Dwelling investment to detract from growth, says government

The Coalition government released its budget for 2019-20 Tuesday night (2 April), which included tax cuts, relief packages and a range of initiatives for SMEs, as well as revealing a surplus of $7.1 billion.

Economically speaking, the budget was fairly optimistic. Treasurer Josh Frydenberg announced that the Coalition government had delivered on its promise to bring the budget into surplus this budget year “after more than a decade of budget deficits”.

This budget year 2019-20 will reportedly see a surplus of $7.1 billion, equal to 0.4 per cent of gross domestic product (GDP).

Further, real GDP is forecast to grow at around its estimated potential rate of 2.75 per cent in 2019-20 and 2020-21, “sustaining solid employment growth and supporting a pick-up in wage growth”.

The government said that it would also look to reduce the nation’s debt to zero by 2029-30.

“The government’s continued focus on spending restraint has ensured that surpluses are being delivered while at the same time providing lower taxes for hard-working Australians and guaranteeing the essential services Australians rely on,” the budget reads.

“The government is reducing debt, not through higher taxes, but by good budget management and growing the economy,” it says.

However, the government has noted that dwelling investment is currently, and may continue to be, a drag on growth.

Despite this, the government did not announce any major plans to increase investment or drive down house prices.

House prices cooling, credit growth easing

In his budget speech last night, Treasurer Josh Frydenberg said: “[T]he fundamentals of the Australian economy are sound,” highlighting strong employment growth, a seven-year low in unemployment, and participation levels at a “near-record high”.

However, he added that “there are genuine and clear risks emerging both at home and abroad”.

Domestically, the residential housing market has cooled, credit growth has eased and “we are yet to see the full impact of flood and drought on the economy”, he said.

Further, the budget outlined that housing price declines have affected the outlook for dwelling investment, but noted that dwelling investment overall remains at “a high historical level”.

The budget document reads: “The recent decline in Australian housing prices has followed several years of strong price growth and, unusually, is occurring alongside generally strong labour market conditions, rising incomes and low interest rates. This adds uncertainty around the estimated response of consumption.”

According to the government, the fall in housing prices accelerated over 2018 and continued into 2019, partly as a result of “a rebalancing of supply and demand”.

It noted that, as at February 2019, capital city housing prices had fallen by 8.6 per cent from their most recent peak in September 2017, with price falls largest in Sydney and Melbourne over that period. However, the budget added that these prices remain around 40 to 50 per cent higher relative to their 2012 levels.

It continues: “In addition, the compositional shift towards the construction of higher-density dwellings, which has changed how the pipeline of work flows through to activity, increases uncertainty around the dwelling investment response.”

According to the Coalition government, as at January 2019, residential building approvals had fallen by almost 40 per cent relative to late 2017, with the fall concentrated in higher-density projects.

“Liaison with industry suggests that softer investment intentions reflect both tighter credit conditions and a weakening in sentiment amongst buyers,” the budget reads.

However, the government said that as higher-density dwellings are completed, this could support dwelling investment activity in 2018-19. This is estimated to bring about a forecast growth of 0.5 per cent, following average annual growth of 5.5 per cent over the previous five years.

“Dwelling investment is then forecast to fall by 7 per cent in 2019-20 and by a further 4 per cent in 2020-21 as existing projects,” it estimated.

The government suggested that housing prices that are (immediately) 10 per cent lower than they otherwise would be due to a reduction in demand for dwellings could result in the level of real GDP being lower by about 0.5 per cent after two years.

“Importantly, this estimate is based on the historical relationship between the relevant variables, makes assumptions about the composition of dwellings affected and does not account for any moderating influences from macroeconomic policy settings in response to lower demand,” it added.

However, it concluded that – in the long run – changes in housing prices should have a limited effect on the size of the economy.

“Changes in the relative price of one asset, housing, over another have not been shown to have a strong relationship with aggregate productivity, participation or population — the long-run determinants of economic growth,” the budget reads.

Overall, the Coalition government has revised down tax receipts by $15 billion over the four years to 2022-23, as a result in the revised outlook for household consumption, dwelling investment and average wages.

In the near term, however, this impact will “be more than offset by an increase in company tax collections” in 2018-19 and 2019-20, reflecting the recent observed strength in commodity prices, government said.

In conclusion, Mr Frydenberg said in his budget speech: “Notwithstanding these challenges, it is a testament to the strength of the Australian economy that it is in its 28th year of consecutive economic growth.

“Our economic plan will see this continue.”

Housing investment incentives should stay intact

Speaking of the budget, Denita Wawn, CEO of Master Builders Australia, welcomed the instant asset write-off expansion and increase, as well as investments for skills and apprenticeships, but added: “While there was good economic news in this budget, Master Builders is concerned that Treasury, in line with Master Builders forecasts, predicts a 7 per cent decline in housing investment.

“This reinforces the need to ensure that all housing investment incentives remain intact,” she said.

Ms Wawn added: “Infrastructure investment right across the country, to build economic growth nationally and in local communities, is fundamental to the success of our industry and the economy. It will underpin economic growth in our cities and regions, many of which are experiencing economic downturn. However, these projects need to be fast-tracked so that work can commence and be accessible to local businesses.”

Likewise, the managing director of the Finance Brokers Association of Australia, Peter White, said he would have liked to see the budget provide more assistance for struggling home buyers, particularly given the declining home values in some areas combined with persistent global uncertainty.

“The government, and all major political parties, must examine what they can do to stimulate the housing market, not suppress it, and that includes any change to negative gearing and capital gains tax,” Mr White said.

[Related: Government unveils budget for 2019-20]