While many property experts are calling time on the boom that has seen house prices surge across Australia, economists are optimistic the slowing property market will not dent the economy.
“You can paint all sorts of scenarios but absent a big economic crash there’s likely to be some support for property prices,” says David Rumbens, partner with Deloitte Access Economics.
“There’s still a lot of people who have been priced out in the last couple of years who would support the market as it started to fall,” he adds.
Paul Bloxham, chief economist for HSBC, expects the growth in national house prices to slow from about 10 per cent in 2017 to between 3 per cent and 6 per cent in 2018. This is in sharp contrast to the period from February 2012 to July 2017 when prices in one of the hottest cities, Sydney, jumped 75 per cent, according to RP Data CoreLogic.
Cooling in the two previously sizzling markets of Sydney and Melbourne is expected to drag on the housing market nationally.
Analysis of recent sales by RP Data CoreLogic shows property prices in the five biggest cities – Sydney, Melbourne, Brisbane, Adelaide and Perth – increased 3.15 per cent in the 12 months to the end of January 2018.
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While independent economist and regular property commentator Saul Eslake isn’t ready to jump on the “property prices are going to decline” bandwagon, he is not expecting any significant increases across Australia this year either.
Eslake says Melbourne prices could rise slightly and growth could also be seen in Hobart.
The red-hot property growth over recent years emboldened many investors to dive in. Now markets are cooling, there might be some pull back in investor activity, says Bloxham.
He points out there is already evidence of a shift in the market from investors to first home buyers.
Slowing consumer sentiment
Many economists agree the change in gear for house prices probably won’t flow through to consumer sentiment, which slumped in September 2017 but then showed signs of recovery prior to Christmas.
This is partly because – unlike the last big spike in house prices around the turn of the century – household saving rates have not declined much in the two most populated states of New South Wales and Victoria in recent years, says Bloxham.
“We doubt that a housing slowdown will have much of a negative wealth effect on spending,” he says. “Households have been much more cautious and have not leveraged up properties to consume like they did in the early 2000s episode when many households were … treating their houses a bit like an ATM.”
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Rising consumer debt
It’s not all good news, though. Thanks to higher property prices, households in Australia are highly indebted and vulnerable to interest rate rises, which could begin late this year or in early 2019.
“One of the risks people worry about is, ‘What if interest rates rise two percentage points? What does that do?’ Well that does quite a lot of damage in terms of consumer spending,” says Rumbens.
“You’re getting to the stage where, for a lot of households, the loans are of such a size that they will never be paid off, and the only way to actually pay them off is when they sell their house when they retire.”
For now at least, consumer confidence and spending should be strengthened by an improving labour market.
Better business conditions, encouraged by a pick-up in global economic conditions, are set to support strong jobs growth, a falling unemployment rate and a modest pick-up in wages growth, which should support household incomes in 2018, says Bloxham.
Rumbens agrees. “Employment’s been strong and wages growth we would expect to pick up a little through the year. So we would expect consumer spending to be higher … despite property prices coming off.”
While employment growth may not occur “at the stellar pace of the second half of 2017,” says Eslake, most of the leading indicators of employment – job ads, various counts of vacancies maintained by the Australian Bureau of Statistics and by the federal employment department, and the hiring intentions component of the NAB Monthly Business Survey – all point to continued growth in employment.
Earlier in 2018 Treasurer Scott Morrison hinted at potential tax cuts for middle income earners in the forthcoming May budget. If they do eventuate, that would be “very positive for consumer sentiment,” says Eslake, who notes there haven’t been any significant tax cuts for almost a decade.
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