My residential outlook for the year ahead: Part 2

Note: This is the second part of Peter Chittenden's 2015 outlook.

To read Part 1, click here.

Looking further into prospects for 2015: currently, the collapse of commodity prices is making hard work of local economic policy settings.

An interest rate cut looks to be more firmly on the agenda and employment prospects look shaky. Consumers are hesitant, but there is good news at the petrol bowser.

Beyond these leading factors, the residential market and in particular the demand for new apartment projects may slow at the margins in 2015, while remaining strong in key areas.

While the health of the wider economy will have an impact, there are a number of specific policy areas that will more directly influence demand. These include a review of taxation policy, the delivery of major infrastructure projects and planning policy. The falling dollar may, however, act as an incentive for off-shore buyers. This time last year, the AUS$ to US$ exchange rate was $0.89. Today it’s $0.81. Although this is a four and a half year low, the Reserve Bank has suggested the possibility of a greater fall, with the dollar valued closer to US$0.75.

Looking towards 2015, it appears that everything financial will have an impact on the residential property market.

The influence of lower rates for anyone with a home loan or looking to finance will be positive. However, with more caution now apparent in the market, lower rates are not likely to push up demand and hence prices.

What lower rates will do is make it easier to service loans, and as history shows, people tend to use lower rates to boost their mortgage repayments. Cheaper home loans may help to boost spending in other areas, and so benefit the wider economy. Currently, bad residential mortgage loans are at historic lows, which further reinforces how cautious and conservative this market is.

Henry & Murray

In 2010 we had the Henry Review of the Taxation System. Now we have had the Murray Review of the banking system, and it appears that 2015 will at last be a time to act. The Murray Review was wide ranging, but areas impacting superannuation, competition and the taxation system may hold particular focus for the residential market.

While an increase to the GST does not look to be an immediate prospect, the reality is that an increase in the GST would lead to almost irresistible pressure to reduce other taxes, such as stamp duty, which for NSW has delivered a wind-fall in revenue this year.

Already the Federal Government has signaled such a structural change is not possible, given the state of the Federal budget.

However, the Murray report does create pressure for tax reform, that may well involve changes to negative gearing and how superannuation is taxed. Changes here would impact the residential market. Buyers would, of course, welcome a reduction of stamp duty, but any changes to negative gearing could cause investors some pain.

The growth in self managed super funds, and the flow of funds into property, in part highlight the sensitivity of this sector. There are some concerns that over-regulation could have the long-term affect of reducing the pool of savings people can access in their old age.

I think there is a natural tendency for many people to be anxious to manage the fate of their own investments, and so property will remain a popular choice with this group of retirees.

While the banking and tax systems have been under the spotlight, I wonder if there is room in the housing and development market for even more creative forms of finance?

Peer to Peer lending is a new financial tool that is only starting to emerge with some areas of personal finance. Could such ideas spread to the housing market? Could we one day see a Bitcoin revolution in housing finance?

Outside of these policy areas, supply will remain a key issue, supply in some markets is still to catch up with demand, and so this will keep pressure on prices, but this is not a universal trend. Investors are also less geographically focused on their own backyard, and so capital will flow to the stronger markets.

For developers, another emerging reality is that development sites have increased in value and demand remains very strong and competitive. Eventually, high site costs have to be absorbed into the final cost of apartments delivered to the market.

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Infrastructure & Planning

In 2015, there needs to be an acceleration of infrastructure delivery, moving from what can at times appear to be endless planning.

Major projects are now more visible across Sydney, for example, and urgency might accelerate as both the State Government and Federal Governments look to election in March 2015 and early 2017 respectively.

In any election setting, activity on the ground is what counts. Activity means jobs, and delivery of infrastructure is an important goal as construction investment in the mining industry continues to fall.

However, beyond any political will to accelerate the delivery of infrastructure, the other reality is that values and demand are also impacted as areas associated with these works become more attractive to buyers.

Across Sydney there’s now a growing list of major projects underway including the South West and North West Rail links, the light rail to the Inner West already in operation, and the CBD and East light rail, plus the West Connex. Areas near these projects will see further growth in the demand for project sites.

The NSW state Government has also now released its vision for Sydney in an expansive document, A Plan For Sydney. The plan includes an important step as it applies to the 41 local government areas and sets up a new body to deliver the vision. Planning issues are always central to the delivery of new homes and apartments, and so it is to be hoped that the policies outlined in the document become a reality.

Quality To Improve

Finance, taxation, infrastructure and government policy are all factors that impact the residential market, but in a more immediate way, there is also a continued trend towards an ongoing improvement in the design and quality of projects.

As buyers approach the apartment market more as a long-term home, and investors also look for quality, we are seeing some inspirational new projects emerge.

This quest for quality and innovation will continue throughout 2015, as will demand for projects with access to established local services and facilities, including transport.

The market in 2015 looks complex than it did this time last year. The current bull run has been with us since mid 2013, so there is a need to remain alert, as possible changes to interest rate settings and taxation policy may yet hold surprises. The resilience of the local economy will be key.

To read Part 1 of Peter Chittenden's 2015 outlook, click here.