A flight from uncertainty to quality and safety will draw investors away from the US to traditional property safe havens like Melbourne and Sydney.
In the wake of the shock US election results, investors worldwide have been clamouring to figure exactly what a Trump presidency would do, and the effect on their investments.
There is no easy answer. Nobody can really predict what Donald Trump will do; in fact, the Trump transition team might not have fully mapped out the implications of Trump’s major campaign pledges. During the campaign, much of Trump’s economic rhetoric was very hard line, but since election day, a lot of Trump’s language appears to have softened.
There are four key areas of economic policy that will affect global property investment in varied ways:
An increase in infrastructure investment – possibly boosting the US economy and creating jobs;
A lowered corporate tax rate – potentially clawing back corporate funds held overseas;
A trade ‘war’ – raising tariffs on foreign goods and pulling out of trade arrangements; and
Increased politicalization of the Federal Reserve – possibly having far-reaching effects on investor confidence.
If these policies work, the US economy will grow stronger, increasing inflation, leading to higher global interest rates, a lower Australian Dollar, and some significant effects on the Chinese economy.
Donald Trump has consistently advocated repudiating the North America Free Trade Agreement (NAFTA), designating China as a “currency manipulator” and imposing tariffs of up to 45% on Chinese imports. As US-bound goods account for 18% of China’s exports (and 4% of its GDP), this could have a significant effect on the Chinese economy and consequently on the Australian economy.
Chinese demand for Australian resources could drop as their production drops, but Chinese investment in US property holdings could decrease, making way for yet more investment in the Australian market. This would be in part the result of Trump’s declared trade war on China, but also because foreign investors view Australian property as a secure long-term investment due to Australia’s sound political and banking systems.
In Australia, foreign investors are limited to buying new and off-the-plan residential properties rather than established properties but can buy established commercial properties. This trend towards investment in property during times of economic volatility is known as “flight to quality”.
As long-term property prices in Australia have remained fairly stable, the Australian property market is poised to benefit from this international investor preference for quality and secure investments.
‘LITTLE IMPACT FROM RATE RISE’
Another major effect of Trump’s economic policies will be his influence on US interest rates. During the election, Donald Trump accused the US Federal Reserve of keeping interest rates low, and signalled that a Trump administration would bring about a rate rise. This is an unprecedented politicisation of the Federal Reserve, and there could be more scope to increase the President-elect’s influence with two open seats on the Fed’s Board of Governors. This uncertainty would no doubt undermine confidence in US monetary policy, but a US rate rise could also give worldwide central banks the excuse they have been looking for to raise their own rates.
Over the long term, lower interest rates increase the value of property, and the effects of rate rises are more pronounced in the first home buyer and luxury ends of the market that are more rate-sensitive. It’s likely, however, that even with a rate increase, Australia’s property market will move from strength to strength. As an example, in both Melbourne and Sydney, more properties have been sold since the US election day than in the weeks prior.
Household confidence appears to be strong, and stricter mortgage underwriting standards since the global financial crisis have not dampened demand, but presented Australian property as a more stable and attractive alternative to investing elsewhere.
In fact, in the last three months, over AU$400 million worth of Melbourne development sites have been sold to Chinese investors, and this is only set to continue as investors from far afield see the enormous opportunity in investing in property in Melbourne’s burgeoning suburbs.
DAMIAN MANNIX is Director of The Agenda Group which delivers public policy, communication and strategic solutions to companies, agencies and governments in Australia.