Forecast

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Overall, it’s hard to see a scenario where Australian housing values could fall off a cliff.
For this to happen we would need to see a material about face in labour market conditions, a global shock or a material rise in interest rates– none of which seems to be a likely outcome at the moment.
Without a doubt, housing risks are heighted relative to a year ago. Dwelling values are slipping lower nationally (down 2% since peaking in September last year), mortgage rates are edging higher (up by around 15 basis points from three of the four major banks announcing a rate rise in September) and mortgage arrears have moved off their record lows (but still only around 0.6% of all mortgages are 90+ days in arrears). All this against a backdrop of record high levels of household debt (the ratio of disposable income to household debt reached 190% in March this year), increasing levels of housing supply and rising domestic and global uncertainty.
It should come as no surprise that some commentators are forecasting a substantial reduction in dwelling values. We saw similar forecasts during previous downturns from the likes of Steven Keen, Harry Dent and Jeremey Grantham as well as many others. The most recent dire prediction to get mainstream airplay was from Martin North predicting a 40-45% fall in dwelling values; albeit with only a 20% chance of this occurring. Since airing on 60Minutes, the segment titled ‘Bricks and Slaughter’ has seen the two primary experts featured, Martin North and Louie Christopher, clarifying their televised comments which were apparently presented in an unbalanced context: a presentation of the worst case scenario with no regard for the most likely outcome.
If we look at the current downturn in Australian housing, the trajectory of decline is actually quite unremarkable.
Australia’s largest housing market, Sydney, has seen values fall by 5.6% sincepeaking in July last year; a trajectory that is straight down the middle of previous downturns. During the GFC, Sydney dwelling values fell by 7.0% in the space of twelve months, and the downturn before that (2003-2006) saw values fall 7.1% over the same number of months.
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Australia’s second largest city, Melbourne, has seen values falling since November last year. Since that time the market is down a cumulative 3.5% and the descent has generally been milder relative to previous downturns.
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Even in markets where values have been falling consistently for more than four years on the back of a material weakening in economic and demographicconditions, we haven’t seen values fall by anywhere near 40%. Perth dwellingvalues peaked in 2014 and have fallen by 12.6% and in Darwin where conditions have been even tougher, dwelling values are down 21.8%.
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Recently released housing value forecasts from Moody’s Analytics certainly paints a less gloomy picture of housing markets over the coming years. While, growth is forecast to be subdued relative to previous years, the forecast is for a relatively mild downturn, with national house and unit values returning to mild positive annual growth by the middle of 2019.
Click here <a href="https://www.propertyobserver.com.au/images/2018/9/21/CORELOGIC%203.jpg" target="_blank">to enlarge.</a>
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The Moody’s Analytics forecasts are based on an econometric model whichuses CoreLogic’s Hedonic Index data as a base to forecast from. Their upbeat assessment of dwelling values is based on rising business investment, particularly in the non-mining sector, a rise in infrastructure spending, above trend jobs growth, and ongoing low interest rates.
Click here <a href="https://www.propertyobserver.com.au/images/2018/9/21/CORELOGIC%204.jpg" target="_blank">to enlarge.</a>
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Of course the outlook for housing conditions is varied across the regions. Bythe end of 2019, Moody’s is expecting every capital city except Hobart (-2.4%) to record a positive annual change in house values, with year on year rises ranging from 4.5% in Canberra and Adelaide to a 0.9% rise in Perth dwelling values.
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Forecasting the movement in asset values is challenging at the best of times. With so much uncertainty at the moment it’s even harder. Several wildcards remain that could have a negative impact on the direction of housing values.
Households are more sensitive than ever to interest rate movements due to the record level of household debt. Roughly, 70% of household debt is housing related, which implies small changes to mortgage rates could have an amplified impact on household balance sheets. Further out of cycle movements in mortgage interest rates could have a negative impact on the market. On the flipside, if the RBA decides to cut the cash rate further (a possible scenario of economic conditions weakened and housing price falls accelerated), this would likely see a rise in housing activity and help to place a floor under housing prices.
There is also the potential for changes to property taxation policies that could have a further dampening effect on investment demand. Based on the value of new housing finance commitments, investors still comprise around 41% of mortgage demand, down from 55% in mid-2015. Investor concentrations remain well above their long term averages across New South Wales (49% of housing finance commitments) and Victoria (41% of housing finance commitments), implying Sydney and Melbourne would have more to lose if investor activity were to drop more substantially. Investors are already being disincentivised by falling prices, mortgage rate premiums and low rental yields; additional disincentives from tax reform could see demand reduce further, creating some slack in the overall demand composition for Australian housing.
In balance, even with mortgage rates edging higher, we are still in the lowestmortgage rate environment since the 1960’s. Population growth remainsstrong and maintaining a consistent migration policy seems to have support from both sides of politics which will continue to support demand for housing. Labour markets are reasonably healthy with unemployment holding at 5.3% and likely to trend lower, underemployment at the lowest rate since May 2014 and jobs growth above the long term trend.
Overall, it’s hard to see a scenario where Australian housing values could fall off a cliff. For this to happen we would need to see a material about face in labour market conditions, a global shock or a material rise in interest rates –none of which seems to be a likely outcome at the moment.
TIM LAWLESS heads up the CoreLogic RP Data research and analytics team and can be contacted<a href="https://blog.corelogic.com.au/author/timlawless/" target="_blank"> here.</a>
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Is the property market really all that bad? CoreLogic's Tim Lawless

