Aussie Property: Entering the Buy Zone

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I believe there is a massive opportunity brewing that few people can see right now. This is where big gains can spring from. It’s going to take guts on your part though.

Interested? I hope so.

We’re going to talk about Aussie property!

But don’t worry if you’re only into shares.

You’ll be able to cash in on this idea via the share market, too.

Which way is Aussie property headed? Find out below!

You know the background…

After Australia’s property peak in 2017, there has been an ongoing debate as to whether the market will keep falling…or find a floor.

It’s very difficult to know what to do under these conditions. Decisions around property involve large sums of money.

And in case you missed it, Moody’s latest forecast indicates an average 7.7% decline nationally in 2019 — with the damage forecasted to be worse in some cities than others.

Other analysts have come forth predicting some sort of 21st-century Armageddon.

Here is what Martin North of Digital Finance Analytics has to say:

Sydney and Melbourne houses will suffer price falls of 20 to 30 per cent, while high-rise units could slide by up to 50 per cent from their peak prices in 2017.’

Now, that’s a ballsy claim.

I completely understand that forecasts like this may worry you.

And you may be wondering if there is an end in sight to this decline.

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Well, I’m here to tell you that Australian property is potentially moving into a compelling buy zone.

Did you see the news about this little tweak?

Part of the reason for the decline in Aussie property is because the Australian Prudential Regulation Authority (APRA) cracked down on lending.

That meant the Aussie banks imposed strict criteria on new lending.

That seems to be changing. Just this week, The Australian Financial Review reports that the RBA and APRA are toying with the idea of easing some of this burden already.

Christopher Joye writes…

This would improve the average home buyer’s borrowing capacity by more than 5 per cent and increase demand in the weak housing market.’

This was entirely predictable. Politicians and government bureaucrats will do everything to protect asset values, especially real estate.

Looser lending policies will help real estate to stabilise.

You also might be surprised to know that rents are still strong in the industrial market.

You can see this for yourself in the following chart.

Source: BIS Shrapnel

But we want to see the potential for growth, too.

Where’s that going to come from?

Well, Australia’s infrastructure boom keeps rolling on. There’s over 200 infrastructure projects currently planned or in motion around Australia, totalling approximately AU$300 billion.

It’s hard to see a major downturn happening anytime soon with that kind of spending going on.

Here’s why. All these new airports, rail projects, telecommunications projects and roads will feed into higher property prices wherever they go in.

And that’s not all. Here is another catalyst that could turn the price of property…

It has to do with the Reserve Bank of Australia and our official interest rate.

Australia is going to zero

In March, the Australian Bureau of Statistics (ABS) published a report detailing Australia’s dull economy, with quarterly growth coming in at 0.00%.

This is important because it sets the scene for monetary policy by the RBA.

This can get confusing. Let’s do a micro crash course.

Both the RBA Governor and Federal Treasurer agree there should be a target for inflation in Australia’s monetary policy. And that target is between 2-3% over the medium term.

Here’s the gist: When inflation is over the target, monetary policy is set to lower inflation.

On the contrary, when inflation is below this target, monetary policy is adjusted to boost inflation.

That’s where we are right now. Australia’s growth figures show this clearly. And one of the main ways the RBA handles a low inflationary environment is by cutting interest rates. I expect it to do this in 2019.

As an investor, you can benefit from a decline in interest rates. It can lower your monthly repayments on any loans and boost your borrowing capacity.

But what happens to property when the RBA drops the cash rate?

Well, in the past, it has acted as a boost to property prices.

And if the RBA does decide to lower the cash rate, which I think is likely from here, it would create the perfect opportunity for you to profit.

And you don’t need to take out a mortgage, either.

Take real estate investment trusts (REITS), for example. REITS are a fantastic way to gain exposure to the property market.

This major index is about to trigger a buy signal

I want to let you in on a little secret.

When I’m looking at the major ASX-listed property companies, I don’t see any major warning signs.

Let me explain.

I want to draw your attention to the S&P/ASX 200 A-REIT Index (XPJ).

The XPJ index tracks A-REIT companies in the top 200. And by using this index, we can gauge the general health of the property market.

Take a look at this chart.

A close up of a map  Description automatically generated

Source: Optuma

As you can see in the chart, the fall in value from the 2007 high was dramatic for A-REITS in Australia.

Let’s talk about that now. While residential property prices have been falling throughout Australian cities, this overall index has not suffered much.

In fact, since the drop from the high in 2016, the XPJ index has been  working its way back up.  

I dug deeper into the individual companies that make up the XPJ index. Several of them are also in very strong uptrends.

Look at the chart again. I’ve noted the high this index made in 2016.

This looks like a key level to me.

I would encourage you to look for this index to go higher than this level and stay above it.

If this occurs, it would suggest that the worst is over for property and investors are now looking to a brighter future.

That’s at odds with the doom and gloom in the mainstream press. But that’s what the market is saying.

I believe property and property stocks are going to go higher than we currently anticipate.

Until next time,

Jim Rickards Signature

Jonathan Evans,
Analyst, Profit Watch


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