- Treasurer Josh Frydenberg has told the property industry he is “optimistic” about the market outlook, claiming that a 10% price increase could add as much as 0.5% to the nation GDP.
- While economists have downplayed the likelihood of such strong growth, Frydenberg cited steady population growth and waning supply as two factors that would continue supporting prices.
- With two interest cuts already implemented and two more expected to come, the Reserve Bank of Australia (RBA) has already warned of the danger of creating a housing bubble.
Hold on to your hats. The Australian Treasurer has just endorsed Australian house prices to go much higher.
Speaking directly to the property industry on Thursday, Josh Frydenberg emphasised the attractiveness of soaring prices.
“Treasury estimates a 10 per cent increase in house prices could lift GDP by 1 per cent,” he told the AFR Property Summit in Sydney on Thursday, citing the “strong link between changes in the property market and consumer behaviour.”
While economists have poured cold water on the assumption that prices could lift by that margin in already unaffordable capital cities like Sydney and Melbourne, Frydenberg identified a few key drivers that could push them higher.
“Between 2005 and 2015, the population grew by 1.7 per cent per year or 3.7 million persons… the fastest average rate of growth in our population, sustained over a ten year period, since the 1970s,” the Treasurer said.
Meanwhile, the supply side looks to stay constrained in the short term.
“Dwelling investment is forecast in the 2019-20 Budget to fall by 7 per cent in 2019-20 and by a further 4 per cent in 2020-21, as existing projects are completed and recent weakness in building approvals flows through to activity,” Frydenberg said.
That could see prices again take off as supply lags and demand eats up any spare capacity in the market. A similar situation helped support price growth leading up to the market peak in 2017.
That saw combined capital city prices increase by more than 50%, Frydenberg noted. While the ensuing positive wealth effect had a strong flow-on effect to the economy it also shot the median house price in Sydney from $600,000 to $1 million, according to Treasury.
As wage growth grew by just a fraction of that rate, those same cities became enormously unaffordable at the same time that property investors profited.
However, the relationship between higher prices and the economy is not nearly as positive as the Treasurer has presented it to be, according to IFM Investors chief economist Alex Joiner, who said that “the negative impact of the debt that pushes up those prices is so readily discounted”.
“A 1% increase in household debt lowers GDP growth in the long run by 0.1% and this impact intensifies as household debt to GDP exceeds 70% – Australia is at 120%,” he tweeted. “The implications for policymakers is clear but seemingly ignored.”
Work from @stlouisfed and @BIS_org speaks volumes – a 1ppt increase in HH debt lowers GDP growth in the long run by 0.1ppt and this impact intensifies as HH debt to GDP exceeds 70% – Australia is at 120% – the implications for policy makers is clear but seemingly ignored #ausbiz pic.twitter.com/AhPtVU97lO
— Alex Joiner (@IFM_Economist) September 26, 2019
In other words, too much debt hurts the economy, not helps it.
And yet, besides acknowledging that 80% of household debt is tied up in the property market, the Treasurer was silent on the potential consequences of increased debt. Instead he indicated that the credit tap would again be turned back on.
“Clearly, the risk that the provision of credit may cause substantial hardship to some should not result in a significantly reduced ability to access credit by the vast majority of borrowers,” Frydenberg said.
“Given the key relationship between the health of the housing market and the wider economy, it is important that we continue to support the recovery that is underway,” Frydenberg said.
Certainly, he and the Reserve Bank of Australia are doing their bit to stimulate the market, with the expectation of two further rate cuts only likely to add further fuel to that fire.
“This stabilisation in the housing sector has occurred against the backdrop of the Federal election, a continuation of strong jobs growth, the passage through the Parliament of the largest tax cuts in more than twenty years and two interest rate cuts by the Reserve Bank,” Frydenberg said.
“Noting that it typically takes around one to two years for the full effect of changes in monetary policy to flow through the economy, we should expect the two interest rate cuts by the Reserve Bank to continue to support demand for housing,” he said, adding he was “optimistic” about the market.
However, with household debt already at eye-watering levels, it’s not clear whether higher prices would continue to flow through the economy. Pointing to the same pressure on households, AMP Capital chief economist Shane Oliver has previously told Business Insider Australia that any subsequent bounce in major markets will be more modest.
As affordability wallows in capital cities, there will be many who will hope Oliver is right.