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The NAB are forecasting a "very large fall" in Australia's second quarter of 2020, but then there will be an extended period of recovery.
NAB economists Alan Oster and Gareth Spence suggested the -0.3 per cent contraction in Q1 was slightly weaker than they had anticipated, however after the inevitable large Q2 dip, they now see a stronger than previously expected pick up in the second half of 2020.
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"Following the integration of the Q1 national accounts our near term forecasts for growth in 2020 are broadly unchanged," Oster and Spence advised in their most recent research.
"We still expect a large fall in activity in Q2 – a decline 8.5% q/q, before an earlier and stronger than previously expected pickup H2 2020 and continued recovery in 2021."
For the first time, NAB have forecast the GDP in 2022, expecting a 2.8 per cent rise. 
They suggest the GDP won't exceed the Q4 2019 levels until mid 2022.
<h1>Housing</h1>
There's been no revision in the house price forecast from NAB. They're still expecting to see falls of between 10 and 15 per cent over the next 12 to 18 months.
"Higher unemployment, slower wage growth and falls in overseas migration will weigh on prices in capital cities while new supply continues to come online", Oster and Spence said, although added that offsetting the declines will be the impact of lower interest rates and a pullback in construction.
They believe dwelling investment will decline around 15 per cent over the next year or so before levelling out in mid-2021.
"High rates of completion are likely to rapidly erode the pipeline of new dwellings while uncertainty in the housing market will see caution in new commitments going forward.
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"A more significant improvement in approvals will be needed going forward to see a return to growth in dwelling investment. However, as noted the impact of softer prices in the established market and uncertainty about the level of migration going forward may weigh on the development process going forward."
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<h1>Employment</h1>
There's further good news coming from the NAB camp. They've downgraded their forecasted unemployment rate, now suggesting it will peak around 8.5 per cent.
"With labour force participation temporarily impacted by definitional changes to Jobseeker payments and the impact of Jobkeeper in supporting jobs it is likely that the unemployment rate will now peak at a much lower rate – around 81⁄2%.
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"Nonetheless, the impact on the labour market has already been large with underutilisation rising to exceptionally high levels and hours worked declining sharply in April.
"The unemployment rate is expected to remain elevated for sometime, despite the rebound in growth.
"This reflects the time it will take to fully recover the level of GDP to pre-COVID levels following the large expected fall in Q2."
 
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Extended recovery forecast by NAB after "very large" Q2 fall 

