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?