Following the surprise result from the US election, I have had several people ask me about my views on the impact on the Australian property market and banking system. My advice – with acknowledgement to Douglas Adams – is “Don’t Panic”. We think both will hold up well.
The financial markets in Europe and US did not take a tumble overnight, because despite the initial surprise, the new administration is likely to drive US economic growth harder (despite questions about funding) and the likelihood of a Fed rate rise in December may have receded.
The ASX All Ordinaries has recovered from yesterdays fall.
Bearing in mind that banks in Australia still fund some of their loan books from the international capital markets – and in recent months funding costs have risen a little – any major spike in prices would have a negative impact on bank funding and may lead to out of cycle mortgage repricing. We were expecting this to happen anyway, and recent events may bring this forward.
Banks are holding more capital than they did. Mortgage pricing has become more rational, and provisions are under control, despite some pockets of rising mortgage defaults in the mining belts.
The current RBA cash rate is, we think, likely to stay at current levels because the current settings are supporting some momentum in the property market, and a further cut would only drive this harder, when in fact household debt is already very high. There seems no compelling case for a cut in the short term, but momentum may change next year. If there was a cut, we believe the banks may in any case pocked some of the cut.
If a trade war were to break out, and tariffs start to emerge, we could be hit as China reacts, but then again, if construction fires in the US, potentially we could access some business there. It is too soon to know.
Latest readings on household confidence and demand for property is still quite strong and whilst mortgage underwriting standards are now tighter momentum remains and we do not think a major fall is coming anytime soon. Credit growth will continue, but more slowly.
We also think that given some uncertainty in the US, international investors may turn their eyes toward Australia, with its steady growth, and strong property trends. We have updated our forecasts for foreign investors in the local property market as we think they may find the market more attractive.
So, overall, we do not think there will be immediate and dramatic fall-outs. The medium term, as we begin to see policy changes after January 2017 are less clear. But not enough evidence yet to suggest major impacts on the property market, or household debt.
