Getting out of property and into stocks?

Thu, 09 Nov 2017  |  

Getting out of property and into stocks

That seems to be a theme developing in the Australian market at the moment, with further evidence of a cooling in the housing market and a coincident lift in the value of the ASX hinting that those with money to invest are avoiding the ultra-expensive, low yielding housing market and instead are looking to the stock market for opportunities.

The Australia stock market is moving higher to the point where the ASX200 index is poised to break above 6,000 points for the first time since 2008. The past decade has been a rocky one for the Australian stock market. There has been the GFC, a commodity price boom and bust, speculators have jumped into and out of bank stocks based on extreme calls on the housing market and many local firms have been dealing with an unrelenting threat from foreign competition.

Some of these issues remain, but a combination of factors appear to be at play in the new found interest in the share market.

Fundamentally important for the ASX outperformance has been the solid profit results from the corporate sector. Profits are being supported by growth in corporate earnings at a time when costs are being well contained by record low wage increases and record low interest costs for business.

With interest rates set to remain at record lows for many months (years?) to come, business profitability is likely to remain robust. A solid expansion in the global economy and still very easy monetary conditions in the advanced economies will continue to spill over to the Australian market.

Housing, on the other hand, is facing its inevitable cyclical downturn after many years of spectacular price increases.

While official interest rates have been at record lows, the banks have been hiking rates for those borrowing interest only and for investment purposes. There has also been a tightening in lending for investment purposes and credit growth is this segment is slowing. Loans for investment in dwellings are now unattractive.

Furthermore, the cost of housing is now a significant deterrent for fresh investment, a point compounded by the dismally low rental yield. In simple terms, buying a dwelling for investment purposes is losing favour. Interestingly, compared to the levels of 2007, the overall level of the ASX is still down around 10 per cent, while Australian house prices have risen over 80 per cent, on average. Housing has proven to be the stand out investment.

It appears that this is starting to change.

With house prices set for a protracted period of weakness and with a very low rental yield, investors are likely to shun additional exposure to property. Money flowing into the stock market will inevitably result.

If there is any sort of investor bandwagon towards the stock market as these trends become increasingly apparent, and history shows rising markets attract enthusiastic investors, the stock market could be set for solid growth, aided by strong investment inflows looking for yield as well as capital growth.

comments powered by Disqus

THE LATEST FROM THE KOUK

Memo to RBA – be careful what you wish for. House prices are falling

Fri, 19 Jan 2018

The recent house price data from Corelogic are showing further falls in house prices.

The falls are, disconcertingly, most evident in Sydney where prices have dropped 0.5 per cent so far in January, which brings the aggregate fall since the September 2017 peak to a chunky 2.9 per cent. This means that for a $1 million property in September, the value has fallen $29,000 in just 4 months.

The house price weakness is not confined to Sydney.

In Melbourne, the Corelogic data shows house prices topping-out. Prices are down 0.3 per cent from the December 2017 peak which, to be sure, is not a large decline after the stunning increases of previous years, but a fall it is.

I'm out of the hammock to look at some facts about Australia's labour market

Thu, 18 Jan 2018

There was another round of euphoria as the monthly labour force data hit the screens. The data showed a nice 34,700 rise in employment in December which brought the total rise in jobs in 2017 to 403,100.

This is good news, to be sure, but how good is it really? What is the context for this increase in employment and how is Australia going in an ever vibrant and dynamic global economy?

Of some concern, Australia’s unemployment rate remains at 5.5 per cent – it actually ticked up from 5.4 per cent the prior month. Interestingly, and something less favourable, is the fact that the unemployment rate has been below 5.5 per cent for just two months (October and November 2017) in the last four and half years. Where is that 5 per cent or lower full-employment target everyone reckons we are near?

What’s more interesting, and a sign of the policy sloth that Australia is enduring at the moment, is that around the world, unemployment rates are falling and are impressively low.

Sure each country will have its quirks but have a look at our 5.5 per cent against these countries.