Where do the uber wealthy really want to live?
The good people of Toorak live in Australia’s most desirable premium suburb.
This area has seen the highest views per listing on realestate.com.au for suburbs with medians over $3 million, in the six months for 31 October 2019.
In Sydney, it is beachside Bronte that tops the list. Australia’s strongest capital city price growth suburb, Vaucluse, is also on the list.
What is the outlook for very expensive suburbs? It is very positive.
Although it is unlikely that we will see double digit price growth across Melbourne and Sydney any time soon, in premium suburbs this is increasingly likely.
Perhaps next year, a $12 million home in Point Piper will seem like a bargain.
Wage growth remains flat and unemployment rises slightly
Wages growth remained flat in the September quarter and unemployment rose slightly. At this point, interest rate cuts are continuing to make very little difference to wages growth or employment.
Long term, wages growth has slowed significantly. Over the past 20 years, average annual growth has been 3.2% per annum. Over the past 12 months, they have increased by just 2.2%.
There are a number of interesting differences across different industries.
Almost all industries are now seeing lower wages growth compared to their long term trend.
The industry most impacted has been construction.
Whereas annual average wages growth over the past 20 years has been 3.7% per annum, growth over the past 12 months has been just 1.9%. Given low levels of residential construction in the pipeline for 2020, this is likely to remain the case until at least 2021.
The industry least impacted has been health care and social assistance – given our ageing population, health spending will continue to rise and people employed in this sector will be in high demand.
Electricity, gas, water and waste services has also performed well, likely driven by privatisation of services in Queensland and NSW.
Why are wages so stuck? Unemployment has risen slightly, but was at a rate at which we should have seen better wages growth.
There are likely to be a number of reasons:
– Employers are more hesitant giving wage rises – this isn’t necessarily because they are hoarding profits, but could be for other reasons like changes to industry structure, technological change, government regulation, and disruption.
– Bonuses are more likely to be paid as a reward for performance, as opposed to being given a wage rise.
– Employees are hesitant to leave for a new role – again for a variety of reasons – higher debt levels mean they are more risk averse, low mobility of labour in Australia, changing family types.
– Employers are offering greater perks to keep people in a company that aren’t financial – nicer workplaces, greater flexibility, health and wellness.
Will we ever see high interest rates again?
In January 1990, the official cash rate was at 17.5% and it currently sits at 0.75%.
Interest rates in Australia have never been lower and most mortgage holders are paying a lot less on their loans now than they were a year ago.
With banks being urged to lend more and consumers and businesses being urged to borrow, how likely are we to see rapid interest rate rises and will they ever get back to double digits?
Interest rates will rise again at some point. At this stage it is very uncertain as to when that will be, primarily given there is so much turmoil in political and economic conditions overseas and interest rates do not rise unless economic growth is very strong. Some forecasters are saying 2021/22 will be the year, but what they are saying is that it most definitely won’t be next year and quite possibly not until the year after.
Between now and then, conditions can take a twisting path – for example, the US/China Trade war could be resolved, or it might be resolved a bit, or even not at all. This alone makes an enormous difference to the outlook.
As to whether we will see double digit interest rates again is more certain and the answer is, highly unlikely in our lifetime. This is more because of demographic change and wealth distribution, as opposed to any fluctuations in economic growth.
Ageing populations around the world has created a lot of savings – there is more money in the world than ever before, and an ageing population is going to become more apparent over the next 50 years. This means even greater creation of wealth. With more money to lend out, interest rates will decrease.
A greater concentration of wealth also leads to a similar situation – as more money becomes concentrated in fewer people’s hands, this also means more money to lend out. Again, lower interest rates.
The last time interest rates got very high was in the 1970s and 1980s. The birth of the Baby Boomers was the largest increase in population ever recorded and in the 1970s, the first wave of them began to enter the workforce in droves. As they began to earn money, they also wanted to borrow money. This forced up interest rates. Such a surge in population occurring again right now seems very unlikely.
Clearance rates still remain high
Last weekend there were 1,080 auctions in Melbourne and 679 in Sydney. Still down on same week as last year (1,127 in Melbourne and 844 in Sydney). As at Saturday night, clearance rates were 76% for Melbourne and 75% for Sydney.
The theme of low listings and high demand looks set to continue for the remainder of 2019.