2021 Recovery

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EXPERT INSIGHT

Australian capital city average dwelling prices rose a whopping 2.8% in March according to CoreLogic and are up 4.8% on a year ago. This is their seventh monthly gain in a row and their fastest monthly rise since October 1988 and they have now surpassed their September 2017 record high by 3.5%.

Sydney dwelling prices rose a very strong 3.7%, which is their faster since August 1988, and they have now surpassed their July 2017 record high.

Melbourne prices also rose 2.4% and have now surpassed their November 2017 record high.

Prices in other cities were all up strongly led by Hobart with prices up 3.3% in March, followed by Canberra up 2.8%, Darwin up 2.3%, Brisbane up 2.4%, Perth up 1.8% and Adelaide up 1.5%. Prices in Hobart, Canberra, Brisbane and Adelaide are all at record highs.

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Regional dwelling prices rose 2.5% in March and are up 11.4% on a year ago with their relative strength over the last year reflecting lower levels of indebtedness and hence less vulnerability to the financial stresses caused by the pandemic driven economic downturn, less exposure to the slump in immigration and increased buyer interest as people seek to relocate from cities as part of a secular trend towards working from home and a greater focus on lifestyle.

Capital city house prices rose 3.1% in March and 6% over the last 12 months whereas unit prices lagged with a 1.9% gain in the month and 1.1% rise on a year ago, with the relative underperformance reflecting an ongoing shift in preferences towards houses as a result of more working from home and a lifestyle choice and as weak rental conditions made worse by the slump in immigration constrained the inner city unit markets in Sydney and Melbourne.

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Over the last 12 months unit rents fell -3.8% compared to a 5.2% in house rents, with the weakness in unit rents concentrated in Sydney and Melbourne. However, the Sydney and Melbourne unit rental markets have shown signs of stabilisation and improvement in recent months.

The strength in home prices is consistent with other data showing a booming property market including record new housing finance commitments over recent months, surging home sales and record or near record auction clearance rates.

Clearance rates are now at levels consistent with 15% to 20% annual price gains in Sydney and Melbourne!

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So why is the property market back to booming?

The property market has seen a huge turnaround from expectations of a year ago for sharp falls in home prices as a result of the pandemic driven lockdowns. Capital city home prices did fall nearly 3% around mid-last year (led by Melbourne), but the fall was brief as the government policy response intervened to protect the housing market from the recession and to push prices higher. Basically the combination of ultra-low mortgage rates, multiple government home buyer incentives, economic recovery, the strengthening jobs market and now an increasing element of FOMO (buying now for fear of missing out) combined initially with low listings are driving prices sharply higher. The pandemic driven desire to “escape from the city” also appears to be pushing up suburban house prices and regional prices up at a faster rate than its depressing inner city unit prices in Sydney and Melbourne.

While first home buyers led the initial recovery, spurred on by various incentives, owner occupiers have followed and now investors appear to be starting to jump in too.

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Average capital city dwelling prices have now surpassed their September 2017 boom time high by 3.5% with Brisbane, Adelaide, Hobart and Canberra and now Sydney and Melbourne along with average regional prices all at clear record highs. Perth and Darwin remain well down on their 2014 mining boom highs, but are now recovering rapidly.  

Outlook

With variable mortgage rates set to remain ultra-low for the next few years average prices are expected to rise another 15-20% or so over the next 18 months to two years.

However, the pace of increase is likely to slow through 2021-22.

First, government housing incentives are likely to be sharply curtailed in the months ahead with HomeBuilder ending, the First Home Loan Deposit Scheme tapped out and some states may start to wind back various incentives.

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Second, in the absence of an ability to raise interest rates, the RBA and APRA are expected to reach yet again for macro prudential controls to slow housing lending. While they don’t target house prices and are of the view that we have not yet seen a significant deterioration in lending standards on the metrics they look at, past experience indicates that surging house prices leads to a deterioration in lending standards and increasing financial stability risks. And the metrics APRA and the RBA look at are starting to push up in the direction of a deterioration in lending standards with record housing finance pointing to an acceleration in housing debt, an increasing share of lending at high loan to valuation ratios and a rising share of interest only loans albeit from a low base. All of which suggests that it will make sense to start tapping the lending standards brake soon. The first thing to do would be to increase interest rate buffers but limits on high loan to valuation ratio lending and high debt to income ratio lending may make sense too.

Thirdly, the recovery in immigration once the international borders are reopened is likely to be gradual and if so this will allow for years of property undersupply to give way to oversupply which is the best way to take pressure off house prices.

Fourth, it’s likely that the 30 year tailwind for the property market of falling interest rates has now run its course. Four year plus fixed rate mortgage rates look to have bottomed and the RBA seems more determined than ever to see inflation sustained in its target range which will ultimately put an end to the long term downtrend in interest rates.

