As house prices fall across Australia, should we be worried for our economy?

Tue, 13 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link:  https://au.finance.yahoo.com/news/house-prices-fall-across-australia-worried-004714571.html 

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As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

There is a range of academic literature on this correlation between house prices and the health of consumer spending. The Reserve Bank of Australia a few years ago showed how high house prices were correlated to higher consumer spending https://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-04.pdf .

Academics from North Western University and the University of Chicago found that there was a ‘large’ consumption response, both up and down, to changes in house prices. https://www.restud.com/wp-content/uploads/2017/09/MS20860manuscript.pdf 

The authors of this global study warned, quite simply, that there was a ‘widespread policy concern that boom-bust cycles can end with large contractions in consumer spending’.

Which provides food for thought as the house price falls spread around Australia.

In Darwin, housing prices have dropped a stunning 22 per cent since the 2014 peak. In Perth, the fall has been a still painful 11 per cent over the same time period. The collapse in mining investment and a slowing in population growth have impacted these two cities, notwithstanding record low interest rates.

Since September last year, house prices in Sydney have dropped a significant 4 per cent which has reduced the value of a $1.1 million property by $44,000. Little wonder retail sales in New South Wales are stalling and the labour market is showing signs of a turn.

Melbourne house prices are, so far, only down 0.5 per cent from their peak in December but there are warning signs that there will be further weakness as new supply comes on to the market and as the banks have tightened their lending. While the economy continues to muddle along with GDP growth of a modest 2.4 per cent in 2017, a house price decline could be the factor that trips up the economy.

If the fall in home-owner’s wealth across most cities continues or worse gains pace, then you, the consumer, will react by cutting spending, firms will hunker down with lower investing and hiring and the economy will weaken.

But even a modest decline in prices will see consumers trim spending which in turn will see the economy under-perform for yet another year.

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.