2020 Budget

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EXPERT OBSERVER
This week for Australia was all about economic policy.
Beginning first with monetary policy. The RBA’s October decision and communications were as expected. There was no change in policy on 6 October, but a more dovish tone in the Governor’s statement signals the likelihood of an imminent move.
As detailed by Chief Economist Bill Evans, of greatest significance is the clear message the RBA Governor’s statement ended on: the “Board continues to consider how additional monetary easing could support jobs as the economy opens up further”.
The pricing in of additional easing by market participants was also recognised in the decision statement: “3-year yields have fallen to around 18 basis points as markets price in some probability of further monetary policy easing”. And open-ended concern over the labour market and activity was on display: “Unemployment and underemployment are likely to remain high for an extended period”; and “it will be some time before the level of output returns to its end 2019 level”.
It is worth adding that risks remain skewed downward: globally given a rising incidence of COVID-19 in a number of economies such as the UK, US, and Europe; and domestically as a result of the underlying weakness seen in Australia’s economy ahead of this pandemic.
We continue to expect the RBA will cut the cash rate; 3-year bond yield target; and TFF rate from 0.25% to 0.10% in November and will also announce additional government bond purchases for maturities between 5 and 10 years at that meeting.
Just a few hours after the RBA’s October meeting concluded, Federal Budget 2020-21 was handed down by Federal Treasurer Frydenberg.
At $213.7bn, the 2020-21 deficit is the largest ever by a considerable margin. Even relative to the size of the economy, this deficit is almost three time the size of that recorded in the aftermath of the GFC and the 1990’s recession.
Very clearly, spending on this scale is justified by the circumstances. Over the first six months of 2020, Australian GDP contracted by over 7% under the weight of the restrictions required to suppress COVID-19. The unemployment rate has since risen from around 5% to near 7%, we believe on its way to almost 8%.
Having already introduced policies to get through the recession, in Budget 2020 the Federal Government is seeking to shift households’ and businesses’ focus from the immediate to the medium-term, and in so doing lay a strong foundation for recovery.
The best example of this is found in the Budget 2020’s job initiatives. JobKeeper and JobSeeker have not been extended past their respective current March 2021 and December 2020 end dates. The focus has instead been shifted to new job creation through the introduction of the JobMaker and JobTrainer which incentivise business to create new jobs and apprenticeships, particularly for young Australians.
To support household confidence and incomes more broadly, the Government has also elected to bring forward the stage two tax cuts to 1 July 2020, raising the 32.5 and 37 cent thresholds to $45,000 and $120,000 respectively. An additional benefit will also be provided to those who earn up to $90,000 through the low and middle income offset in 2020-21.
Investment is also being encouraged. Businesses with turnover of up to $5bn will be able to deduct the full cost of eligible depreciable assets of any value in the year installed, to June 2022. Cash flow support is also being offered via a temporary loss carry-back arrangement which allows businesses to claim current losses against tax paid on prior profits, potentially generating a refund. Business and the economy more broadly will also benefit from additional infrastructure investment in coming years.
The Government is optimistic on the success of these measures, anticipating a GDP gain of 4.75% in 2021-2022 after 2020-21’s 1.5% forecast contraction. That said, on the Government’s forecasts, the unemployment rate remains materially above the full employment level in mid-2024, circa 5.5%. Our own expectations for the unemployment rate over the entire period are higher still, highlighting that a complete recovery from recession will be hard won and that risks will remain skewed to the downside. Additional significant policy initiatives will likely prove necessary in coming years.
Quickly turning to offshore developments. In both the United States and Europe, the most recent central bank meeting minutes again emphasised the risks clouding their respective outlooks as well as these monetary authorities’ willingness to do more. Progress towards additional fiscal support in the US, in contrast, remains absent, even as existing measures continue to roll off and the new case count rises again. Momentum in the US and Europe is robust for now, but the degree of slack is pervasive and the northern hemisphere is heading towards winter.
ELLIOT CLARKE is a senior economist at Westpac 
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A budget of unparalleled significance: Elliot Clarke

