March was another month of mixed economic signals, but we’re excited about the opportunities the current landscape is presenting. In this month’s update, I’d like to share with you some of our observations regarding the economy, the implications for property markets and also some exciting developments within our own business. I hope you enjoy reading this month’s Company Update.
The Economy
After keeping the official cash rate target steady (4.35%) at the Reserve Bank of Australia’s (RBA) meeting last month, Governor Bullock reaffirmed the RBA’s continued focus on bringing inflation back to target range, and the ongoing theme of mixed signals coming from the economy.
On the one hand, significantly slowing household consumption growth was reported, along with easing labour market conditions. These developments both have the impact of reducing pressure on inflation, which had also moderated over the prior month.
On the other hand, the RBA noted that growth in labour costs per unit of output remained high and some of the price declines in categories like fuel were expected to taper off. The Bank also acknowledged the upcoming implementation of pre-announced tax cuts, and existing growth in household real income. These developments could have an inflationary impact.
Employment and consumer sentiment
Since the release of the RBA minutes last month, February employment statistics were released by the Australian Bureau of Statistics. Unemployment fell slightly from 3.8% to 3.7% in seasonally adjusted terms, while the participation rate increased slightly from 66.6% to 66.7%. While increasing workforce participation can lead to growth in goods and services produced, it’s productivity growth (the amount of output per unit of labour cost) that will relieve significant amounts of pressure from inflation, and the RBA has alluded to this. Without productivity growth, a falling unemployment rate risks increased upward pressure on labour costs (which is inflationary); and more money in the household budget could drive consumption, which is also potentially inflationary.
That said, Westpac reported a 1.8% decline in consumer sentiment. This is unsurprising given cost of living pressures and the mixed signals in the economy. It also isn’t necessarily a bad thing, as cautious consumers are more likely to pay down debt or save, both of which relieve pressure from inflation.
House prices
Another reference the RBA made in their release related to housing. The Bank acknowledged rising home prices and rents; and attributed these rises to demand and supply. In short, a rapidly growing population of people are competing for a supply of housing that is not growing at a sufficient rate.
Reflecting this, Core Logic reported earlier this month that their Home Value Index had risen 0.6% in March, with all capital cities posting gains except Darwin which lost -0.2%.
Interestingly, the composition of price growth has changed. Last year, the strongest price growth was recorded by houses in the upper quartile. This year, however, lower quartile housing has led growth, increasing 3.1% in the first quarter of 2024, compared to the upper quartile of the market which rose 0.7%.
Core Logic also reported that in March, home prices rose for the 14th consecutive month.
This is an important development to note. For a period of time after the RBA began its rate tightening cycle in May 2022, there was a lot of negative press, and arguably, fear mongering, regarding the prospects for property values. Terms such as “mortgage cliff” were used to describe what might happen to house values as people’s previously fixed mortgage rates reset to higher rates. After 13 rate increases, interest rates have now been steady since last November; we’re yet to see any real evidence of a “cliff”, and as Core Logic reports, home values continue to rise, month-in, month-out. As we’ve suggested in prior releases, selling the family home is typically the last-resort response to rising interest rates. Households will attempt to address rising costs by seeking additional income or tightening the purse strings elsewhere, before selling the family home. More importantly, offsetting any sell-offs that may occur due to increasing rates, is the persistent and potentially deepening supply/demand imbalance.
The supply / demand imbalance
The Australian economy has seen consistent population growth quarter-on-quarter for decades, only pausing during the pandemic years. From around 2007 to 2020 population growth, as reported by the Australian Bureau of Statistics (ABS) largely fluctuated between 60,000 and 120,000 per quarter with more outliers on the higher end than the lower end (see Chart 1 below). Over the same timeframe, new dwellings completed per quarter, as reported by the ABS, have generally been between around 35,000 and 50,000, although between 2016 and 2018 50,000-60,000 new dwellings were completed per quarter. During the pandemic, population growth virtually halted, but since March quarter 2022, population growth has consistently been above 100,000 per quarter and at times more than 150,000. New dwelling completions tapered back towards 40,000 per quarter during the pandemic and have remained at those levels. Strong population growth requires strong building activity to keep people in houses – and the more population growth outpaces construction, the more competition you have among home buyers, thus driving up prices.
The Government’s target of 1.2 million new homes over five years is a direct acknowledgement of this supply/demand imbalance, but industry experts HIA forecast that this target is unlikely to be met.
Given the ongoing supply / demand imbalance and in the absence of a significant and persistent pause in population growth, or a significant increase in building activity, it’s difficult to see house prices falling any time soon. On the contrary, our economy appears to be presenting great opportunities for builders, developers, lenders and investors, to work together to bring desperately needed houses to market to meet persistently growing demand; and generate good returns in the process.
Chart 1
Data sources:
Australian Bureau of Statistics, 21 March 2024: National, State and Territory Population September 2023
Australian Bureau of Statistics, 17 January 2024: Building Activity, Australia September 2023
Australian Bureau of Statistics, 12 March 2024: Total Value of Dwellings December 2023
What this means for Trilogy Funds
We see the continued demand for new housing reflected in an increase in funding enquiries to our Monthly Income Trust from developers looking to finance good construction projects.
With interest rates having been elevated for some time, we have also started to see a softening in capitalisation rates on industrial properties. This has led to the opening of good acquisition opportunities. Having not acquired a property for over 12 months we have recently contracted to make an exciting new acquisition for the Trilogy Industrial Property Trust.
An exciting acquisition for the award-winning Trilogy Industrial Property Trust
As previously reported, we recently contracted to acquire an exciting industrial property, with a strong, stable tenant and excellent financials, in one of Queensland’s premier industrial precincts. For further details and exclusive early access to this capital raise, please contact investorrelations@trilogyfunds.com.au.
I’m also pleased to report that after winning the 2023 Financial Newswire and SQM Research Direct Property – Fund Manager of the Year, the Trust has been nominated as a finalist in the Australian Wealth Management Awards 2024 for Real Estate Asset Manager of the Year (Listed and Unlisted).
Introducing Trilogy Talks – our new podcast
Finally, we recently launched our podcast ‘Trilogy Talks’, where we’ll explore key themes in the Australian property and investment markets with industry experts. In our debut episode, Tim Lawless, CoreLogic Australia Executive Research Director (Asia-Pacific), joins us alongside Clinton Arentz, Trilogy Funds’ Executive Director – Lending and Property Assets, to share insights on Australia’s post-pandemic housing market. Listen to our first episode now, available on Spotify and Apple Podcasts, here.
Thank you for reading this month’s Company Update. As usual, we’ve included below the performance for our flagship funds.
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