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Westpac economists have gone full circle in their house value forecasting, with prices to soar from December 2021.
They had been expecting between April 2020 and June next year, the national price index to fall by 10 per cent.
But <a href="https://www.urban.com.au/news/117231-westpac-soften-house-price-forecast-now-predicting-a-total-five-per-cent-fall#:~:text=17%20September%202020-,Westpac%20soften%20house%20price%20forecast%2C%20now%20predict%20five,cent%20peak%20to%20trough%20declines&amp;text=They%20had%20been%20predicting%20a,over%20the%20following%20two%20years." target="_blank">last week they updated their forecasting</a>, stating prices would only drop five per cent between April and June next year.
There have already been -2.3 per cent declines nationally, according to CoreLogic's data.
And now they're forecasting a much stronger rebound, accumulating 15 per cent over the two years from December next year.
"Apart from Victoria, where we expect prices to fall in the December quarter, we expect that in the December and March quarters in the other states, prices will be relatively stable with some upside pressure."
Evans says the June quarter and September quarter 2021 when markets have to deal with $240 billion of deferred loans currently on the balance sheet of the banks.
"That's about 620,000 borrowers, $180 billion in mortgages", Evans says.
"It's our view that risk will be well managed", Evans suggests, adding that there will be restructuring of loans, banks will be patient, and at the time there will be modest downward pressures on prices.
"But broadly speaking, The sort of fears that some of had, that that phase will be a very negative phase for house prices, I think will be unfounded."
Evans says the final phase will be that interest rates are at record lows, the overhang of the deferred loans will be behind us, and the central bank and the government will be focused on the economy, not on constraining bank lending or on over regulation
"That will be a very positive environment for the housing market."
To listed to Westpac economist Bill Evans full update, watch below. 
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Westpac's full circle - forecasting 15 per cent house gains post COVID

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Scentre Group announced the sale of four local shopping centres amounting to $783 million due to settle in the third quarter of 2015.
Releasing their results for the six months to June 30 2015, funds from operations came to 11.38 cents per security and distribution of 10.45 cents per security, keeping in line with forecasts.
Scentre Group expects to meet its 2015 full year FFO forecast of 22.5 cents per security making for 3.5% growth and a distribution forecast of 20.9 cents per security. 
Scentre Group chief executive officer Peter Allen said the group is pleased with these operational results, which reflect the focus of driving value from our high quality shopping centre portfolio. 
"In addition to having 14 of the top 20 shopping centres in Australia by annual sales, each of Bondi Junction and Westfield Sydney now generate annual sales in excess of $1.0 billion," he said.
“The Group is committed to creating extraordinary places connecting and enriching communities, and this year has announced a number of major initiatives, including $825 million of development starts, new services to improve the shopper and retailer experience, and an improvement in the quality of the Australian portfolio.
Gross proceeds of recent sales account $783 million, a 3.4% premium to 30 June 2015 book values.
The Group maintains its forecast FFO of 22.5 cents per security, representing 3.5% growth with a distribution forecast of 20.9 cents per security for the twelve months ending 
 
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Scentre Group release six month results to June 30

