Why Scott Morrison thinks the economic fallout from Australia’s property downturn will be contained

Australian federal Treasurer Scott Morrison. Stefan Postles / Getty Images

  • Federal Treasurer Scott Morrison says the run-up in Australian house prices over recent years was “not the function of some sort of investor bubble, or some finance bubble”.
  • Morrison blamed “sclerotic regulatory systems” for holding back construction volumes and preventing supply from meeting the demand when property prices started rising.
  • The treasurer made the comments in an extended interview with Business Insider discussing the state of the economy following another strong set of GDP data which showed growth ran at 3.1% in the year to March.

Treasurer Scott Morrison says the federal government is monitoring the downturn in Australia’s property market closely but argues shock absorbers built into the financial system by regulators over recent years should contain the economic impact of falling prices.

Morrison said the run-up in house prices through 2016 and 2017 — a period that saw Sydney prices growing at an annualised pace of 18 per cent at one point — was simply a function of the supply shortage stemming from “sclerotic regulatory systems” which prevented housing construction volumes rising to meet demand, rather than an investment bubble.

“This is the point about all of these property values in Australia: they’re real,” Morrison told Business Insider in an extended interview this week. “They’re a function of supply and demand. They’re not the function of some sort of investor bubble, or some finance bubble, as we’ve seen in other parts of the world.

“That’s why often when people look in at the Australian economy, they misunderstand it because they apply their housing market and housing finance markets to the Australian situation and it pumps out a very different answer.”

He said he never believed there was a bubble in Australian property. “Prices have always been fundamentally driven by the supply-demand imbalance and that’s why the fundamental answer to housing affordability whether it’s in Sydney or Melbourne or Darwin, or Alice Springs, is about supply,” Morrison said.

“What I bemoan is the fact that when house prices, particularly in our major metropolitan markets, started moving more than a decade ago, the supply response took more than a decade, and that’s a function of regulation, and planning and zoning, and a lot of the sclerotic regulatory systems, which is more responsible for the unaffordability of Sydney housing than any other factor.”

After several years of rapid growth, property prices have started to decline in the major cities and forecasters are predicting a protracted period of price falls.

While Sydney property prices have fallen over 4% over the past year while Melbourne is down just over 2% there are signs the slowdown is gathering momentum in some areas. Sydney’s auction clearance rates fell further again last week and Business Insider reported last week that discounts of 10% were becoming commonplace in highly desirable parts of the city such as the eastern suburbs and the north shore.

Morrison said he was now “more comfortable” that property prices had moderated, as was the Reserve Bank of Australia. “I think that’s taken a lot of pressure off how the Bank looks at the general rate settings in the economy,” the treasurer said.

“At 18% growth there were obviously quite real concerns about how hot that market was getting. In [Sydney] and in Melbourne there was an obvious imbalance between supply and demand that had gone on for some considerable period of time, and that had been exacerbated by some pretty easy credit in the sector. And when we saw interest-only loans in the sector getting over and above 40% … that wasn’t a healthy level.

“When you had investor credit growth running at over 10%, that wasn’t healthy. And [banking regulator] APRA took quite sensible and reasonable steps to condition, if you like, that enthusiasm on credit at that end of the market. And since then we’ve seen quite an adjustment take place.”

Credit tightening

There is increasing evidence that credit conditions have been tightening, with banks reducing loan amounts and applying more stringent rules on borrowers. This has come at a time the banking industry has been under unprecedented scrutiny thanks to a string of scandals and the instigation of the royal commission.

Morrison said the impact of this on the credit environment was “more perceived than actual because of the connection to the royal commission” and that a range of regulatory interventions in recent years — including lower loan-to-value ratios [LVR] that reduced the amount borrowers could access against the value of a property, and the cap on growth in investor lending — had been tightening the system for several years.

“Banks have done that, proactively, as well as responding to what the regulators have been saying,” Morrison said. “So what it means is, in the last couple of years, people have been taking on new loans in a market that was moving pretty hot. They have been taking them out at lower LVRs, and as a result, they are probably – from a credit assessment point of view – in a position of relative being quarantined, if you like, from the downside of any significant correction.”

One factor that could potentially complicate the housing downturn further is the prospect of out-of-cycle rate increases by banks. While the Reserve Bank is likely to keep the official cash rate on hold at 1.5% for some time, there is upwards pressure on the cost of money at an institutional level as rates rise globally, and analysts at Credit Suisse have argued rate rises by the banks are a “material risk” as banks seek to protect their profitability.

Morrison pointed to data that shows most mortgage holders are ahead on their repayments by more than a year as evidence that the impact of the downturn would be limited.

“What would be the risks of the banks [raising rates]? One of the really positive features of the Australian housing finance market is the fact that we have an insulation to the sort of impacts you’re talking about, because we’re about, on average, two and a half years ahead of payments on mortgages and that’s how people have largely been significantly saving,” Morrison said. “As the rates fell, they kept paying at the same rate, built up their balances, and so they’re a few years ahead, on average.

“Now some people won’t be in that situation, particularly if you’ve just taken a mortgage, but they took those mortgages on lower LVRs and have a bit of a quarantine at least on the asset side anyway. So I think there’s a lot of forces there which are protective. You’re just never complacent about it.”

The full interview with Morrison discussing GDP growth and the impact of the immigration intake on the economy and the labour market is online here. You can also find it on iTunes here, or search “Devils and Details” on your podcast platform of choice.

SEE ALSO: Sydney auction clearance rates tumble below 50%