Fifth, poor affordability will start to become an increasing constraint again if it’s not already.

Finally, government policy should further encourage the shift away from city living as unleashed by the pandemic and working from home as a way to take pressure off capital city property prices. This remains to be seen though. 
The ending of JobKeeper and the expiration of home loan deferrals may also act as a dampener to the extent that they may boost forced sales but in the absence of a significant new coronavirus driven lockdown the impact is likely to be marginal. Actual net job losses from the ending of JobKeeper are likely to be low and the proportion by value of home mortgages on payment holidays has collapsed from 11% in May to below 2%.
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Australian capital city average dwelling prices rose a whopping 2.8% in March according to CoreLogic and are up 4.8% on a year ago

soliver

Australian capital city home prices surge 2.8% in March, their fastest since 1988: Shane Oliver

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EXPERT INSIGHT

We have lifted our growth forecast for 2021 from 4% to 4.5%; the key will remain the household sector, where accumulated savings; ongoing reopening; vaccines and the boom in the housing market are likely to offset the major headwinds of reduced government support and zero net immigration.

Westpac has lifted its GDP growth forecast in 2021 from 4% to 4.5%, with the 2022 forecast holding at 3%.

The December quarter national accounts provided rich evidence of the key dynamics that will emerge as the recovery continues.

They showed continued evidence of Australia’s bounce back from the pandemic induced recession in the first half of 2020.

Growth in GDP printed at 3.1%qtr, following the 3.4% increase in the September quarter. Annual growth is now -1.1% for 2020, compared to market expectations of -2% only a week earlier.

The key components of growth – household consumption; business investment and dwelling construction all surprised on the upside.

Our forecasts for GDP growth anticipate solid ongoing momentum in those components in 2021.

Household consumption lifted by 4.3% in the December quarter 2020, significantly boosted by the reopening of Victoria where spending increased by 10.4%. Spending in the rest of Australia rose by 2.3%. This result provides compelling evidence of the “reopening” effect with Victoria contributing around 2ppts to the growth rate in household spending.
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bevans

Boom in housing market likely to offset major economic headwinds: Westpac's Bill Evans

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Property transactions will increase by about a quarter in 2021 after a significant slump through the middle of 2020, according to research from RiskWise Property Research.  

Doron Peleg, CEO of RiskWise Property Research noted that “although transactions in the established market continued to flow through in modest volumes, through April and May off the plan sales were becoming increasingly scarce.”

“The exact final numbers will only be known in the fullness of time, but it seems likely that with total stock listings stuck at low levels deep into 2020, stamp duty coffers will experience a substantial hole due to this year’s major disruptions” Mr Peleg said.  

Mr Peleg said market research suggested that there is "a significant burst of pent-up demand set to be unleashed" as Victoria’s economy has reopened and travel restrictions are eased.

Pete Wargent of BuyersBuyers.com.au said that the biggest unknown factor is whether the international borders will be open and flights operational before the second quarter of calendar year 2021”. 

“While acknowledging the potential for delays in vaccine progress, it seems likely that residential property transactions will increase by a quarter in 2021 as in addition to homebuyers we’re now seeing property investors also returning to the fold, lured by the prospect of neutral-to-positively geared investments”.  

Pete Wargent noted “2020 has been one of the most unusual years on record for real estate markets in Australia.”

“We came into the year with relatively low unemployment and confidence running at a solid clip, but as the first quarter of the calendar year progressed it became increasingly clear that significant disruption could be on the cards.” Mr Wargent said. 

“We then had multiple buyers putting their searches on hold until the situation became clearer.

"But now it’s notable that they’re feeling confident enough to buy again”.

 
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Property transactions will increase by about a quarter in 2021 after a significant slump through the middle of 2020, according to research from RiskWise Property Research

jchancellor

Property transactions to spike by a quarter 2021: RiskWise

<html><body>Through to November, there have been signs of an economic and property market uplift in Victoria, according to the latest data from CoreLogic.

This follows a decline in Melbourne dwelling values, which are sitting 5.0% below the record high value reached in March 2020.

New listings across Melbourne rose from 2,756 in the month of September, to over 8,000 in November. Meanwhile, sales activity rose from 1,546 to an estimated 4,301. This means the increase in sales activity has not matched the big increase in stock on the market, which may have a dampening effect on the recovery of the Melbourne market.

The Melbourne rental market has been particularly impacted by the pandemic. This may also end up impacting property values, and CoreLogic data suggests larger dwelling value declines are correlated with declines in rent values.
"Nationally, housing market values did not see the large decline anticipated at the start of the COVID-19 pandemic. Housing values fell just 1.9% between March and September before moving into a recovery trend, increasing 0.4% nationally through October and 0.8% in November," Eliza Owen, CoreLogic’s Head of Research Australia said.

