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A strong property market: what it means for the economy in 2021

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In part one of this two-part series we provided insight into the resilience of the Australian property market throughout the pandemic. In part two we turn our focus to the economic headwinds and tailwinds that will drive performance in the year ahead.  These indicators show that the Australian economy is negotiating the current volatility, and rebounding into a position of ongoing economic growth.

Optimism has returned to markets, as targeted lockdowns in Victoria, New South Wales, Queensland and Western Australia have all proven successful in controlling local outbreaks of COVID-19.

The rollout of the vaccine, which will help the return to more normal conditions, is further cause for optimism.

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Volatility is still likely to drive markets in 2021, however, as economies globally rebound at different speeds.  Investors are rightly continuing to review portfolio allocations to protect investment returns and income against this risk. As we discussed in part one, the residential property and credit market has been impressively resilient throughout.

As always, there are economic headwinds and tailwinds set to impact the economy.

A high-profile example of an economic headwind is the scaling back of government fiscal support measures, such as JobKeeper and JobSeeker, at the end of March 2021.

While seemingly a headwind, it is important to note that following an initial peak, these fiscal measures were progressively withdrawn throughout 2020 to now relatively insignificant levels.  Through this same period, GDP and unemployment figures both rebounded significantly. JobKeeper and JobSeeker have well and truly completed their heavy lifting - any adverse effects from their removal will be limited in scope.

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Meanwhile, the rapid rebound in GDP and unemployment has exceeded the expectation of virtually all commentators.

The consensus is that we will see continued strong economic prints in the year ahead.  Unemployment, always a key indicator of the health of an economy, is improving month on month.  The current monthly figure of 6.4%, being a figure well below the peak forecasted by more bearish commentators, shows an economy moving back towards full employment.

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There are, however, economic tailwinds that are helpful for investors seeking low-volatility income, and indeed investors in Australian residential property generally.

Low interest rates, declining unemployment, and rebounding GDP are all examples of tailwinds that are supportive of a resilient economy and which point to a rebounding residential property market.

Economic tailwinds favouring residential property have aided its resilience and position as a foundation asset class in the Australian market.

Auction clearance rates are presently near-or-above 80% in capital cities, demonstrating the continued rebound in demand.

Increasing stock levels also indicate that both buyers and sellers are active in the market - a sign of healthy market conditions.  Even Melbourne, with its prolonged second wave and recent five-day lockdown, has shown a strong rebound in auction clearance levels and stock of residential property.

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The renewed confidence in residential property also provides a tailwind for the banking and finance sector.

Trends in residential loan applications are showing increases in loan commitments and reflect a positive start to the year.

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Low interest rates, improving unemployment and a return of economic growth all point to tailwinds for investors in 2021. There will undoubtedly be volatility in markets as local and international economies rebound, react and reset as we emerge from COVID-19.

Investors should gain comfort that while there are always headwinds, a rapidly rebounding economy is likely to drive the foundational asset class of residential property into continued positive growth over the next 12 to 24 months.

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Troy Stratton is deputy chief investment officer at La Trobe Financial. He has more than 20 years' experience in the financial services industry. Prior to joining La Trobe Financial, he worked in London in a number of leadership roles at Barclays Wealth and HSBC's Retail and Wealth Management divisions. Troy is also a certified accountant and holds a Bachelor of Business and a Bachelor of Computing degree.