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GUEST OBSERVER
The Reserve Bank has made some notable changes to its forecasts in its August Statement on Monetary Policy.
It has retained its forecast for GDP growth in 2015 at a below trend 2.5% but lowered its forecast for growth in 2016 from 3.25% to 3.0%.
It has retained its forecast for growth through to June 2017 at 3.5% and has added an even more optimistic forecast for 2017 of 3.75%.
The lower growth forecast in 2016 can be attributed to a weaker outlook for non-mining investment; lower forecast population growth; and a lower terms of trade (adjusted by 4% from the May Statement).
Significant attention is given in the Statement to the lower forecast for population growth. Annual population growth is forecast at 1.5% over the years to end 2017 – 0.25% below previous forecasts.
That forecast has implications for both demand and supply in the economy. On the demand side both investment and consumption can be expected to be somewhat weaker while growth in supply will also be lower.
Because of weaker supply growth the Bank has been able to adjust its forecast for unemployment despite weaker demand. In May the Bank forecast “unemployment will probably rise further to peak at 6.5% in mid - 2016 and remain elevated for longer”. It is now forecasting that “the unemployment rate is expected to remain little changed from recent levels for some time". Readers should note that this report was finalised on August 6 the day the unemployment rate was announced to have lifted from 6.1% to 6.349%. It is reasonable that the Bank has chosen to look through the monthly volatility of the employment reports and today’s Statement can be read as the Bank formally revising down its peak unemployment rate forecast from 6.5% to around 6%.
In taking 0.25% from its population growth forecast the Bank is effectively revising down its estimate of “trend” or” potential” growth. If, say, it now sees growth in productive capacity at nearer 2.75% than 3% then a lower demand forecast should NOT be interpreted as a signal that policy needs to be adjusted. Demand growth is now seen to be sufficient to stabilise unemployment and therefore rate cuts are seen to be less necessary despite the softer demand.
This discussion neatly overlooks that a central bank should not necessarily be comfortable with unemployment stabilising at above 6% when full employment is generally accepted in Australia to be below 5%.
However this point is covered in the 2017 forecast that growth will reach a stunning 3.75% - well above the assumed “potential” growth of 2.75% (using the lower population growth forecast) and consistent with a solid fall in the unemployment rate. With the drag from the contracting mining investment still set to be running at the current or even more intense pace and the lift from housing investment likely to be easing by then such a growth forecast in 2017 puts a lot of faith in a desired boost to consumer spending and associated non mining investment.
Fortunately the forecast is not based on some expected boost in the terms of trade. Although the Bank does not release point estimates of its terms of trade forecasts Graph 6.2 in the Statement indicates a reasonable assumption that the terms of trade will stabilise in 2016 and 2017.
The Bank’s recent forecasting record highlights downside risks to that forecast. Consider its growth forecasts back in November last year, 3% for 2015 and 3.5% for 2016. Those numbers now stand at 2.5% and 3% respectively.
Overall, however, taking these growth forecasts at face value indicates no pressing need for the Bank to deliver any further policy easing.
While we expected the Bank to lower its growth forecast for 2016 we did not expect it to revise up its very confident underlying inflation forecast for 2016. Recall that in May it revised down its underlying inflation forecast from 2.5% to 2.25%. That represented the first time since 2009 ( aftermath of the GFC) that the Bank had forecast underlying inflation, one year out, below the mid-point of the target range.
The reason given in the text for revising back up the inflation forecast was that the exchange rate assumption for the forecasts had fallen from USD 0.80 to USD 0.74 – a 7.5% fall in the AUD or a 5% fall in the TWI.
It would also be a factor that with the unemployment rate now not expected to rise the degree of spare capacity in labour market would be seen to have lessened imparting a more modest disinflationary pressure.
Other underlying assumptions behind the forecasts are also of interest. The oil price is assumed to be 25% lower than the price used in the May forecasts while the interest rate forecast assumed, ”that the cash rate moves broadly in line with market pricing”. The caveat that “this assumption does not represent a commitment by the Board to any particular path for policy” was noted, as was the case in both February and May.
In February market pricing assumed a 100% probability of a rate cut by May and a cut was duly delivered in May .In May market pricing assumed a 40% probability of a cut by August and no cut was delivered. Current market pricing is in line with May with around a 40% probability assumed by November.
The precedent from May does not provide much encouragement for those folks expecting a November move. It would have been much more interesting if the market pricing of recent weeks had prevailed where the probability of a November cut ranged between 60% and 80%.
Conclusion
Readers will be aware that Westpac expects that we are at the bottom of the cash rate cycle with the next move up not expected until well into 2017. The Bank’s forecasts are certainly in line with those views given its expectations of a 3.75% growth year in 2017. The forecasts for 2016, at 3%, with a stabilising unemployment rate, at around 6%, would be consistent with steady rates in 2015 and 2016.
If, however, it became clear by the second half of 2016 that a 3.75% year was in the offing in 2017 then that rate hike might be delivered earlier than our current timing. However we are much more doubtful about that prospect than appears to be the view of the Bank. Our current view is that 2017 is more likely to be nearer the bottom of the Bank’s 3-4.5% confidence band.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Reserve Bank's noticeable forecast change: Bill Evans

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Mozo property expert Steve Jovcevski expects prices to further cool in the major housing market of Sydney, while Melbourne will enjoy a spike in property values.
 Brisbane houses should slowly increase while Hobart will continue to be the star performer.
 
Sydney – property market decrease of -5%
The Sydney housing market plateaued in 2017 and will drop slightly over 2018, but we’re unlikely to see a dramatic bubble burst. Signs pointing to a slower market include lower clearance rates and higher than average housing supply. Clearance rates could continue to be low in Sydney due to rampant under-reporting of sale prices by agents. It is possible that actual clearance rates are even lower than reported. The market is expected to pick up in Autumn but the Spring season, typically a boom period for the Sydney property market, will be tough in 2018. First home buyer demand will be stronger, due to lower competition and ongoing low rates.
 
Melbourne – property market increase of 5-7%
Melbourne will continue to be a first home buyer’s market with more affordable housing in comparison to Sydney. Melbourne is experiencing strong population growth and while the market will continue to grow, it will slow compared to the 10% growth experienced in 2017. It is anticipated that Melbourne clearance rates will also drop from 70% to 60% due to the slowing of first home buyer activity and a drop in pent-up demand. Apartment markets may struggle due to oversupply issues in some inner-city locations.
 