"Relative to previous housing market downturns, the current decline through to November seems relatively mild, with dwelling values just 0.7% below the pre-COVID levels. There are numerous factors which have contributed to the prevention of a larger downturn in dwelling values including the institutional, coordinated response to the pandemic, which have seen low borrowing costs, added incentives for first home buyers and the extension of mortgage repayment deferrals limiting forced sales."

"Despite an initial slump in housing finance through the beginning of the year due to the COVID-19 pandemic, the year to October saw a remarkable 14.5% lift in the volume of finance secured for the purchase of property, according to ABS lending indicators."

"The post-COVID mortgage lending boost was driven by owner-occupiers including changeover buyers such as upsizers and downsizers, as well as buyers getting into the property market for the first time."

"Money lent to first home buyers saw the fastest growth rate at 35.1% in the year to October, accounting for 22.1% of lending, up from 18.8% in the year prior. Meanwhile, investor mortgage lending increased less than 1% in the same period. There are several factors that contributed to this growth in first home buyer activity, including generational trends, monetary and fiscal incentives and lower dwelling values and competition," she concluded.</body></html>

Through to November, there have been signs of an economic and property market uplift in Victoria, according to the latest data from CoreLogic.

urban.com.au

Despite a recovery, Melbourne property values remain 5% below peak

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Experts are positive that Australia is on track to exit a recession, and that property prices will return to 2019 levels next year, according to this month's Finder RBA Cash Rate Survey.
Of the 40 experts and economists who weighed in on future cash rate moves and shared their key economic and financial predictions for 2021; all 40 correctly predicted that the cash rate would remain at 0.10%.
From the closure of major bricks-and-mortar retail stores to the national uptake of a COVID-19 vaccine, experts were asked to rate the likelihood of various economic scenarios unfolding in the year ahead.
Australia will exit recession
When asked about the likelihood of Australia exiting and staying out of a recession in 2021, all 28 experts who weighed in agree that this is either “likely” (54%, 15) or “very likely” (46%, 13).
Economists are also optimistic about the nation’s GDP growth, with 79% (22) expecting the economy to see its first quarter of growth before the end of 2020.
Graham Cooke, insights manager at Finder, said that the nation’s economy may have already recovered.
“Official GDP figures for the September quarter will be released this Wednesday, with the general consensus being that Australia may have already exited a recession.
“This can largely be attributed to almost $500 billion in government and central bank stimulus and effective COVID-19 control measures alongside news of a vaccine, strong consumer spending, and a resilient property market.
“It remains to be seen if our economy can keep moving uphill once the training wheels come off.
“The December quarter is likely to be robust as well, meaning it’s highly probable that we may see a gradual recovery of GDP through 2021,” Cooke said.
Property prices and sales volume to return to 2019 levels
Australia’s property price recovery looks set to continue.
More than 4 in 5 experts (85%, 24/28) predict that house prices will increase above 2019 levels next year, and 79% (22/28) think that sales volumes will recover to match or exceed 2019 levels.
CoreLogic data shows that, despite predictions of up to 15% drops in value earlier in the year, house prices in Australia have proved resilient.
Prices increased in all capitals bar Melbourne in October and were significantly higher compared to October 2019 in all cities bar Perth, which saw a marginal price increase of only 0.04%.
According to Matthew Tiller of LJ Hooker, record-low interest rates have been a key driver of market stability.
“One of the main beneficiaries of the ongoing record low rates has been property markets, with LJ Hooker agents reporting a significant increase in enquiries and strong levels of sales transaction volumes,” he said.
Closure of major bricks-and-mortar stores due to increase in online shopping
E-commerce surged during the pandemic, with more than 8.5 million households shopping online between March and October in 2020 according to Australia Post figures.
Yet over half of the experts (56%, 15/27) believe that the recent uptick in online shopping could be the death knell for major bricks-and-mortar department stores like Myer and David Jones.
Cooke said that Aussie shoppers are becoming increasingly wise to the outdated retail model used by department stores.
“Department stores operate on an old-fashioned regular discounting model, where an item is advertised at an inflated price for several weeks, only then be ‘on sale’ for several more weeks.
“Consumers are becoming annoyed by this false discounting, and they prefer the flat low-cost pricing offered online,” Cooke said.
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j.ballantyne1990-6AQqhLzZaK

Australian property to bounce back in 2021: Finder.com.au survey

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EXPERT OBSERVER
The Business Indicators publication is largely important each quarter for the data on inventories that helps finalise the estimate for economic growth.
The gross domestic product (GDP) or economic growth figures are released on Wednesday. But there are still two important ‘partial’ components before then in the shape of government spending and net exports – the figures released on Tuesday.
At this stage GDP is expected to have rebounded by at least 2½ per cent. That means that the economy exited from its first ‘technical’ recession in 29 years during the September quarter.
Courtesy of government assistance, corporate profits rose another 3.2 per cent in the September quarter after the 15.8 per cent gain the June quarter. Profits are rising at the fastest annual rate in three years. The aim of policymakers has been to keep business in business and keep workers in jobs. And all evidence suggests that the measures are working well.
What do the figures show?
Business Indicators – September quarter
Company operating profits rose by 3.2 per cent in the September quarter to be up 18.6 per cent on the year. Profits rose in 12 of the 15 industry groups in the September quarter.
Inventories fell by 0.5 per cent in the September quarter after a 2.9 per cent fall in the June quarter. Inventories will add 0.9 percentage points to quarterly economic activity. Four of the six industry sectors posted declines in inventories led by Electricity, gas, water and waste services (down 3.7 per cent).
The total real value of sales rose by 4.4 per cent in the September quarter but was down 5.4 per cent on the year. Real sales rose in all of the 15 industry sectors except Mining (-1.5 per cent) in the September quarter. In current prices, sales rose by 4.0 per cent in the quarter but fell 6.8 per cent on the year.
Over the full year to September, real sales fell by 3.6 per cent on a year earlier (decade average +1.5 per cent). And in current prices, sales fell by 3.2 per cent in the full year to September (decade average +3.3 per cent).
In current prices, sales rose in seven of the states and territories in the September quarter: NSW (up 5.8 per cent), Victoria (up 2.2 per cent), Queensland (up 2.8 per cent), South Australia (up by 9.8 per cent), Western Australia (up by 1.5 per cent), Tasmania (up 13.2 per cent), Northern Territory (down 0.7 per cent) and ACT (up by 4.0 per cent).
Wages &amp; salaries (includes changes in wages and employment) rose 2.4 per cent in the quarter to be up 0.4 per cent on the year – reflecting slower growth in wages but higher employment.
<img src="https://attachments.office.net/owa/jfidler%40propertyobserver.com.au/service.svc/s/GetAttachmentThumbnail?id=AAMkADQ3ZGM4MTFjLTUzM2MtNGRlMy1hNTRkLTVlMTg5NTg1MTZjNABGAAAAAACwVkXUIRtYR67gBrMt3wq%2FBwDeQoafX1oGQ7i8PLrB5m%2FDAAAAAAEMAADeQoafX1oGQ7i8PLrB5m%2FDAAJKzD5JAAABEgAQACK8R8yukhJBqpGRzo6mVI4%3D&amp;thumbnailType=2&amp;token=eyJhbGciOiJSUzI1NiIsImtpZCI6IjU2MzU4ODUyMzRCOTI1MkRERTAwNTc2NkQ5RDlGMjc2NTY1RjYzRTIiLCJ0eXAiOiJKV1QiLCJ4NXQiOiJWaldJVWpTNUpTM2VBRmRtMmRueWRsWmZZLUkifQ.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.PH1fFwCfxZjuKoCpgQN1tXA6f07WVbH29jElNeiSFUlSFZ3yeOwE2vVYs2A88-9jGxxWgmcGmIKLWiJGzTBz-K55yVbspXl6ZzZKrz_-hG22aBp0ZIpwJ7tyGmyOUrX_40_4SOMndfygi7zdLAfNAvrcd2JUTRpGfQSQkpacGVryDew3cpEWLs3zLT3mC-L3riY2ZwbNl-ePR30-nU0zHUflO9UBxFGNi7X20Bx7ed-jmb2X-9icUAV-HHGozA4YBFqXo2zodcNtagRWkuUpP7Wm2ep6zjXkiY1VtKYlH9ZFORPWklZfDGzF3QZPX67r8Nai8TlLrlRt3ZWDTvRnug&amp;X-OWA-CANARY=cYNCnnKQIkSMgBoXnImPAMB8Nr_dlNgYalBOlv2hG_ZgUuA-eID-bAWSd2QX6b1jnzn3kAOGXU0.&amp;owa=outlook.office.com&amp;scriptVer=20201123001.11&amp;animation=true">
What are the implications for investors?
It’s all about COVID. It’s an extraordinary period but we are coming out the other side into a different world.
The good news is that the virus is suppressed across Australia. Yep more good news with stimulus measures to remain in place until we are fully back on our feet. And even more good news with the progress of vaccine development and potential for roll out in coming months.
Our major trading partner, China, continues to show encouraging signs of economic recovery with both manufacturing and service sector purchasing manager indexes well above the 50 line in November – the line that suggests expansion of activity.
CRAIG JAMES is the Chief Economist at CommSec
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cjames-5S2v74qSNK

