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What Trump’s win means for Australia

It’s been several weeks since Donald Trump won the US election but there is still a lot of speculation over what the likely effects will be in Australia.

Anyone watching the sharemarket on the day of the election could have been forgiven for thinking it was going to be all doom and gloom as the ASX lost $32.5 billion. However, the next day $50 billion was added as investors decided Trump’s win might not be as bad as first thought.

It was a similar scenario with Brexit: sharemarkets nosedived when the British voted to leave the European Union before recovering in the days and weeks since.

 

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As with Brexit, the sharemarkets following the Trump win have had a rollercoaster ride.

 

Perhaps the only thing we do know about the Trump effect is that nothing is certain. Some pundits are predicting Australia’s property market will benefit from Trump’s election while others are saying it’s all going to fall in a heap and a recession is just around the corner – a view exacerbated by Australia’s recent GDP figure, which showed the economy shrank by 0.5 per cent in the September quarter.

One point economists agree on is that the Trump win will very likely result in higher interest rates. Trump is expected to be a big-spending president, especially on infrastructure, in his quest to “Make America Great Again”. If the spending is funded through government debt, inflation will be a result, which will lead to higher rates.

These higher US rates are expected to be mirrored around the globe and in Australia will have a negative effect on the property market if mortgage holders struggle to service their loans. Over the past few years, the low rates have encouraged Australians to take on more debt – Australian household debt to GDP is now 125.2 per cent – and if households can’t service their debt, problems will arise.

 

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A number of lenders are already raising rates on investor and fixed-term loans – a move that is partially being attributed to the Trump effect.

 

A potential surge in foreign investment

Another potential effect of the Trump win is an increase in the level of foreign investment into the country.

The United States is already the second-biggest foreign investor in Australian property, with $7.1 billion worth of applications approved by FIRB in 2016. Whether this will increase as a result of the US election (and also Brexit) remains to be seen. However, real estate agents did notice a spike in online enquiries about moving to Australia following these events. Australia is viewed as a safe-haven destination by many for its stable political environment and strong banking system.

But it is China where an increase in investment is likely to come from. The Chinese already invest heavily in Australia but if Trump introduces measures to curb trade or increase tariffs on Chinese imported goods – as he has proposed – they may decide to forgo any other form of investment in the US and look to Australia.

Shane Oliver, AMP Capital Chief Economist, told news.com.au that the outcome of the US election is likely to see an increase in Chinese interest in Australian real estate. “It is probably more significant than Brexit,” Oliver said, adding it could push up house prices.

“The problem is that anything that adds to demand in an already hot market is a bit of a problem in the sense it pushes prices further into unaffordable territory for ordinary Australians,” Oliver said.

 

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Oliver said it is likely Australia will get an initial surge in interest from Americans looking to potentially relocate, but it will probably die down as people wait to see what happens.

“If they are then unhappy with what happens then it might surge again,” he said.

But foreign buyers are restricted in what they can buy in Australia to largely new and off-the-plan residential properties, although established commercial properties are allowed.

While theories abound regarding the effects of Brexit and the Trump win, at the moment it is all conjecture. Only time will tell what will play out but the fundamentals supporting Australia’s economy – i.e. stable government, decent growth prospects and a sound banking system – should continue to instill confidence that Australia will continue to perform well.

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Gayle Bryant

Gayle has been a financial and business journalist and sub-editor for almost 30 years. She has written for a wide range of newspapers, magazines, custom and trade press and websites. Gayle’s articles regularly appear in the Sydney Morning Herald’s small business section and the Australian Financial Review’s special reports section.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.