Perth – property market increase of 2-4%
The Perth housing market has stabilised in the last quarter although the market experienced a slight housing price drop over the last year. The Perth housing market has struggled over the past few years and is now set to enjoy a small amount of growth which will continue to climb. The city boasts an affordable first home price point compared to other major metropolitan areas in Australia and is experiencing steady population growth. The local economy is slowly strengthening after overcoming the mining collapse and now enjoys a more secure local economy.
 
Canberra – property market increase of 7%
Low vacancy rates continue to support the Canberra property market with an adequate supply of interstate investors seeking good yield. Demand in the first buyer space continues and the local economy remains consistently strong. Migration to Canberra also continues as Australians seek out the capitals excellent job market, lifestyle opportunities and housing affordability.
 
Brisbane – property market increase of 5%
Brisbane has experienced steady population grown due to the affordable lifestyle it offers. Many Australians are migrating to Brisbane from more expensive city centres due to housing affordability and a stable local market. 2017 saw a steady increase of 4-5% and it is predicted this slow and steady rise will continue for years to come. Apartment markets may struggle compared to houses due to an oversupply in some areas.
 
Hobart – property market increase of 10%
Hobart posted a whopping 12% growth in the past year, and is expected to experience similar growth in 2018. Compared to other Australian metropolitan centres, Tasmania boasts some of the country’s most affordable housing. With close proximity to Melbourne, low vacancy rates and consistently high rental demand it is an excellent investment prospect. The local economy continues to improve and lifestyle migration is expected to be a major factor in driving up house prices. 
 
Adelaide – property market increase of 3-4%
Slow is steady is the track record for Adelaide's housing market and this continues in 2018. The ideal market for investors, housing prices are not prone to sharp price rises and dips. In the last year, Adelaide enjoyed a 3-4% price increase and this is expected for 2018. An increase in new apartments may increase house prices slightly, but generally, Adelaide will enjoy slow and consistent property growth.
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Hobart to remain the property star in 2018: Mozo's Steve Jovcevski 

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The young high flying Sydney investor Nathan Birch has given his mildly bearish property predictions for 2018.
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"We are entering into a period of uncertainty," the face on Binvested forecast.
"Tighter lending regulation from APRA has made it difficult for buyers all over Australia to get finance.
"This has meant fewer buyers across all markets," says the young investor who knows just what it is like to seek finance and to sell in tightened circumstances.
Birch recently confirmed he had "briefly" fallen behind on "one or two mortgages" <a href="https://www.urban.com.au/news/79329-nathan-birch-facing-lending-default-on-paradise-point-property" target="_blank">citing increased lending restrictions</a> arising from the much-heralded Australian Prudential Regulation Authority investor crackdown.
He predicts it is likely the market will stagnate over the next 12 to 18 months.
"But, despite what the general population may think, this is excellent news for investors especially for those who are cashed up and finance ready.
"This year will be an excellent time to buy."
"While many are finding it difficult to get finance, those who are ready to pounce will have the opportunity to pick up properties for cheap."
He suggests the next 12 to 18 months will offer a "small window of opportunity" to buy properties that are ‘on sale’, before the market picks up speed again.
He says it was the type of market that he built my foundation portfolio on back in 2004 to 2009 as having fewer people buying properties, "it becomes easier to negotiate a good price."
"Vendors become more flexible with the amount they are willing to accept, because at the end of the day, they need to sell.
"If they want to sell, they have to settle for less."
Birch's opinion is that rates will continue to remain low over the next 12 to 18 months, unchanged for some time.
"The banking system is currently in unchartered waters. If the RBA was to increase the cash rate now, millions of Australians would find it difficult to repay their mortgages.
"This would have a flow on effect; with less consumer spending causing damage to the economy.
"The APRA changes have done what a rate rise would normally do – without causing financial strain for those with existing mortgages."
 