Bounce-back from COVID-19: CommSec's Craig James

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GUEST OBSERVER
From the 1980s right through to the global financial crisis, the standard response in Australia and elsewhere to too weak or too strong an economy has been <a href="https://www.investopedia.com/terms/m/monetarypolicy.asp">monetary policy</a> — the manipulation of interest rates by a central bank, in our case the Reserve Bank.
Rates can be moved quickly, and central banks are seen to be independent and to behave responsibly, while governments are seen as making decisions for political rather than economic reasons.
But since the global financial crisis (in much of the world) and since COVID (in Australia) managing the economy has come to be seen once again as the role of the government through spending and tax decisions — so-called <a href="https://www.investopedia.com/insights/what-is-fiscal-policy/">fiscal policy</a>.
One reason is interest rates have fallen so low there’s been little left to cut.
After the 1990s recession, the Reserve Bank cut its cash rate from 17% to 7.5%. After the financial crisis it cut it from 6% to 3.25%. By the time COVID came around the rate was already at a record low of 0.75%
The bank did cut, as much as it could — first to a new record low of 0.5%, then to 0.25% and now to <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">0.1%</a>, but there’s little more it can do, at least with the cash rate.
Rate cuts have been used up
And there’s little that whatever cuts it could make could do to boost the economy. Their immediate impact would be to push up the prices of houses and other assets and worsen inequality.
So the government has turned to fiscal policy. Since the onset of the pandemic the Commonwealth has provided A$257 billion in direct economic support; about 13% of GDP.
By comparison, in response to the global financial crisis it spent $72 billion; about 6% of GDP.
It will help, but it will do little about the underlying reason why rate cuts have become ineffective, which is an excess of savings over opportunities to invest them.
We’re in a savings glut
As far back as the mid-2000s the then chairman of the US Federal Reserve, Ben Bernanke, was talking about a savings glut: too many savings chasing too few opportunities to invest.
For a while the US and other economies remained strong as the downward pressure of excess savings on demand was held at bay by households borrowing ever increasing amounts in order to spend.
That escape valve closed after the global financial crisis, and numerous (mostly American) economists began talking about ongoing slow economic growth, which they described as “<a href="https://theconversation.com/have-australian-bankers-bought-the-secular-stagnation-theory-29765">secular stagnation</a>”.
There are two suggested explanations. One involves <a href="https://www.investopedia.com/terms/s/supply.asp">supply</a>. It might be that the ability of the economy to supply more of what we want is slowing.
The other involves <a href="https://www.investopedia.com/terms/d/demand.asp">demand</a>. It might be that we not demanding enough of the things the economy can produce.
Potential supply might be slowing because modern-day technological progress, principally in the form of information and communications technology, is having <a href="https://rootsofprogress.org/summary-the-rise-and-fall-of-american-growth">less of an impact</a> than previous new technologies such as electricity, the internal combustion engine or the automated production line.
 
Australia’s treasury has also suggested the Australian economy might be <a href="https://treasury.gov.au/speech/s2019-396067">less dynamic</a>, with lower levels of firm entry and job switching, slower adoption of frontier technologies and processes, and less labour reallocation of resources from low to high productivity firms.
It is these supply-side constraints that have captured the attention of the Australian authorities.
On the other hand, in the US, former Treasury Secretary Lawrence Summers has pointed out that if supply-side constraints were the principal problem, <a href="http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/">inflation would have been expected to accelerate</a> as capacity to supply fell short of demand, whereas in fact it has decelerated.
Low spending means low investment
What’s more likely is there’s insufficient demand for the goods and services the economy is able to supply.
This would explain why firms are reluctant to invest (and invest in new technology) to make more goods and services, a reluctance that might itself be slowing technological progress and the rate of increase in potential supply so that it better matches the slow increase in demand.
It would also explain why interest rates have been falling. Businesses don’t need funds to invest on the scale they once would have, however widely available those funds are.
According to Australia’s <a href="https://treasury.gov.au/speech/policy-and-evolution-uncertainty">treasury secretary</a> Steven Kennedy, this savings glut is the reason the neutral interest rate (the real cash rate that is neither <a href="https://theconversation.com/why-zero-interest-rates-are-here-to-stay-149523">expansionary or contractionary</a>) has been falling over the last 40 years.
He attributes these lower rates to “some combination of population ageing, the productivity slowdown and lower preferences for risk among investors”.
Given the international literature, it is surprising he hasn’t also identified changes in the distribution of incomes.
As is well known, higher income families tend to have a higher propensity to save than low income families.
Our incomes are becoming more skewed
This means changes in the distribution of incomes can drive changes in demand.
In Australia’s case — and Australia is far from the worst among the advanced economies — over each of the decades in the 1990s and 2000s male real earnings grew by about <a href="https://www.urban.com.au/property-observer">30%</a> at the top of the distribution, while at the bottom of the distribution they grew not at all in the 1990s only by 10% in the 2000s.
For females, real earnings grew by about 15% for women on below median earnings in each of the decades, while at the top of the distribution, female real earnings grew by 25% in the 1990s and <a href="https://www.urban.com.au/property-observer">35%</a> in the 2000s.
Although the available data doesn’t show any further increase in income inequality during the 2010s, it shows the previous increases haven’t been reversed.
In addition, the unequal distribution of wealth has <a href="https://www.abs.gov.au/statistics/economy/finance/household-income-and-wealth-australia/latest-release#key-findings">worsened dramatically</a>.
For fiscal policy to be effective from here on it will need to be directed toward Australians with high propensity to spend and away from Australians with a high propensity to save. This means it will have to adopt as a goal a more egalitarian distribution of incomes, and perhaps wealth.
We’ll need to boost low incomes
So far, the government response to the COVID crisis has been good in this respect.
<a href="https://theconversation.com/the-key-to-the-success-of-the-130-billion-wage-subsidy-is-retrospective-paid-work-135042">JobKeeper</a> and the <a href="https://theconversation.com/scalable-without-limit-how-the-government-plans-to-get-coronavirus-support-into-our-hands-quickly-134353">Coronavirus supplement</a> for job seekers have both been of most benefit to lower income Australians.
Looking to the future, a sustained recovery in demand is unlikely to come from <a href="https://minister.infrastructure.gov.au/mccormack/media-release/morrison-government-delivers-75-billion-boost-transport-infrastructure-across-nation">extra spending on infrastructure</a>. These projects typically employ few people and have either no business cases or business cases of dubious value.
Nor will it come from general fiscal support, <a href="https://theconversation.com/top-economists-back-boosts-to-jobseeker-and-social-housing-over-tax-cuts-in-pre-budget-poll-146914">including income tax cuts</a> for high earners with high propensities to save.
Long-term, it will have to involve boosting the earning potential of low earners.
Education and services are the places to start
This will mean, as a first priority, boosting spending on education and training in order to improve skills and earning power and better suit skills to needs.
The second priority has to be improving the quality of and access to government services.
Services such as aged care have suffered from under-funding, denying employment opportunities to low earners and denying others support.
 
