Impact of GEC (GFC) on Local Property
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Michael Chappell is the director of Pracsys Economics. He discusses the impact of the global financial crisis on local property markets. The key points are that property, equity, and commodity bubbles burst simultaneously, leading to a deep and quick economic decline. Unemployment is expected to rise to over 8% and further falls in property prices of 10% or more are anticipated in 2009 due to unemployment. On the positive side, Australia has strong population growth and will eventually see supply catch up to demand after 2012.
Impact of GEC (GFC) on Local Property
- 1. Impact of GEC (GFC) on Local P L l Property t Michael Chappell Director p r a c sy s .
- 2. Outline 2 ! Michael Chappell ! What went wrong? ! What will happen next? ! The good news g ! The bad news ! Megatrends for cities p r a c sy s .
- 3. Michael Chappell 3 ! Economist with 23 years experience ! Founder and Director of Pracsys Economics ! Research program economics of urban systems p r a c sy s .
- 4. Pracsys 4 ! Offices in Perth, Sydney, Brisbane ! Feasibility, strategy, impact ! Economics of urban sustainability www.innovation4cities.com.au www.pracsys.com.au p r a c sy s .
- 5. What went wrong? 5 ! OECD June 2007 " “the c rrent economic situation is in man ways much better than we current sit ation many a s m ch e have experienced in years” " “soft landing in the USA and strong & sustained recovery in Europe” " “solid trajectory in Japan” " “unprecedented growth in China and India” ! Two months later, BNP closes three subprime funds…. Lehman Brothers FM & FM Basis… funds Brothers, FM, p r a c sy s .
- 6. What happened? 6 ! Economy has declined deeply and quickly ! Deeply because of simultaneous bursting of property, property equity and commodity bubbles ! Quickly because of the amount of private debt in opaque packages p r a c sy s .
- 7. What happened? 7 ! 2007: +5% GDP growth but Australia’s aggregate demand due to change in debt: +20% Australia, +23% USA A t li ! Raiding the kids piggy banks! kids’ p r a c sy s .
- 8. How it Happened 8 ! Commodity boom & cheap debt pushed household expenditure & investment in housing & equities ! Much debt was ‘on a knife’s edge’, exposed by subprime crisis – worldwide (Madoff’s Ponzi) ! Bad debts exploded & financiers withdrew funds ! Growth stalled - recession - unemployment ! Asset prices fell – margin calls – negative equity p r a c sy s .
- 9. What happens next? 9 ! Economy will contract with unemployment 8% + ! Bad debts and savings will increase ! Government Stimulus Package straight to private savings (or debt reduction) ! Package = $70b, private debt = $2,000b P k $70b i t d bt $2 000b ! Asset demand goes from debt-fuelled to income-fuelled g ! All asset prices will fall – but how much?? p r a c sy s .
- 10. The Good News 10 ! Australia is in top 5 economies globally ! 3 years p y pent up demand residential, commercial? p , ! Population growth much higher than expected " Natural increase " High immigration (p g g (poorer performing economies) p g ) " Low dwelling supply to support prices ! New areas supported by first home buyers ! Interest rates falling – a bit g p r a c sy s .
- 11. The Bad News 11 ! 7/10 of Australia’s trading partners in recession ! Property bubble much longer than 1990/91 ! 10% - 20% fall already (finance freeze effect) – another 10% + in 2009 (unemployment effect) ! Tokyo h f ll T k has fallen 72% since 1989 peak i k p r a c sy s .
- 12. The Bad News 12 ! If 20% + fall – mortgage stress doubles ! Car dealers: 21% fall sales Feb 08 – Feb 09 ! First home buyers don’t know about unemployment… ! Banks are increasing profit margins p r a c sy s .
- 13. On Balance 13 ! Demand for property will fall, which is good ! Some projects fall over due to finance (& bankruptcies) ! Prices decline 2009/2010 (unemployment effect) then flat until 2012 ! Supply will eventually catch up (cheap immigrant labour?), S l ill t ll t h ( h i i t l b ?) then gradual increase beyond 2012 ! China may provide ‘silver bullet’ – but with our assets! p r a c sy s .
- 14. Megatrends – Abundance to Scarcity 14 ! Food ! Water ! Transport ! Energy gy ! Finance p r a c sy s .
- 15. Food 15 ! Access to protein will shape cities i f t A t t i ill h iti in future ! Protein comes from beef, pork, chicken ,p , ! Most feed for livestock comes from fishmeal ! Fishmeal is nearly gone! Food Conversion Ratio Critical for cities: Beef 12:1 secure local food production Pork 8:1 c ose popu at o us g close to population using renewable inputs Chicken 6:1 (aquaculture, grains..) Fish 1:1 p r a c sy s . World Food Organisation, 2007
- 16. Water 16 ! Most drinking water goes on lower order uses ! Reuse, recycle, repurpose ! Innovation in decentralised capture, storage and capture use of water will reshape cities Critical for cities: Diversification of water sources, improved sources reuse across all user types and zero liquids discharge from industrial estates p r a c sy s .
- 17. Energy 17 ! Fossil fuels for power generation in decline ! Decentralised power generation from renewables is rising – but peak load capacity is weak ! We need better portable storage (eg: nonobatteries vs NiMeHi) and fixed storage (vanadium flow batteries) Critical for cities: power storage innovation has lagged (car companies?) and new efficient technologies are needed p r a c sy s .
- 18. Transport 18 ! Urban sprawl has separated people from city amenities and jobs (particularly smart jobs) ! Car use has grown based on cheap fuel ! Public transit systems work best serving dense urban agglomerations Critical for cities: private transport based on renewable energy and public transport serving dense, diverse activity centres p r a c sy s .
- 19. Finance 19 ! World finance system is badly broken ! Globalisation and ‘innovation’ separated sources and innovation application of funds too much ! Regulation must tighten, but only to improve transperency and information flows ! Bubbles are good for the economy of cities in the long run because they fund innovation p r a c sy s .