy something nice, or do you go, or no, it’s just too risky I’m going to put it under my bed. The treasury secretary, Steven Kennedy said yesterday in a speech that the economy could take five to seven years to recover from this crisis. So we’re talking a long, slow, probably deep recession ahead. Now we haven’t had this before. If we look back in history, the last recession we had was the one we had to have under Paul Keating as prime minister back in 1991. So there’s whole generations that have never ever experienced tough times. We have had little dips and you can see here, where we’ve had below this line where we’ve had negative growth or negative quarters.
So we had it once in the dotcom bust, GFC Queensland flood and now. So the fourth time in the century. So, and for the first time, since 1991, we’re going to have it as a certainty for the June quarter. So how we respond will be important. What happens in a recession is everyone stops spending. We’ve already had 600,000 jobs were lost in April and the hours that people work declined by nearly 10%. So a massive, massive, really fast contraction. And that means people spend less. Now it was hidden a little bit because the figures are backward looking and weren’t really considering the last week in March, that was severe. And it was hidden because everyone went out and bought toilet paper and other things. So there was spending. So what you’ll see is what people spent on, was actually food went up. [inaudible] discretionary spend, the orange is discretionary, so we didn’t have to buy it wasn’t do or die, but alcohol went up.
I don’t know, maybe it was do or die. Maybe it’s a lockdown thing. Communications, we still had to get on our phones, on our internet, even more working from home, so that went up. Furnishings and household goods, Bunnings, and household stores that sold blankets and doonas and pillows and stuff like that. Because people were at home, they invested a little bit more in those sorts of things and education services. Everything else was negative. So purchases of cars, goods, services, even gas, electricity, and obviously entertainment and the arts and all of that was severely declined. Transport services, nearly 14% there. So big declines across the board in what we’re spending. And we can see here when we look at services down there by record amounts. So the amount we spent on services, partly because things were shut down, but are people going to spend more coming out of lockdown with joblessness is unlikely.
And the treasurer has already said that it’s going to, we’re in a recession and the June figures are going to be far more severe. We are not as bad as other countries on a positive note. We can see France here, they declined in their March quarter, nearly 6%. So 0.3% of all the developed economies in the world, we’re in the right country. We’re in the right place as a start. [inaudible] can’t just shut down. I’ve been saying this for months. You can’t just stop everything. Order everyone to stay in their homes, industry just shuts down and then not have the aftermath. So we’re taking the medicine of that. That’s the pill we have to swallow now. And that’s going to flow through. If we look at confidence though, confidence, consumer confidence. If the reserve bank is saying, we’ve got a recession, the way to stop a recession is by businesses and consumers being confident and going out and spending money. The quickest and shortest route to that is via property.
Now, let me explain that. Every country in the world is affected and most sectors have been exposed. So how do we create confidence in Australia? In Australia, as opposed to any other country in the world, we have a love affair with property. And most Australians store most of their wealth as equity and property. We’ve had a market that’s a 30 years. We haven’t had a recession. We haven’t had a downturn. Prices haven’t fallen significantly. In fact, on average, since records were kept, they double, property prices double in value every 7 to 10 years. So we have a lot of people with a lot of their wealth tied up in property. Now, last time we had a little blip with the rest of the world, suffered immensely was the global financial crisis, but our property prices didn’t really fall in. And in fact, we avoided a recession and we did that because, A, of our property market and B, because we had mining and we had China to support us in business.
But now, unfortunately we haven’t got mining anymore and China is not going to help us through this time. And we’ve still got property. But part of our property, the demand for property is dependent on foreign students, foreigners, migrants, immigration. People coming into Australia as skilled migrant workers buying our properties. So there’s two ways we get population growth. One, and the obvious one is through having babies, but obviously that’s a longer burn. They’re not going to look at buying property for about 20 years. So the quick fix is immigration, and that’s what Australia has been relying on. An immigration policy that grows our population to support our economy. The bigger the population, the bigger the economy. You look at Australia with 25 [inaudible] million people. We’re doing pretty well to rate with the rest of the world that has hundreds of millions of people driving an economy. And we’re still a player.