In addition, cutting the cost of childcare and a revamping its means tests would encourage many women to increase their hours of work and thus their family income, as well as creating more jobs for carers.
One of the great benefits of fiscal policy is that it can be targeted in this way, refashioned to improve income distribution and consumer demand.
It is another reason for preferring it over monetary policy for some time to come.<img src="https://counter.theconversation.com/content/150081/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
<a href="https://theconversation.com/profiles/michael-keating-528224">Michael Keating</a>, Visiting Fellow, College of Business &amp; Economics, <a href="https://theconversation.com/institutions/australian-national-university-877">Australian National University</a>
This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/from-here-on-our-recovery-will-need-more-than-fiscal-policy-itll-need-redistribution-150081">original article</a>.
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Recovery will now need more than fiscal policy, it’ll need redistribution

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The impact of COVID-19 on the property market is greatly varied across this large state.
COVID-19 has significantly increased the unemployment rate in Queensland with a greater impact on regional areas, particularly those with a heavy reliance on tourism. As of August 2020, the unemployment rate was 7.5 per cent.
The sustained period of the border closure between Queensland and other states has been a contributing factor to the already substantial impact of COVID-19. This is due to the strong connection between Queensland and New South Wales and, to a lesser extent, Victoria.
COVID-19 has helped strengthen ‘work from home’ opportunities, meaning owner-occupiers can take advantage of ‘lifestyle’ prospects instead of being tied to employment hubs.
Before COVID-19 hit, there was already a strong trend of sea- and tree-change homebuyers looking for the best of all worlds – lifestyle, accessibility to employment hubs and affordable housing.
In Queensland, the areas that attract those lifestyle buyers include the Gold Coast and Sunshine Coast.
Beachside suburbs especially outperform the market as they offer fantastic lifestyle opportunities.
However, while solid house price growth may be experienced in Brisbane, the inner-city unit market remains oversupplied and, therefore, high risk.
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Brisbane houses solid but inner-city unit market oversupplied: RiskWise