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EXPERT OBSERVER
Three major housing-related measures were highlighted in Treasurer Frydenberg’s budget address on the 6th of October: an extension of the First Home Loan Deposit Scheme (FHLDS), additional low-cost financing for affordable housing through NHFIC, and additional funding for the Indigenous Home Ownership Program.
Other measures detailed in the budget papers included a proposed capital gains exemption for granny flats for eligible persons from July next year, and a continuation of funding for state social housing services.
The papers also note that the expansion of the first home loan deposit scheme will be complemented by announced changes to ease credit regulations, which would boost credit availability.
Funnelling new demand into new property
First home owners have previously been a target of demand-side housing stimulus during economic downturns. Currently, Australia may be in a demographic ‘sweet spot’ for first home buyer demand.
The relatively large millennial generation is now estimated to be aged around 26 to 37 years old. According to ABS data, this puts millennials into the most common first home buyer age groups.
Alongside the typical barriers to entry for hopeful first home buyers, this may be one of the reasons the first home loan deposit scheme has been so well-subscribed since its introduction in January this year.
The extension to the FHLDS will see an additional 10,000 places available between the 6th of October and the 30th of June 2021, adding to the 20,000 places made available since the scheme started in January 2020.
However, these additional places are for construction or purchase of newly-built homes. The price thresholds have also been increased for newly built homes, which would potentially further incentivise a pivot away from the established housing market. The change in purchasing thresholds by region are summarised below.
<img src="https://www.urban.com.au/images/2020/10/8/Eliza%20Owen%20Budget.PNG" alt="">
It will be interesting to see if these conditions create as rapid an uptake as the places for established housing. In 2008, the temporary boost to the first home owner grant provided added incentives for new builds, yet 85% of its uptake was directed at established housing₁. However, incentives limited to new home builds could still help soften the blow to dwelling construction through COVID-19.
Since the introduction of the HomeBuilder scheme, new home sales have been boosted across Western Australia, South Australia and Queensland. CoreLogic data shows valuations ordered for the purpose of construction loans have seen a boost above pre-COVID levels since the introduction of the HomeBuilder scheme.
In terms of the impact these schemes would have on the established market, the increased incentive for new home builds could reduce established home prices if demand is diverted from this sector. However, the price of newly built homes may rise up to the threshold cut-off. It is worth noting that despite the rhetoric employed around the extension of the scheme supporting the construction sector, the budget papers highlight that this will not be enough to offset a decline in new dwelling investment.
At August, dwelling approvals for units had fallen -18.4% year-on-year. The budget papers forecast an 11% decline in dwelling investment over 2020-21, before rising 7% in 2021-22. Indirect Impacts on Housing With much of this year’s budget focused on the labour market, infrastructure construction and tax cuts, one could be forgiven for thinking housing reform and stimulus took a back seat in this year’s budget. However, some of the budget highlights will also have implications for housing.
These include: 
<ol>
<li>The JobMaker hiring credit and JobTrainer fund. These initiatives may help re-absorption of young people into the labour force following the initial pandemic-induced shock. This reflects the disproportionate job loss of young people throughout COVID-19, where around 40% of job losses between March and August were among those aged 24 and under. Job loss among younger Australians may present less direct risk to the housing market due to their lower likelihood of holding mortgage debt. However, support for youth employment may create more buoyancy in the rental market, where inner-city markets in particular have seen rental income declines since the onset of COVID-19. </li>
<li>A boost to infrastructure spending. Depending on the nature of infrastructure projects, surrounding housing markets could see a rise or fall in demand. Much of this year’s infrastructure allocation is in roadworks, which can have positive impacts on nearby housing by increasing accessibility to an area, but devalue properties with exposure to high traffic intensity, construction and noise pollution.</li>
</ol>
Support for regional Australia
The budget outlines $350 million in support for regional tourism to attract domestic visitation, and seeks to strengthen regional industry through concessional loans to farmers and access for exporters to global supply chains. This may further generate interest in regional dwelling markets, beyond what has resulted from COVID-19 and the normalisation of remote work. However, it worth noting this budget allocated little to fossil fuel alternatives, with climate change presenting on ongoing challenge to the liveability of some regional markets.
 Beyond the Budget
Further to the budget, there have been many institutional interventions which have likely played a role in stabilising housing market conditions since COVID-19.
These include, but are not limited to: 
<ul>
<li>A comprehensive monetary easing package from the RBA, which saw a reduction of the cash rate to 0.25%, bond yield targeting and the establishment of a term funding facility which has been extended to June next year; </li>
<li>Early access to $10,000 of superannuation in 2019/20 and 2020/21; </li>
<li>The Australian Prudential Regulation Authority (APRA) changed capital ratio expectations for the banking sector in March, facilitated home loan deferrals and later extended the availability of deferrals to March 2021;</li>
<li>The availability of JobKeeper and a boost to JobSeeker, which were made available from March, and extended to March 2021, albeit in a tapered form; and, </li>
<li>A mix of state-based incentives for home buyers, such as the Building Bonus grant in WA, the Home Improvement Scheme in the NT, and temporary stamp duty discounts in NSW.</li>
</ul>
These events remind us that housing does not operate in a vacuum. Many different factors are currently supporting housing demand. This has created a turn in housing market sentiment, which is seeing prices rise across the small capital cities, and a softening of price declines across Sydney and Melbourne.
Looking forward, there may still be more tailwinds to come. The RBA left the cash rate on hold in October ahead of the budget, but hinted in the final sentence of the statement on the decision that “additional monetary easing” was possible.
A recent address by Deputy Governor Guy Debelle carried the same messaging. Lower interest rates, together with easier access to housing credit could create further housing market demand, given prices have historically increased against a lower cost of debt and greater availability of housing finance options.
ELIZA OWEN is the Head of Research Australia at CoreLogic
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2020 Budget

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