Australian Property and the US Election

Blog
Friday 30th October 2020

Australian Property and the US Election

Blog
Friday 30th October 2020
Written by Chris Lioutas

Australian Property Update 

The Australian property market remains in a state of flux, but the outlook is significantly better than it was back in March, thanks to a combination of extraordinary fiscal and monetary stimulus and other government measures, which were needed following the government’s chosen virus policy path of suppression (ie. lockdowns).

On the commercial property front, retail and office property values have seen somewhat of a recovery, but remain well off their pre-virus highs, whilst industrial property values have powered ahead helped by the growing thematic shift to online retail. There are still plenty of issues to work through on the retail and office front, with significant pressure remaining on tenants, tenant re-leasing spreads and space, landlord incentives, and demand/supply dynamics. Some properties, landlords, and tenants will fare better than others. At this stage, there’s still too many unknowns regarding the ongoing government response to the virus, the potential for a vaccine, and how much of the changed consumer and business behaviour is temporary versus permanent. Commercial property will recover, however those unknowns will dictate how long the recovery takes.

On the residential property front, current market conditions are significantly better than expected earlier in the year, where some were expecting a more than 20% fall in property prices on rising unemployment. That has not materialised due to 3 main factors: debt repayment deferrals from the banks, the extraordinary JobKeeper and JobSeeker programs, and the government “instructing” the banks not to foreclose on anything (ie. government and/or central bank would provide additional support if needed). That has resulted in a very small fall year to date in the national capital city average with Melbourne and regional Western Australia being the hardest hit. Now volumes have undoubtedly been low whilst auction clearance rates have been rising over the last few months. Commonwealth Bank currently expects a peak to trough fall of around 6% nationally and for the trough to end in Q1 2021.

We think there are way too many variables and unknowns right now to pick the direction of the residential housing market over the next 12-18 months. We think the government and central bank have and will do enough to limit any further material falls, but we’re not yet convinced that a price boom is likely either.

The case for a residential house price boom include:

  • Limited supply
  • Lower borrowing costs
  • A lowering of borrowing standards
  • Changes to bankruptcy laws
  • Government and central bank support of the mortgage market and any rising bad debts
  • Government needs to get the economy going and rising house prices will assist

The case against a residential house price boom includes:

  • Tapering of JobKeeper and JobSeeker will see some households underwater versus their pre-virus incomes
  • Stubbornly high unemployment and very low wages growth
  • No immigration for some time
  • Oversupply of units/apartments in some cities
  • The household was already heavily indebted pre-virus (the most heavily indebted household sector in the world)
  • Potential drop in foreigners buying

We do know the residential landlord market remains tough from here in light of higher unemployment, low wages growth, and potential excess supply. Location and property differentiation will be key.

All in all, it’s impossible to conclude right now the next direction of residential housing prices. As much as governments and households are hoping for rising prices, hope is not an investment strategy.


US Election Update

There’s never a dull moment when it comes to US politics and particularly during a Presidential race. Regardless of your political persuasion or whether you think US politics doesn’t affect you, the US remains the world’s superpower and US politics and policy can have a significant impact on investment markets.

Right now, less than 10 days out from the election, it’s important to understand how markets may be impacted or react to the result. Much of the share market rally over the last 3-4 weeks can largely be explained by the market’s acceptance that a Democrat / Biden clean sweep (ie. House, Senate, President), as indicated by the polls and betting odds, would usher in a huge stimulus package, lead to less adversarial foreign policy, and give the elected government sufficient power to “get things done”.

However, the polls and betting odds look eerily like they did leading into the 2016 US election with Clinton leading Trump. The difference this time is that we have Covid-19 and President Trump as the 1st term incumbent. Long term history shows that 1st term Presidents generally get a 2nd term and recent history shows that election polls can be well and truly off. As 2016 showed, President Trump didn’t win the popular vote, but he did win the Electoral College which means key swing states are likely to come into play this time around too.

Putting that aside, this is what we know:

  • US equity markets generally go up after a Presidential election
  • Republican policy is generally more Wall Street (ie. share market) friendly
  • President Trump, if re-elected, will continue to operate on the same platform he has for the last 4 years – ie. smaller government, lower taxes, pro-US policies.
  • Joe Biden, if elected, will increase taxes, support a very large stimulus package, and support pro-environmental policies.
  • Both the Democrats and the Republicans are anti-China, but Democrats support continued globalisation whilst Republicans under Trump prefer less globalisation.
  • Republicans prefer a faster re-opening of the US economy whilst Democrats prefer a slower re-opening.
  • A President Trump re-election will likely result in both a US equity market and US dollar rise, with a faster short term recovery in the economy.
  • A Biden win could see the US equity market rise (under a huge stimulus package) or fall (under the burden of rising taxes) and likely continue to downward pressure on the US dollar, with a slower short term recovery in the economy.

As you can see, there are a lot of variables and a lot of unknowns for the market to digest, and significantly more than those listed above. As it pertains to global equity markets, the following is key to note:

  • Markets won’t like a delayed result – ie. the result could take some time to obtain given the number of postal votes. In addition, if the result is tight, it’s likely either side will request a recount.
  • Markets won’t like a messy result – ie. a result whereby Trump or Biden win with very small majority or no majority in the Senate. Believe it or not, a Democrat House and Senate with Trump retaining the Presidency is actually possible!
  • Markets will like a decisive result – ie. a clear election win for either side will see market volatility subside
  • Markets will like a clean result – ie. a Biden or Trump victory with either clean sweep of the House and Senate, or at the very least, a clear majority in the Senate.

The election is 4th November Australia time (3rd November US time). It will make for an interesting week with a Melbourne Cup with no spectators and a Reserve Bank of Australia meeting which is likely to see the Bank cut the Cash Rate to 0.1% and launch a large bond buying program (quantitative easing).

Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972


Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a factual nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns.