Is the Royal Commission affecting property prices?

Ross Greenwood speaks to Deloitte Chief Economist Chris Richardson about why the banking Royal Commission is having an impact on property prices, as a result of tighter lending conditions.

Introduction: Is the Royal Commission affecting property prices?

Ross Greenwood:  First up on the program this evening. I want to take you to the state of Australia’s economy and our budget which is improving far more quickly and rapidly than what you might have anticipated. Now that said there are still challenges and one of those things we spoke about earlier is the Fallen house prices in major capital cities because once housing starts to fall if you start to have less employment unless retail spending that causes some pressure inside households.

That said the balance for the budget right now and the government looks pretty healthy. Let’s go to Chris Richardson from Deloitte Access Economics always great with his time, many thanks for your time, Chris.

Interview with: Chris Richardson, Chief Economist, Deloitte

Chris Richardson: Thanks.

Ross Greenwood:  The numbers that came out on Friday are the monthly financial statements to the end of May. They showed not only again in May was the budget in the black, in other words, the government wasn’t losing money but also over the course of this financial year, it would right now seem as though the government is going to be significantly ahead of where they might have ever anticipated 12 months ago.

Chris Richardson: Yes. I look at things on the budget front are looking ever better. A lot of that comes back to what’s happening on the world stage if you like. The world economy remains very good. In recent months we’ve seen Europe and Japan not as strong as they were but the US doing very well and so far although the latest data out of China wasn’t that flash the bits of China that buy from Australia are doing well.

All those commodity prices that feeds into the budget looking good and the budget itself as you note looking substantially better than it’s done in a very long time.

Ross Greenwood:  We should try and explain it’s because the government in the budget just handed down a couple of months ago indicated that they believed that they could get back into surplus or profit a year earlier than anticipated. Now going the way they’re going right now do you believe there’s any chance that they might even be able to announce before the election that they could be there even sooner than expected, again the reason for that I’m sitting there looking at these continuous underlying cash balances that are in the black.

In the last month it was $4.9 billion, the year to date, to the end of May there’s a $10 billion budget deficit or loss but that compares with $18 billion expectation from the budget this year. All of it looks incredibly positive I would have thought.

Chris Richardson: Look, it does, as you say just a month or so ago when the budget came down the government said that the year that we have just finished 2017-18 would have a deficit of a bit over 18 billion. In the last 12 months, we know that 12 months to May it was less than 13 billion or in other words 5.5 billion dollars better than they were expecting. They budgeted the year we’ve just begun to see a deficit of 14.5 billion.

On this trend, you’d still say not likely that 2018-19 would be a surplus but it’s certainly not impossible. That rabbit out of the hat will depend is so much dollars in Australia. What happens next in the world economy in general and in particular in China.

Ross Greenwood:  Right now as you pointed out, it is really about coal prices, it’s about iron ore prices, it’s about energy prices, oil prices being higher than they have been and as a result, that’s pushed our stock market to close on 10-year highs. Just a couple of bits and pieces also it means also if the government does not hand out company tax cut. Even though these were further down the track and still later than expected that would also be money in the bank effectively paying down that deficit much more quickly than they anticipated.

Chris Richardson: Yes. As you note, that makes a difference in several years time rather than the short-term and I’d put myself on the side of those who see the company tax cuts as something you do for prosperity reasons, it would help the economy. Not doing it, all the things equal, shocks the budget and you’d have to say the size of the personal tax cuts that have just come through does make it a little harder for the government to get its company tax cut through.

Just in the sense that there’s only so much money in the budget, we’ve already just allocated a chunk of it to personal income tax cuts. That does limit a little bit the wriggle room around company checks.

Ross Greenwood:  All right. I’m on that subject actually when you make a forecast inside Deloitte Access Economics and it goes wrong. Do you blame someone else, do you blame yourself normally?

Chris Richardson: Hopefully, I blame myself so it could be fair like many forecasters I will tend to just talk about the next forecast rather than the last one.

Ross Greenwood:  I understand. We should actually go to the opposition leader Bill Shorten because today he has, well, of course, been in the news in recent times for having announced that he wouldn’t be handing out a certain company tax cuts but now he said “No, we’ve had a mature decision about this and we now will not be doing what I’ve said previously.” here’s something he said today as well.

Bill Shorten: Listen, on the company tax issue. I’m not going to debate the process but I think we’ve got to the right place in the end. There’s no doubt that my economic team thought that an initial threshold of 10 million was sufficient but looking at the uncertainty that business raised with us and colleagues raised with us. I think we listened and now we’ve led.

Ross Greenwood:  Now he listened and he led as he said but normally when you’ve made that statement you don’t blame your economic team normally take that one on yourself. I would have imagined anyway, let me move on. Let’s go to the next one and that is property prices with them softening as I indicated that is a key driver for employment but also economic activity in Australia.

Are you concerned that the slow down in house prices, especially in Sydney and Melbourne, will have a flow-on effect to the economy and therefore some of those other budget numbers we were talking about in glowing terms earlier might not necessarily be able to be achieved?

Chris Richardson: It is definitely a risk and it’s a growing risk and infecting budget terms, the state governments are the ones who are most exposed when it comes to property. Several things are happening. One is the size of the tax cut in the US a top and already strong economy there is one very strong reason why the US Federal Reserve will keep raising interest rates.

Other things equal, that cost of funds around the world is on the rise, it’s already squeezing here in Australia. Is this the reaction to the Royal Commission these days the big banks are dotting I’s and crossing T’s in a way that they seemingly weren’t before and it means that the matching borrower, you get the same borrowers, the same characteristics fronting out for a loan today getting a substantially smaller loan but maybe 10% or 15% smaller loan than they would have gotten 18 months ago.

Other things equal, that would suggest property will continue to fall. Not yet. Dangerous, but certainly one of the things you should very much be keeping an eye on.

Ross Greenwood:  All right in a final part about that is in the US where interest rates are rising where it is in Australia the Reserve Bank is keeping interest rates on hold, an interest rate decision tomorrow from the Reserve Bank is broadly expected to be on hold. Is there a danger that the US interest rates are basic creating a buffer in the future if there is an economic downturn. Whereas if we do not ultimately raise interest rates, if there is a global economic downturn, the Reserve Bank does not have very much ammunition to fire at that downturn.

Chris Richardson: It is a risk and it’s one of the many things the Reserve Bank has to juggle. As a nation, we essentially chose to go from a China boom to a house price boom but one of the costs of that was we now have less ammo to deal with the next downturn. Having said that it’s not just the Reserve Bank that sets interest rates here in Australia. Those rates are, as we noted a moment ago, effectively rising already. Other things equal, that does help give a little more potential room to move where across the state.

Ross Greenwood:  Tell you what always great to have in the program, Chris Richardson from Deloitte Access economics and Chris have a great evening.

Chris Richardson: Thanks, Ross.

 

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