But this time round, we’ve lost immigration. Where we’ve got, rocky road relationship with China and they buy most of our exports. So we’re dependent on our income from China and they’re not there this time, and we don’t have the demand for mining because China are contracting themselves. So we’ll have to rely on the local market, but property is a pillar of confidence. So if we look here, this big blue slab of the pie is all of the owner occupied homes. Most people store their wealth. If we look at wealth in the economy, in their owner occupied home, or the green slab here is their property investments. So investors buying property. The red bit here is superannuation, but you’ve also got to remember, that’s probably part property as well because people use their super funds and super funds buy property.
So property is a good, well over three quarters of what we measure our wealth from as consumers and businesses. What that means is, if property prices fall, we lose confidence. If I’ve got a $500,000 house and in a recession, the property market crashes and the bank valuation comes in at $400,000, I’ve lost in effect, even though it’s only on paper, I feel I’ve lost $100,000. So I’m I feeling good now? And I’m not feeling confident, I’m feeling pretty bad about everything. And I’m really, really worried. I’m not going to go out and spend money. And thus, the economy contracts further. CoreLogic have put out the figures. So there is $7 trillion in our economy tied to our residential real estate market. So the blue in the honeycomb here. There’s $2.9 trillion, much smaller amount in our superannuation, so the orange honeycomb. Our stocks and shares the Australian stock market is the gray here, $2 trillion, and $1 trillion, the yellow there in commercial real estate.
So when we look at the wealth around our economy, in the private sector, it is definitely overwhelmingly stored more than 50% in residential real estate. So when the government looks to show up confidence, when the treasurer says we’re in a recession and we need people to be confident, and we’re going to pump money into the economy, where are they going to pump it? You guessed it ,into the blue section. So they’re going to spend on infrastructure, and, roads and, builds that are going to support the property market. But they’re also going to stimulate the housing market. So the construction industry accounts for 8% of our revenue. So a significant part of the economy of what we earn if Australia were a business, 8% of that is tied to the construction industry. And it accounts for 10% of jobs in Australia. And there are many more industries as a knock-on effect that are impacted by construction. So real estate agents, that sort of thing. The property market is a behemoth of an industry.
So the government want to keep construction going. So they’ve released some stimulus measures today as to how they’re going to support that area of the economy and rebuild confidence. And as we know, our financial sector, our banks are heavily exposed to real estate, especially residential real estate. So if you look at their mortgage books, the money that they lend out, that makes up 80%, the equivalent of 80% of our GDP is residential mortgages. So the last time we had a blip in property prices in 2018, 124,000 millionaires lost their status. If you look at the Credit Suisse list of millionaires and more than any other country in the world, because Australian’s wealth is tied to real estate. Real estate goes down, the wealth effect, what they call the wealth effect. The fact that we feel poorer, caused the economy to contract.
So the average Australian was worth, according to the Credit Suisse data, $US411,000. And when the property market fell a bit, we became on average, the average per capita person in Australia was worth $US386,000. Still wealthier per capita per person, than other countries in the world. But you can see that rises and falls in property markets affect our confidence and our net worth. So a lower dollar, which we’ve got at the moment and falling house prices mean we’re all worth less. So in 2018, we saw that when the wealth effect was impacted, when property prices went down, when our net worth went down, then consumer spending and confidence fell. So consumer spending makes up half of our economy. We need people to be confident. We need people to go out and spend money. And that’s probably going to be threatened come September. When the holidays people have had on their loans come to an end. When the government stimulus packages like job keeper and job seeker come to an end. And the government is now therefore looking at plan B.
So they’ve released their fourth stimulus package now, and it’s far more targeted. So it was emergency, cut and paste patch job, when everything went pear shaped with COVID. And what they did was quickly on the steps of parliament. They pass laws, they handed out job keeper, job seeker, all sorts of stimulus packages, but they were generic. What they called in the time of the great depression. They referred to this stimulus as helicopter money, the government, literally flying a helicopter over and throwing money out the doors so that people could catch it. Now they’re being a bit more strategic and laser focused about it.