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APRA credit squeeze victim Nathan Birch sees stagnate property markets in 2018

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DPN’s Managing Director, Sam Khalil, looks back on 2017. He gives us his take on property investment around the country and what lies ahead for 2018. 
A sobering year as APRA measures take hold
What a year that was. 2017 was perhaps the bleary eyed come down from the last five years of heightened excitement and frenzied activity. 
Measures introduced by APRA last year have had an instant effect on banks and investor lending. It has put the brakes on the lending system. Banks have increased the cost of interest only investor loans. This has had an effect on the number of investors entering the market. This in turn has cooled down prices.
Sydney slow down
The APRA measures have taken greatest effect in Sydney. We’ve seen clearance rates drop from the record highs of 85% down to around 55%, its lowest level for two years. And in September, traditionally, the strongest period of the year for Sydney, recorded on average 68% clearances. All this is despite a drop in the number of properties on sale. All this indicates how cautious and muted the Sydney market is.
However, those who speak of Sydney’s property market demise or talk about a “bubble bursting” are, in my opinion, taking a myopic view. From 2012 to 2017, Sydney was Australia’s best performing market. Let’s not forget that from 2004 to 2012 Sydney was the worst performing market. In the average returns from 2017 you’ll see quite a sensible growth across Sydney. When you average it out the returns are under 10% in all suburbs over those eighteen years. Sydney is now returning to what it normally does in the property cycle. It’s having a minor correction or plateau and will slowly grow again.
Brisbane steadily taking off
Brisbane is beginning to move. It won’t have as dramatic growth as Sydney or Melbourne. But it’s being helped along by increased interstate migration especially in south east Queensland. Brisbane is over supplied in the inner city market, particularly in apartments. This has led to a real plunge in prices for inner city flats, down by 6 per cent over the year. However Brisbane is slowly taking off. There’s some serious money rolling into the city: like a $3 billion casino project in Brisbane’s CBD. And there’s hefty investment into infrastructure projects; investment in rail and road. Rental prices are growing. You won’t see spikes or plunges in the Brisbane market. All indications are that it will be the steadiest market for some time.
Melbourne still buoyant
Melbourne has been on a strong upward trajectory and this year overtook Sydney for percentage increase. It has had a 10% value growth over 2017 according to Core Logic. Melbourne suffered a glut in apartments recently and is still recovering from that. Yet while housing prices continue to grow in Melbourne they’re not at their dizzying peaks. It is high levels of overseas
migration that is keeping the housing market buoyant, which is leading to constant housing demand.
Hobart, Adelaide and Perth
Hobart has been a surprising achiever over the last year. Its growth of 13.6% capital gains is a record for any capital city. This is partly due to strong interstate migration and partly because of its scarcity of buildings. Another factor is the flourishing tourism market. This is helped by the MONA museum and its cultural attractions. However, with a small population it’s hard to gauge the city’s long-term prospects.
Adelaide has remained steady. Both it and Darwin don’t have enough critical mass to yet see a surge in prices. Perth is slowly hauling its way back from the mining collapse and is still some way from being competitive.
Wollongong 
Wollongong is the third most expensive city in Australia following Sydney and Melbourne. Land development is still tight in that region. The demand for property remains very high. It’s attractive to both investors and homebuyers due to its proximity to Sydney.
So where does all this leave us?
As I’ve said before, Australia is not one single property market but many. There are as many property markets as there are suburbs. As the above breakdown shows, while parts of Sydney are at a plateau, other areas are thriving. So some investors may be wary of entering the market next year. But the canny investor will use the reduced competition, low interest rates and affordable house prices to strategically snap up a bargain.
SAM KHALIL is founder and director of <a href="https://www.dpn.com.au/" target="_blank">Direct Property Network</a>.
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Sam Khalil’s property investment outlook for 2018

