Shaky Housing Adds $7 Trillion Hazard to Australia's Economy




  • In Business
  • 2022-06-30 07:41:54Z
  • By Bloomberg
 

(Bloomberg) -- Economists agree Australia's housing prices are about to sink. What they're not so aligned on is just how much a slide in the country's A$10 trillion ($6.9 trillion) property market will drag the economy down with it.

Most Read from Bloomberg

  • Trump's Final Scene Didn't Go According to Script

  • Democrats Weigh Paring Biden Tax Hike to Win Over Manchin

  • Venice Plans to Start Weeding Out Cheap Tourists

  • Fauci Suffers Covid Symptom Rebound After Course of Pfizer's Paxlovid

  • Disquiet Over the Housing Market Is Only Growing

With interest rates rising and inflation yet to peak, few expect an economy that's 60% fueled by consumption to escape unscathed from a housing correction. While some economists are talking of recession, others expect Australia's consumers to withstand the reversal of a wealth effect that accelerated during the pandemic.

The disparity in views underscores the delicate balancing act that Reserve Bank Governor Philip Lowe must perform as the central bank seeks to quickly tame inflation that's plaguing economies worldwide. Housing slowdowns driven by tightening cycles can have an outsized impact on broader economic growth as households cut spending to repay their mortgages, and Australia's central bank is forecast to hike rates at the fastest pace on record.

Here's a look at the optimistic and pessimistic scenarios for Australia's economy as its housing market cools.

The Bullish Case

Optimistic analysts cite solid underlying economic momentum with unemployment at a near 50-year low of 3.9%, high job vacancies and still resilient consumer spending as reasons the economy will withstand a slide in home prices.

By comparison, during the previous property downturn in 2017-2019, unemployment hovered at 5-5.5% while household savings were less than half of what they are today.

Since January, home prices in the bellwether Sydney market have declined 0.9%, while the nationwide value saw its first decline in June since 2020. Australia & New Zealand Banking Group Ltd. economists predict Sydney prices will drop one-fifth by the end of next year.

Bloomberg Intelligence sees prices in the nation's largest city falling 12-15% in 2022, based on the cash rate climbing to 1.75% by December.

Leading the cautious optimists is Governor Lowe, who has raised interest rates twice since May to 0.85% and is widely expected to move again in July. While he acknowledges that rapid hikes will trim the financial buffers amassed by the country's indebted households over the past couple of years, he sees reasons to be positive.

"We've got more financial assets as well as A$200 billion of extra savings, that's a lot of money," Lowe said in Sydney last week. "There are a lot of kind of moving pieces here, but where we stand today, household spending has been pretty resilient."

Among other reasons why most economists aren't panicking are recent data showing that Australian businesses' investment plans are the strongest in more than a decade, firms are still hiring hard and household savings are above 11% of income.

Job vacancies also remain high, with data Thursday coming in at 13.8% for the three months through May, more than double the previous quarter.

Australia's Higher Household Buffers Limit Risk From Rising Debt

"There are many positives that will keep Australian economic growth from collapsing: high consumer accumulated savings, large pipeline of residential building work, government spending and solid commodity export demand," said Diana Mousina, a senior economist at AMP Capital Markets.

Andrew Boak, chief economist at Goldman Sachs Group Inc., has one of the most aggressive forecasts for the RBA's rate path. While that drove him to also downgrade his economic growth estimates, he reckons the risks to the household sector from rising rates are manageable. Goldman predicts 50-basis-point rate hikes in July, August and September, and sees the RBA's terminal rate at 3.1%, almost in-line with money market bets of 3.2%.

Boak points to a drop in net housing debt as a share of income from its 2008/09 peak, along with RBA data showing the average mortgage holder in Australia is 21 months ahead of repayments.

In addition, "seven years of macro prudential policy has substantially reduced risky lending," Boak said in a report earlier this month, "and our analysis on the composition of household debt and the implied rise in the debt-servicing burden looks manageable."

The Bearish Case

Economists surveyed by Bloomberg are predicting a mild economic slowdown in 2023 to quarterly growth rates of around 0.5% from a brisk pace of above 1% over the past year, as tighter monetary policy pushes unemployment higher and consumption lower.

While consumer spending has remained solid to date as the wealth effect reverses and loan repayments increase further -- especially after this month's surprise 50-basis point hike -- a crunch may still be on the cards for Australian households, whose record high debt level of 187% of income is among the world's worst.

In the pessimists' corner, Deutsche Bank AG sees a heightened risk of a recession Down Under with Nomura Holdings Inc. an outlier in actually calling one for 2023.

