Let’s start with what we are fairly sure about and move on to the particularly speculative bits. So we are fairly sure interests rates will rise this year. The Reserve Bank of Australia (RBA) could do this as early as June this year or even as late as early 2023 if it is too proud to admit it has misread the economy. Inflation has started marching upwards on the back of constrained supply of goods, wage pressure, and government funded increased consumer spending. Economists from the major banks are predicting an August 2022 rate rise. To some degree the timing of this is slightly moot as the banks have already started taking steps to move interest rates up. The bigger question is how far they will move and how quickly. I’m thinking these moves will be relatively small and on the slower side. It won’t take much of a rise to take the heat out of the housing market, say 0.5% to 0.75%. Expect the banks to have done this by the end of this year.
The bigger concern is the Australian Economy. Government’s pumped over $300 billion into the national and regional economies over an 18 month period in response to the economic impacts of the COVID-19 pandemic. Virtually all of this money has now been spent or saved and there is unlikely to be much stimulus available to meet any short term economic hiccups. However we still have several industries struggling to survive – hospitality, tourism, retail services, whilst others are precariously balanced such as construction.
The big concern is if significant numbers of these businesses tip over the edge into bankruptcy. This then potentially leaves customers out of pocket, employees without jobs, and spending starts to contract. All of a sudden the economy has the breaks on.
Now not many commentators are talking about this at this point and governments certainly aren’t. Maybe they are glass half full type of people or maybe they are self interested and focused on their own re-election. From my perspective no good ever comes from hiding the truth. You are better to acknowledge it and get out in front of it.
So if you are in the property industry how do you get out in front of this? Well you need to direct your development and investment activity towards the areas which will have demand during this next period. These are the health sector, logistics industries, disability services, affordable housing, community infrastructure, and housing targeted at retirees and seniors.
For those sectors that are facing challenging times the retail development sector is demonstrating a sound approach. It has basically said that it does not plan to develop additional retail floorspace for the next 2-3 years while it lets demand catch up to supply. The commercial office sector should take note. Otherwise it risks shooting itself in the foot and devaluing its existing assets by oversupplying floorspace at a time when there has been a step change in the amount of work hours being done from home.
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