News & Media

May 2017 Newsletter

NSW THE TOP PERFORMER IN AUSTRALIA

It’s official! New South Wales has the number one economy in Australia.

According to the latest State of the State sreport from CommSec, New South Wales has again ranked number one, with the ACT overtaking Victoria to claim second place.

CommSec assesses all states and territories on eight indicators:

- Economic growth

- Retail spending

- Business investment

- Unemployment

- Construction work done

- Population growth

- Housing finance

- Dwelling commencements

The report also looked at economic momentum and growth – and NSW cruised in comfortably. We lead on business investment, retail trade and dwelling commencements.

"Population growth has been picking up and that's creating demands for homes, and those homes are now being built," CommSec's chief economist Craig James said. "That's creating momentum across the broader economy. New South Wales ranks first, second or third across the eight indicators that we look at."

Not surprisingly, Sydney’s strong housing market kept NSW in the lead for dwelling starts – these were 87 per cent above decade averages. And in the December quarter the number of dwellings started was 15.1 per cent higher than a year prior.

But we shouldn’t become complacent.

The latest data indicates a multi-speed national economy. NSW is solidly on top with little to separate the ACT and Victoria,” said Mr James. “Last quarter we said that NSW may experience a challenge from either Victoria or the ACT over the coming year. And that remains the case.”

Across the remainder of the country Tasmania was fourth, Queensland fifth, Northern Territory sixth and Western Australia seventh.

HOUSING AFFORDABILITY STILL A FOCUS IN THE FEDERAL BUDGET

Next Tuesday, May 9 at 7.30pm (AEST), the federal treasurer Scott Morrison hands down his second budget. And from all the reports in the lead up to the budget, there’s expected to be a fair amount of focus on housing affordability - although perhaps not as much focus as originally thought.

Prime minister Malcolm Turnbull has hosed down expectations that housing affordability would be at the heart of the budget. “I’ve read that in the press, but I don’t think that’s a fair description. The focus of the budget is, and has to be, firstly driving continued strong economic growth. That is the tide that we have to ensure lifts all boats.”

The changing rhetoric of the government might have had something to do with recent polling by JWS Research, showing that voters are more concerned about health, economic growth and welfare than they are about housing affordability. But that doesn’t mean housing affordability has taken a back seat. It equals education funding as a priority, in addition to beating debt reduction, infrastructure investment and personal or business tax cuts.

Regardless of Australians’ priorities, there’ve been plenty of pre-budget “leaks” to test public opinion on housing affordability – and test it they have.

The idea of first home buyers being able to dip into their super to be able to buy a home has been lambasted by many. The negative gearing debate has raised its head yet again, but been ruled out by the treasurer. A tax on vacant houses has been mooted, but been derided as ineffective. There’s also the suggestion of older Australians receiving a financial incentive to downsize their family home.

And then there’s the idea of changing the capital gains tax (CGT) discount, which has been in place since 1999. Recently the government has mentioned the idea of cutting the capital gains tax discount from 50 per cent to 25 per cent. While this change hasn’t been ruled out, there appears to be some reticence on the part of Mr Morrison. He says mum and dad investors are important for increasing supply of rental properties and he says the reasons they own those properties is for capital gains. So the concern is if they’re made to pay tax on capital gains, then it’ll curtail these investors providing rental properties.

Australians have become voracious property investors. In 1990 we invested around $10 billion in residential investment properties each year. Fast forward more than 25 years and that’s increased to around $500 billion a year.

Australia has an estimated 2 million landlords - and most don’t have a substantial portfolio. In the 2015-16 financial year, 72 per cent had one property while 90 per cent had two or fewer. Which puts a dampener on the idea of stopping investors from amassing huge portfolios of property, another suggestion that’s been bandied around. Many property experts have slammed the idea, claiming it wouldn’t be a fix for housing affordability.

Grattan Institute chief executive John Daley called the idea “genuinely stupid”. In an article on Domain.com.au, he said one of the major problems facing those in the housing market today was not multiple property owners, but so-called “mum and dad” landlords with just one investment property.

“One of the fundamental problems with the Australian rental market is that it doesn’t have enough multiple property landlords,” he told Domain. He went on to say that those with large portfolios (i.e. 10 or 20 investment properties) would be more included to offer long-term leases and stability for tenants. “There are very few big landlords and very few long-term tenancies,” he said. He added that it did not make sense to blame housing affordability on a small number of multiple property owners.

HITTING THE BRAKES BUT WILL IT WORK?

Surging house prices aren’t just a concern for regulators in Australia; global regulators in many parts of the world are seeking to prevent the asset price bubbles in the post-GFC era of record low cash rates. We’ve seen regulators in Australia, New Zealand, Ireland, Canada and a host of other countries introduce macro prudential rules in an effort to rein in house price growth.

In Australia, in 2014 the Australian Prudential Regulation Authority (APRA) placed a 10 per cent limit on growth in new lending to investors, while in recent times APRA issued new rules to limit the flow of interest-only mortgage lending by banks to 30 per cent of their total new residential mortgage lending.

APRA has also instructed banks to place “strict” internal limits on the volume of interest-only loans at loan-to-valuation (LVR) ratios of more than 80 per cent, and told them to ensure tougher scrutiny and justification of any LVR for an interest-only loan above 90 per cent.

"A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience," RBA Governor Dr Phillip Lowe told the RBA Board Dinner in April. "With interest rates so low, now is a good time for us to move in this direction."

But whether or not these measures will work to dampen house prices in Australia remains to be seen. A number of overseas economists and fund managers have said the efforts to control the housing market through a clampdown on interest-only loans could be futile, with Australian borrowers’ appetite for such loans defeating macro prudential controls.

In a recent economic briefing, UK-based Standard Life Investments stated that “the latest Financial Stability Review certainly increases pressure on banks to rein in excessive risk, and lenders are already responding, with out-of-cycle mortgage-rate hikes and tougher loan serviceability tests. However, the persistence of investor-only and investor loan growth is likely to continue to increase vulnerabilities in the Australian housing market.”

Investor loans result in a "higher average level of indebtedness" compared to a typical principal and interest-payment loan, and borrowers are more likely to fall into negative equity if house prices fall, Standard Life Investments said.

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