Nomura's Andrew Ticehurst, who sees the cash rate peaking at 3.1%, expects a slowing housing sector together with a "deleveraging" consumer as key drivers of a likely recession. He sees the average home loan rate rising by 140 basis points, in addition to an estimated 170-basis-point increase so far this year from lows of around 3%.

"We are particularly mindful of potential downside and non-linear amplifier effects, given that Australian consumers are carrying very high debt levels by global standards," Ticehurst said, adding that an inflated balance sheet could deepen the economic downturn.

(Updates with job vacancies in 12th paragraph)

Most Read from Bloomberg Businessweek

  • How Generations of Black Americans Lost Their Land to Tax Liens

  • You Can Give People What They Want. Or You Can Give Them Web3

  • Moving to Ban Juul, the FDA Delivers a Blow to Big Nicotine

  • ADT Is Betting Google Can Drag It Into the Future

  • Did Razzlekhan and Dutch Pull Off History's Biggest Crypto Heist?

©2022 Bloomberg L.P.

COMMENTS

More Related News

5 Money Moves Experts Make When Inflation Is High
5 Money Moves Experts Make When Inflation Is High

The most recent Consumer Price Index (CPI) report puts the annual inflation rate at 9.1%, up from 8.6% the month before. That's nearly five times the sub-2% ...

Saudi Oil Windfall Tops $65 Billion Without Dividend Rise
Saudi Oil Windfall Tops $65 Billion Without Dividend Rise

(Bloomberg) -- Most Read from BloombergSaudi Billionaire Made $500 Million Russia Bet at War OnsetWill Housing Prices Flatten - or Collapse?How the US...

Activist Investor Dan Loeb Takes New Stake in Disney, Urges ESPN Spinoff
Activist Investor Dan Loeb Takes New Stake in Disney, Urges ESPN Spinoff

(Bloomberg) -- Activist investor Dan Loeb is urging Walt Disney Co. to consider a spinoff of ESPN, cut costs and add new directors as part of a sweeping set ...

Lundin Weighs Sale of $1 Billion Copper-Zinc Mine in Portugal
Lundin Weighs Sale of $1 Billion Copper-Zinc Mine in Portugal

(Bloomberg) -- Lundin Mining Corp. is weighing the sale of a copper and zinc mine in Portugal that could be valued at about 1 billion euros ($1 billion...

Iran Set to Give Nuclear Deal Response and Signals Pact Is Close
Iran Set to Give Nuclear Deal Response and Signals Pact Is Close

(Bloomberg) -- Most Read from BloombergSaudi Billionaire Made $500 Million Russia Bet at War OnsetWill Housing Prices Flatten - or Collapse?How the US...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

  • I quite like reading an article that can make people think. Also, thanks for allowing for me to comment!

    REPLY
  • Mantra vashikaran to control wife
    (2022-06-30 12:49:09Z)

    Excellent Article!!! I like the helpful information you provide in your article.

    REPLY
  • dark web links
    (2022-06-30 13:37:45Z)

    But what if my son is on the dark web? Well, then there is really only one solution. And that is to change all our web pages to use HTTP instead of SSL

    REPLY
  • deep web
    (2022-06-30 13:55:53Z)

    To change what if my son is on the dark web links, we will just change our IP address. If we do this, when we log into the Internet, our web browser will ask for a new IP address

    REPLY
  • dark web links
    (2022-06-30 14:04:15Z)

    Of course, there are some drawbacks to this method. One of these is that our request for information may not be well-researched or well-needed. Also, we will be transferred to a fake web site, which may only look like a legitimate web site, but it is a web site that can steal our personal and financial information

    REPLY
  • dark web sites
    (2022-06-30 14:12:07Z)

    If you have a subscription to one of those sites that syndicate's web links, then you may have noticed that there are sometimes links on the page that you get from a post. If you know what to do when I say "what should I do when my son is on the dark web", then you can avoid that problem

    REPLY
  • dark web
    (2022-06-30 14:24:43Z)

    If you want to find out more about a web link, all you need to do is visit the website where the information came from. If the information is still available, you will be able to see the IP address of where the link was first posted.

    REPLY
  • work from home jobs
    (2022-06-30 14:32:36Z)

    One of the most effective affiliate marketing success tips I can share with you is to have a plan. Affiliate marketing is not a one-time-only venture, it takes work.

    REPLY
  • affiliate marketing success
    (2022-06-30 14:42:26Z)

    It's great to have a mentor that can push you in the right direction, but in my opinion the best person to have as an affiliate marketing assistant is yourself. A good mentor will teach you affiliate marketing success tips, strategies, and tools, but will also encourage you when times are tough and help you through any problems you may be facing

    REPLY

Top News: Business