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The difference between buying a house and buying a unit rental property has never been more pronounced.
RiskWise market research clearly showed that while houses show better prospects, some sectors of the property market remained high risk, particular inner-city apartment areas which were oversupplied and experiencing falling rents as Australians, many now able to work remotely, were seeking lifestyle properties and often avoiding higher density locations.
Mr Peleg said there were many opportunities for buyers looking for houses with high land value as a proportion of the property value, and a strong component of scarcity, especially if they intended to hold on to the property for several years or longer.
“In recent weeks there has been a material improvement in buyer sentiment and key data with a prime example being the relatively high auction clearance rates for houses in Sydney, with preliminary results that have been consistently well above the 70 per cent mark during the past four weeks. Melbourne’s market, however, remains dormant, for now,” he said.
Pete Wargent of BuyersBuyers.com.au, a national marketplace now offering affordable buyer’s agency services to all homebuyers, said that there has been a notable shift in enquiries over the past year.
“Low-maintenance units have often been popular with investors and non-resident buyers, but these buyer numbers are well down from their cyclical peaks. Most homebuyers are looking at houses at the present time, and in part this is a shift away from density at a time when many are seeking space” Mr Wargent said.
Mr Peleg of RiskWise said, “it’s important to distinguish between the two capital cities and there is a marked difference. Sydney property is strongly forging ahead with auction clearance rates tracking at levels similar to those of 12 months ago."
“The same cannot be said for Melbourne, especially due to the second wave of the COVID-19 which had a major and immediate impact. Prices in Melbourne have declined by about 6 per cent since their peak in early April 2020, according to CoreLogic, and this is the largest fall recorded amongst all capital cities."
“Despite this, Melbourne’s houses have better long-term prospects than Sydney’s. Indeed, we expect 2021 to be a strong year for houses in Melbourne, with significant capital growth forecast to play out.”
Mr Wargent of BuyersBuyers.com.au said ultra-low interest rates would drive price increases once the pandemic is over when the long-held link between the cost of borrowing and housing prices would reassert itself.
In addition, Mr Wargent said that Melbourne is more affordable than Sydney in terms of house-to-income and mortgage serviceability ratios while ABS data also projects that in 2026 Victoria’s capital will have a larger population than that of New South Wales.
Because of the strong population growth, Melbourne had enjoyed very strong capital growth until February 2020, Mr Wargent said.
Mr Peleg of RiskWise said, “while the second wave of COVID-19 created major volatility in Melbourne, RiskWise asserts that following the end of the pandemic, the Melbourne market will have similar projections to Sydney thanks to chronic undersupply increasing land and house values (while for units the oversupply increases both equity and serviceability risk)”.
In Conclusion:
Mr Peleg said the current ultra-low interest rates had created a unique environment where buying a house in many areas was cheaper than paying rent on one.
So while things look gloomy at this point of time, certainly in Melbourne, the market will likely bottom in the first half of 2021 and then the traditional connection between low interest rates, dwelling price growth, and the continuous chronic undersupply of family-suitable properties, with good access to employment hubs in popular areas, will drive them up relatively quickly
Land scarcity has been and will continue to be a major driver in land appreciation and, consequently, the appreciation of house values.
However, investors should consider family-suitable properties as opposed to rental apartments which will continue to carry a high level of risk in relation to both price movements (equity risk) and serviceability (cash flow risk). This risk of negative equity has significantly increased across the country.
Poor economic growth and a soft employment market will see the attractiveness of Australia as a destination fall in the short term. Therefore, without a significant improvement in employment conditions in the next few years, the risk to the rental apartment sector is likely to remain high.
DORON PELEG is the RiskWise CEO 
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Houses projected to bounce back mid-2021 with higher risks for units: RiskWise's Doron Peleg

