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House prices slump: Straw that breaks the economy’s back?
Will a slump in house prices be the straw that breaks the economy’s back and be the trigger for an economic hard landing in Australia?
Probably no, but it is a question that will likely dominate the news over the remainder of 2017 and into 2018.
Australia has gone 25 glorious years without a recession, but the risks are building that late 2017 and 2018 will be glum ones for the economy. The extent to which the economy is stuck in the mud will depend on the extent of the housing slowdown, the impact this has on already fragile consumer demand and the policy response of the RBA and possibly the government.
A slump in house prices will damage consumer wealth and with that consumer spending, investment and employment. Wages growth, which is already at a record low, will stay low which will further compound the lack of traction in the economy and feed into the fragile growth outlook. Already retail sales are flat or falling and consumer sentiment shows more people are pessimistic than optimistic.
Those in power, who are able to pull the economic policy levers, are unable or unwilling or simply unaware of what is happening in the economy and what needs to be done to get the economy back on track to stronger job creating growth.
At every opportunity, the Turnbull government is sweeping economics under the rug while it focuses on terror, laws on racial vilification, rhetoric about ‘hard working Australians’, a blip in energy prices and anything else that means the economy is not discussed. The ‘jobs and growth’ mantra is as sincere and meaningful as a US shop assistant saying ‘you’re welcome and have a nice day’ just after they serve you a miserable coffee.
The other economic policy heavyweight, the RBA, is fixated about house prices in Sydney and Melbourne and continues to leave Australia with some of the highest interest rates in the industrialised world and an over-valued exchange rate. It does this while inflation is entrenched below the bottom of its own target range, real wages growth stalls and the spare capacity in the labour market balloons.
To be fair, there is one economic policy issue that has a substantive proposal behind it – the cut to company tax rates. But the plan to reduce company tax rates is more like a Chinese Politburo 10-year plan and it is of such a scale that it will fracture an already vulnerable budget outlook. And, in any event, it looks like hitting the rocks in the senate as it is expensive, ineffective and unpopular. The key elements of the company tax issue will no doubt slowly but surely sink in the not too distant future.