So they’ve brought in what they call the home builder package. And how it works, there is, it’s $25,000 for new builds and substantial renovation. So it’s a government grant of $25,000. It’s only for renovations over $150,000. And to qualify, you have to be an individual earning $125,000 or less if you’re single or not more than $200,000 combined income as a couple. You can’t claim it in a company or a trust. It’s not for investment properties. It’s only for your owner occupied property. And it applies to houses up to $750,000 in value. Now there’s a few more restrictions around it. So it’s not just for home first time buyers, it’s any owner occupier. And it’s for new homes, new builds or big renovations. So over 150,000. You have to apply as an individual. You can’t apply in a company or a trust. You have to be over 18 years of age and an Australian citizen.
And we talked about the income caps. There are over 125 for a single, 200,000 for a couple. Therefore all building contracts signed entered into between the 4th of June and the 31st of December this year. So you don’t have to start doing the work to get the grant, but you have to sign the building contract. Has to be with a licensed builder. Can’t just be a Cousin Vinny or anything. It has to be a proper Australian building contract. It’ll be administered through the states.
So the states will be the ones who, where you apply to get the money. And the home has to be valued up to $750,000. Now, if it’s house and land package, that includes the land as well. And it’s for renovations between 150 and 750, but the property can’t be worth more than $1.5 million before the renovations. And it can’t be things like tennis courts or luxury items or outdoor things. It has to be real renovation like kitchens, bathrooms, decks, additions. It can’t be a granny flat or something separate for an investor. It can’t be for investors at all. And it can’t be for swimming pools or other things like that.
But if the money is going somewhere, and if it is the backbone of an economy, you want to put your money on that horse in the race. So property is definitely the place to be over the longer term that it’s in the government’s and the economy’s best interest to look after residential real estate. And we can see that they’re doing just that. This is designed for jobs, for builders, for tradies, to keep the whole industry propped up because their pipeline of work is running out. So come September, there’s no new builds and consumer confidence isn’t there for people to come in and enter the market.
So they’re manufacturing it by putting money the $688 million into this scheme. So if you’re wanting to renovate your own occupied home, or if you’re wanting to get into the market with a house or land package or a new build, now maybe its the time, because you can take advantage of that grant. Obviously we’re not out of the woods yet. And they’re going to keep on dancing and they’re talking about, we’re still at a time of uncertainty. So the government Josh Frydenberg has said, look, we’re going to review JobKeeper. We might cut it short early. We might put the money more targeted places like this. Everything is watch, weight, see and measure. There’s no playbook for this. But the big takeaway right now is that for the first time, in 30 years, we’re entering into a recession. If you were and lived through the last recession, interest rates were up at 18%.
A lot of people lost their shirts off their back. So again, it’s an uncertain time. It’s going to be for a long time. So treasury says between five and seven years, and we’ve just got a hunker down and what’s going to happen is people are going to get nastier. They’ll get more litigious. There’s a grab for finite money. And everyone’s hungry. People aren’t fat and happy anymore and comfortable. People are getting really, really desperate, desperate times, desperate measures. So first thing you have to know, you can’t control any of this, but what you can control is yourself, your situation, your response. First thing to do is, Jack Ma, read a quote from Jack Ma yesterday. He said, “Right now it’s just survival”. Basically it’s staying alive. Businesses just have to stay alive. Don’t worry about growth or profits or anything else. Tread water, keep your head above water, just get through it and stay alive.
It’s not what you make. It’s what you keep right now. And the same applies to us on our wealth journey. It’s what we keep. So I’m going to be talking about that in a special briefing tonight. If you are not protected, if you haven’t guarded against the downside and you’re not focusing on what you keep with the troubled waters ahead, that’s the first thing you need to fix now. So in the description section of this live stream, I’ve put a link. If you haven’t already registered for that and you’re exposed and you want to get your house in order and shore things up before it all goes pear shaped, then now’s the time to do that. So head over to that link and register for tonight.
That’s it for today. However, if you like this, share it with your friends. So I want the ripple effect. I want people to be able to join our community, to learn more, to share knowledge and to empower each other. And that’s what this is about. So make sure that if you’re inviting a friend, there’s free content for anyone that you tag them in to the comments section. And don’t forget to like us, follow us on YouTube, subscribe and hit the bell. And you’ll be notified every time we release new content. In the meantime, stay safe, take care, and we’ll speak at our next state of play next Tuesday.