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EXPERT OBSERVER
The 7 per cent fall in the economy in the June quarter is the biggest decline since quarterly records began in 1959. In annual terms, the economy fell 6.3 per cent in the June quarter. The annual decline is similar to the 5.8 per cent fall in the economy in 1945 (5.8 per cent fall) but smaller than the 14.3 per cent decline recorded in 1931.
This is not your typical recession. It hasn’t occurred because there has been some policy mistake – like the Reserve Bank leaving interest rates too high. Inflation remains under control – prices are neither surging nor plunging. There has been no balance of payments crisis – record trade surpluses are being reported. And the federal budget was broadly balanced at the start of 2020. Rather the recession is the result of a community lockdown to battle a one-in-a-hundred-year pandemic. And the whole world has been similarly affected. 
Policymakers certainly aren’t sitting on their hands. An unprecedented amount of stimulus has been applied to the economy by governments and the Reserve Bank. Barring more second waves from the virus, the worst appears to be over for the economy. The hope over the coming months is that Victoria – and to a lesser extent, NSW, - can join the rest of the country in being relative ‘virus free’. 
It’s not your typical recession because home prices are still at or near record highs. Annual growth of retail spending is at 19-year highs. The Aussie dollar is just off two-month highs. And share prices are 36 per cent up from lows. 
The economic recovery has begun. But the path is uncertain and likely to be bumpy. The battle for normalcy has only just begun. 
We expect the jobless rate will rise from 7.5 per cent currently to around 9 per cent in the next few months. The aim will be to quickly get people back to work as the longer they are away from workplaces, the less employable they are likely to be. 
Somewhat perversely, there were two positive aspects in the data. Aussies saved more – the household saving ratio rose by 19.8 per cent in the quarter. Clearly it was hard to spend in lockdown but the government topped up people’s bank accounts. And productivity increased. GDP per hours worked rose 3.1 per cent. These are two elements that had been causing angst for policymakers in recent times.
What do the figures show? 
Economic Growth: The Aussie economy contracted 7.0 per cent in the June quarter after easing 0.3 per cent in the March quarter. It was the biggest contraction in gross domestic product (GDP) in the 60-year history of the series. 
The economy contracted by 6.3 per cent in the year to June. Growth has previously averaged 2.6 per cent over the decade and averaged 2.7 per cent over the last 15 years.
The non-farm economy fell by 7.1 per cent in the June quarter after a 0.2 per cent fall in the March quarter. Nonfarm GDP is down 6.3 per cent over the year. 
Farm GDP fell by 2.3 per cent in the June quarter to be down 6.0 per cent over the year.  At current prices, GDP fell by 7.6 per cent in the June quarter after rising by 0.9 per cent in the quarter. Nominal GDP fell 5.9 per cent on the year (decade average +4.5 per cent).
As at June 2020 the Australian economy was valued at $1,981.6 billion.
GDP per capita fell 7.2 per cent in the June quarter to be down 7.4 per cent. 
Contribution to the overall result: The biggest contributions to growth came from net exports (+1.0 percentage points); public investment (+0.1pp) and government consumption (+0.6pp). But detracting from growth was household spending (-6.7pp); inventories (-0.6pp); dwellings (-0.4pp); business equipment (-0.5pp) and other private investment (-0.4pp). 
Inflation &amp; wages: In terms of domestic price pressures, the household consumption implicit price deflator fell by 0.8 per cent in the June quarter. Annual growth eased from 1.9 per cent to 0.5 per cent. Real non-farm unit labour costs fell by 9.8 per cent in the June quarter and was down 9.3 per cent over the year.
The terms of trade rose 0.2 per cent in the June quarter to be down 1.8 per cent on the year. 
Productivity: GDP per hour worked rose by 3.1 per cent in the June quarter to be up by 4.1 per cent on the year. GDP per hours worked in the market sector soared 5.9 per cent in the quarter to be up 7.3 per cent on the year.
States &amp; Territories: The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). State final demand in the June quarter: NSW (down 8.6 per cent); Victoria (down 8.5 per cent); Queensland (down 5.9 per cent); South Australia (down 5.8 per cent); Western Australia (down 6.0 per cent); Tasmania (down 7.4 per cent); Northern Territory (down 4.9 per cent); and ACT (down 2.2 per cent).
Consumer spending: Household spending fell by a record 12.1 per cent in the March quarter to be down 12.7 per cent for the year. Hotels, cafes and restaurants fell 56.1 per cent and Transport services fell by 85.9 per cent. Spending on furnishings and household equipment rose 9.5 per cent with Alcoholic beverages up 13.0 per cent.
The ABS notes: “Spending on services fell 17.6 per cent reflecting temporary shutdown of businesses and movement restrictions. Spending on goods fell 2.8 per cent driven by record falls in operation of vehicles and clothing and footwear, while spending on food recorded the biggest decline since June 1983.”
Industry sectors: Fifteen of the 19 industry sectors contracted in the June quarter. The biggest contribution to the overall decline in output came from Transport postal and warehousing (-0.9 percentage points) from Accommodation and food services (- 0.8pp) and Administration and support services (- 0.7pp). Output rose in Mining, Education and training; Public administration and safety; and Financial and Insurance Services. 
Other points: Profit share at record high. In seasonally adjusted terms, the ratio of profits to total factor income rose from 29.0 per cent in the March quarter to 31.1 per cent in the June quarter. The wages share fell from a 2-year high of 52.5 per cent to 49.4 per cent. 
Household savings ratio. The household saving ratio rose from 6.0 per cent in the March quarter to 19.8 per cent in the June quarter in seasonally adjusted terms. 
Imports rose as a share of spending. The imports to sales ratio fell from an 11-year high of 0.378 to 0.397 in the June quarter – not far from 11-year highs. 
The private non-farm inventories to total sales ratio rose from 0.581 to 0.604 in the June quarter.
What are the implications for interest rates and investors? 
In the current September quarter the economy may end up contracting around 1 per cent, due largely to the lockdown in Victoria. Over the 2020 year the economy may contract by around 4 per cent – the biggest annual decline in 75 years. 
But it could’ve been worse. The Reserve Bank initially estimated that the pandemic contraction would be near 10 per cent in the June quarter. And GDP has contracted by an average of 11 per cent in the quarter for the 20 or so advanced economies to report so far. 
There is no shortage of stimulus to get the economy back on its feet. But money is not the problem – this is a health crisis, causing an economic downturn. There are encouraging signs of virus suppression in Victoria and NSW. But the path is uncertain. 
The fiscal roadmap in next month’s federal budget will be critical to economic recovery – as will developments on virus treatments and vaccines. 
Quite amazingly, data today showed a record 7 per cent economic contraction and the sharemarket was untroubled – currently up by around 1.8 per cent. The Aussie dollar eased from highs near US73.80 cents to US73.35 cents after the data release.
CRAIG JAMES is the Chief Economist at CommSec
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