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Weighing up the risks

March 1, 2019

So who’s right and who’s wrong? It all comes down to perception and emotion as much as logic and data. After all, economics is a behavioural science, not a physical one.

On the upside, local and global unemployment is low. Domestically we’re seeing big infrastructure and mining projects while other industries, such as education and tourism, are travelling well. The RBA is even optimistic about wages growth.

On the downside, the European economy is slowing, and Brexit’s full impact remains a matter of speculation. The Chinese economy is wobbling, propped up by a government unafraid to intervene but threatened by a shrinking population.

Interest rates are likely to hold steady as a result, with many analysts expecting the next move to be down, not up (financial markets expect a rate cut by mid-2020).

House prices

Over the year to February 2019, house prices fell in Sydney, Melbourne, Brisbane, Perth and Darwin, with modest growth in other cities and Hobart standing ahead of the pack. Over the last decade house price growth has been uneven between the capitals (with Sydney, Melbourne and Canberra seeing the biggest gains), but the 20-year average shows a flatter distribution, with 6–9% growth per annum in the capitals.

This suggests that prior to the 2008 global financial crisis common factors (like falling interest rates and rising household debt) were the key influencers, with various local factors coming to the fore thereafter. Our economy is less volatile now that it was ten years ago, but it remains to be seen whether prices will continue falling or begin to stabilise.

Housing and the economy

Housing accounts for around half of all consumer wealth, though for most individuals it’s well more than half. The RBA has shown the link between short-term house price movements and consumer spending was weak in the last half of 2018, but consumption has been down for some time. Household goods, for example, was the weakest retail segment, and the outlook for disposable income growth is uncertain.

Tax cuts for low- and middle-income earners should help, along with promising jobs growth predictions, but underemployment is endemic and with tightened lending criteria (thanks to the Royal Commission) credit is less available now than it has been for many years.

House price drivers over recent years

Price growth and a fall in offshore real estate investment after 2016 brought domestic investors back into the property market, though borrowing growth and house price growth both began slowing after 2017. This decrease in investment spending has brought new home owners into the market, but imbalances between population growth and housing supply still cause market fluctuations.

What does this mean? In the short term, house prices in Sydney and Melbourne may fall further. The population keeps growing, as does housing supply, but household disposable income growth will be modest at best.

Impact on equipment finance

The real estate market looms large for many individuals and small business owners, as housing costs are significant and ownership a long-term prospect. Even if prices fall further in capital cities, this is more likely to be a correction than a ‘bust’, with long-term growth still positive.

But it’s only one risk factor in the economy, which overall remains on a steady, if flat, trajectory. Interest rates remain low and with corporate profits at record levels, big businesses have money to spend. Clients needing to invest in new assets should move with confidence, locking in deals at attractive rates and positioning themselves for growth.

Impact on you and your business

Interest rates remain low and with corporate profits at record levels, big businesses have money to spend. Clients needing to invest in new assets should move with confidence, locking in deals at attractive rates and positioning themselves for growth.