Canary

Canary in the coalmine

Opinion is split as to whether Australia’s economy will experience growth or decline in 2019. HIA Economics weighs in on implications for housing.

Author

Geordan Murray

Economists’ expectations for Australia in 2019 are divided. Some see another healthy year of growth ahead, while others are far less optimistic.

The downturn in the housing market throughout 2018 was significant. It naturally raises the question of whether there is something fundamentally wrong with the economy that could cause the housing downturn to become something more sinister in 2019 or whether it’s the customary cyclical downturn following a boom.

Those of a more pessimistic persuasion tend to suggest that housing and economic cycles have a long history of running in tandem and that the housing downturn will weigh heavily on economic growth. In the pessimist’s eyes, the housing downturn is the proverbial ‘canary in the coal mine’ and 2018 saw the canary fall off its perch.

They expect households to respond to the downturn by cutting back on spending, prioritising debt reduction and deferring major purchase decisions (including housing). If households tighten the purse strings a little too much then the impact reaches far beyond the housing market. Household expenditure accounts for over half of all expenditure in the economy, so even a small reduction represents a substantial volume of economic activity. If this is the case, then our canary has given us fair warning of what may lie ahead.

Other forecasters, including both the Reserve Bank of Australia and the Commonwealth Treasury, are more optimistic. They see another year of reasonable economic growth ahead. With an improving labour market, rising wage growth, a healthy pipeline of public sector investment and a pick-up in resource sector investment, this outlook can be justified. Among the optimists, the housing downturn is considered a cyclical headwind, but they still acknowledge that it has the potential to be worse.

Nevertheless, for coal miners with a wobbly canary, a cautionary response is understandable. But, are there other factors out there that could be affecting households’ willingness or capacity to engage in the property market?

Doubling down on debt?

Household debt is a potential risk. There are two possible angles: firstly, whether we have too much debt, and secondly, whether those with capacity to take on debt are able to access finance on reasonable terms.

The build-up of household debt in the economy is likely to mean that households are more susceptible to any deterioration in their economic environment (actual or perceived) than ever before. For this to become a material issue we would need to see a marked reduction in households’ capacity to service their debt, and for this to occur, it would likely be preceded by a rise in unemployment. Given that the unemployment rate has been stable at relatively low levels for some time, this doesn’t look to be an immediate threat in 2019.

Buying food at market

Household expenditure accounts for over half of all expenditure in the economy

Credit squeeze

Throughout 2018 the mortgage lending environment underwent a significant change and this is a more immediate concern. In addition to the cap on lending to investors and lending on interest only terms, banks began to pay far closer attention to borrowers’ financial affairs. Banks had always assessed a household’s earnings but then essentially assumed that households could budget to pay their mortgage around their other living expenses. Banks are now assessing whether a household has the capacity to service a mortgage in context of both their income and actual expenditure. The added degree of complexity has slowed the flow of lending. It is now a far more laborious process for households to apply for a loan and the time taken to assessing applications has blown out. In addition, it has reduced the borrowing capacity of many households.

When it comes to accessing credit and changes in the lending environment, regulators (who are responsible for the stability of the banking system) are likely to look at the recent changes in a far more favourable light than bank customers, who now have to jump through hoops to get a loan approved. Thankfully, APRA eased up on its restrictions on investor and interest-only lending during the year which should ease the squeeze for some borrowers.

Home building has driven economic growth in Australia for the past five years but this is no longer the case

Growing pains

There are certainly risks for the housing market in 2019 and potentially in the years beyond. Given that we are now in an election year there is an added degree of uncertainty for households and businesses. The major parties look set to contest the election on issues that could have a significant impact on the housing market. The Coalition is looking at measures to slow population growth, while Labor has carried over attacks on negative gearing and the capital gains tax concession from their 2016 campaign.

The weak GDP growth in the final quarter of 2018, which was considerably below expectations, is likely to have been a shock for the optimists and will embolden the pessimists. It also adds weight to arguments that the next interest rate move could be a cut and sooner rather than later. We might even see election campaigns deviate from the traditional battle grounds and see the major parties dual over how best to reignite an underperforming economy.

Home building has driven economic growth in Australia for the past five years but this is no longer the case. Activity in the industry is contracting and this will become a more substantial drag on economic growth in the years ahead. Stronger growth in other sectors of the economy will be needed to pull housing forward. The degree to which this occurs will be pivotal in determining the speed and depth of the housing downturn.

Growing pains

There are certainly risks for the housing market in 2019 and potentially in the years beyond. Given that we are now in an election year there is an added degree of uncertainty for households and businesses. The major parties look set to contest the election on issues that could have a significant impact on the housing market. The Coalition is looking at measures to slow population growth, while Labor has carried over attacks on negative gearing and the capital gains tax concession from their 2016 campaign.

The weak GDP growth in the final quarter of 2018, which was considerably below expectations, is likely to have been a shock for the optimists and will embolden the pessimists. It also adds weight to arguments that the next interest rate move could be a cut and sooner rather than later. We might even see election campaigns deviate from the traditional battle grounds and see the major parties dual over how best to reignite an underperforming economy.

Home building has driven economic growth in Australia for the past five years but this is no longer the case. Activity in the industry is contracting and this will become a more substantial drag on economic growth in the years ahead. Stronger growth in other sectors of the economy will be needed to pull housing forward. The degree to which this occurs will be pivotal in determining the speed and depth of the housing downturn.


Growing pains

There are certainly risks for the housing market in 2019 and potentially in the years beyond. Given that we are now in an election year there is an added degree of uncertainty for households and businesses. The major parties look set to contest the election on issues that could have a significant impact on the housing market. The Coalition is looking at measures to slow population growth, while Labor has carried over attacks on negative gearing and the capital gains tax concession from their 2016 campaign.

The weak GDP growth in the final quarter of 2018, which was considerably below expectations, is likely to have been a shock for the optimists and will embolden the pessimists. It also adds weight to arguments that the next interest rate move could be a cut and sooner rather than later. We might even see election campaigns deviate from the traditional battle grounds and see the major parties dual over how best to reignite an underperforming economy.

Home building has driven economic growth in Australia for the past five years but this is no longer the case. Activity in the industry is contracting and this will become a more substantial drag on economic growth in the years ahead. Stronger growth in other sectors of the economy will be needed to pull housing forward. The degree to which this occurs will be pivotal in determining the speed and depth of the housing downturn.


Growing pains

There are certainly risks for the housing market in 2019 and potentially in the years beyond. Given that we are now in an election year there is an added degree of uncertainty for households and businesses. The major parties look set to contest the election on issues that could have a significant impact on the housing market. The Coalition is looking at measures to slow population growth, while Labor has carried over attacks on negative gearing and the capital gains tax concession from their 2016 campaign.

The weak GDP growth in the final quarter of 2018, which was considerably below expectations, is likely to have been a shock for the optimists and will embolden the pessimists. It also adds weight to arguments that the next interest rate move could be a cut and sooner rather than later. We might even see election campaigns deviate from the traditional battle grounds and see the major parties dual over how best to reignite an underperforming economy.

Home building has driven economic growth in Australia for the past five years but this is no longer the case. Activity in the industry is contracting and this will become a more substantial drag on economic growth in the years ahead. Stronger growth in other sectors of the economy will be needed to pull housing forward. The degree to which this occurs will be pivotal in determining the speed and depth of the housing downturn.


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