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<h1>Vital Signs: five economic red flags to watch for in 2018</h1>
<img src="https://images.theconversation.com/files/196084/original/file-20171123-6072-13xyzhk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="File 20171123 6072 13xyzhk.jpg?ixlib=rb 1.1">
We don’t know for sure if any of these things could happen, but if they do we’re in for a wild ride in 2018. Image sourced from shutterstock.com <a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, <a href="http://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a>
Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.
This week: A break from weekly data to look forward to the year ahead.
<hr>
With a data-light week, and the end of 2017 looming, this is a good time to touch on five issues to watch out for in 2018.
<h2>1. Trump loses patience with NAFTA</h2>
US President Donald Trump has made clear his contempt for a variety of international agreements to which the US is a signatory. The North American Free Trade Agreement is certainly one of them. 2018 could be the time when Trump engineers either a renegotiation of NAFTA, or (scarily) a US exit from it.
Right now, the administration is trying to extract concessions from China and Mexico on the deal, and has set a March 2018 deadline for an agreement.
A US exit from NAFTA would be calamatous. The three economies have become heavily integrated since NAFTA began, and it’s almost hard to imagine what the US economy would look like without, for example, cheap goods and agricultural produce from Mexico.
<h2>2. We find out Australia had a housing bubble, because it bursts</h2>
Is there a bubble in the Australian housing market? I have consistently said that I don’t know, and I wouldn’t know how to prove it even if there was. But there are some troubling markers, including investment bank <a href="https://neo.ubs.com/shared/d1QtAq68bSw15m/?off_id=AC201709E304806129W1757731499&amp;ma=X47535154596E5669&amp;camp_id=EM%3AUNKW%3A2017-09%3A10%3AC" target="_blank">UBS’s report</a> warning about the potentially large number of so-called <a href="https://theconversation.com/how-liar-loans-undermine-sound-lending-practices-87073" target="_blank">“liar loans”</a>.
I’ll add one more marker that I haven’t heard discussed before. <a href="https://thejollyswagmen.com/new-blog/2017/11/15/28-liar-loans-peter-white" target="_blank">A respected mortgage industry insider said</a> the data in the UBS report doesn’t make sense, and that mortgage brokers aren’t encouraging people to falsify loan applications. But the same expert said any instances of bad behaviour are isolated, that statistics aren’t facts, and he rejected the idea that incentive payments to brokers encourage them to push bigger loans to borrowers. Basically, “believe me!”
2018 should give us a pretty good read on whether there will be a slow deflation of Sydney and Melbourne property prices (at least in real terms), or whether there will be an abrupt reduction in prices, a series of fire sales, and trouble for the banks. I think the balance of evidence now suggests the latter.
<h2>3. There’s a ‘take back’ of the Brexit vote</h2>
The UK will continue to negotiate its exit from the European Union, and 2018 will be both important and consequential. There is a very specific timeline for the UK’s exit – 11pm GMT, Friday March 29, 2019 to be exact.
The four big issues are: (i) what the UK owes the EU financially, (ii) the Northern Ireland border, (iii) what happens to UK citizens living in the EU, and EU citizens living in the UK, and (iv) the biggest of all – trade.
Theresa May – when not defending inappropriate behaviour from her male colleagues, or falling for sophomoric pranks when speaking in public – is sticking to her “hard Brexit” line. 2018 will show whether this is even vaguely possible. I strongly suspect not – and there are a whole host of interesting things that could happen.
One, May could easily lose the prime ministership. Two, there could end up being another vote to “take back” the Brexit vote. If you think that’s crazy then <a href="http://podcast.cnn.com/the-axe-files-david-axelrod/episode/all/1TFnFglOwOT80L/f3h850">listen to Tony Blair</a> discussing how it could happen.
All of this could cause major upheaval in financial markets. London remains a fundamentally important international capital market.
<h2>4. US financial regulation softens</h2>
Janet Yellen’s departure as US Federal Reserve Chair in February, and her replacement by Jay Powell, is unlikely to materially alter US monetary policy. Expect gradual rate rises throughout 2018.
What could differ – and not in a good way – is the Fed’s stance on financial regulation. Powell is thought to be more hostile to Dodd-Frank (as the regulatory response to the Great Recession is known) than Yellen. 2018 will be revealing in this regard, because the Trump White House is known to despise those regulations and there could be a concerted effort to remove them using whatever means available.
This would be dangerous and foolish, and lay the groundwork for the next financial crisis.
<h2>5. The European experiment fails</h2>
With a wave of populist sentiment across Europe, and German Chancellor Angela Merkel having a hard time forming a coalition, there is the slim but scary prospect of the EU essentially disintegrating. This could be the result of a sovereign default by a major country like Italy or Spain, that is too big to bail out. Or it could come from a German government that is no longer willing to support the European Central Bank the way it has to date.
<img src="https://counter.theconversation.com/content/87851/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">It could well be that none of the worrying scenarios outlined above actually occur. But any number of implicit and explicit deadlines make 2018 look like a more eventful year than most.
<a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, Professor of Economics and PLuS Alliance Fellow, <a href="http://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a>
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-five-economic-red-flags-to-watch-for-in-2018-87851" target="_blank">original article</a>.
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