Paul Bloxham

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Sydney house prices could fall by as much as 15 per cent next year, while Melbourne could see a 17 per cent drop, according to an HSBC analysis.
Australian house prices could tumble 12 per cent in 2021, as a U-shaped recovery and COVID-19-related policies take their toll, Paul Bloxham, chief economist at HSBC, suggests.
However this year, the gains already accumulated before the pandemic will offset the decline in prices expected in the second half.
Nationally, prices could end 6 per cent higher, with Sydney up as much as 9 per cent and Melbourne as much as 7 per cent higher.
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Bloxham predicts stalled migration and rising unemployment were likely to drive housing oversupply.
However Bloxham said low interest rates would work to make the housing market attractive to borrowers.
<div>The overall impact, Mr Bloxham said, was that national housing prices will fall between 2 per cent and 12 per cent in the 2021 financial year.</div>
The drop could even be deeper if the economic recovery was an “L” or “W” shape.
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Next year Sydney prices could fall between 5 per cent to 15 per cent, with Melbourne dropping by 7 per cent to 17 per cent.
The analysis was by HSBC's chief economist, Paul Bloxham, and colleague Daniel Smith.
"Forecasting housing prices is difficult at the best of times, but at the moment it is particularly challenging," they wrote.
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<div id="adspot-320x360_320x120_320x50_300x250_300x50-pos2-mobile"> "We expect larger declines in housing prices in Sydney and Melbourne than in Australia's other cities, given greater reliance in these cities on migration and foreign students, which have stalled as a result of border closures."</div>
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Sydney house prices could fall by 15 per cent, and Melbourne 17 per cent drop next year: HSBC

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After five years of strong house price gains in Sydney and Melbourne, the market is cooling, particularly in Sydney (Chart 14).
 In both cities, housing price growth has run at double-digit annual rates over the past five years. However, in the past six months, Sydney house prices have declined 3% and Melbourne price growth has slowed to a 5% annual rate. The rest of the country has had low single-digit house price growth over the whole period.
Click <a href="https://www.propertyobserver.com.au/images/2018/1/22/blox4.jpg" target="_blank">here to enlarge.</a>
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The slowdown in Sydney and Melbourne has been driven by a number of factors. 
First, housing supply has ramped up, as an apartment building boom has delivered new dwellings to market.
 Second, prudential settings have been tightened, which has also included an increase in lending rates for investors. 
Third, foreign demand has pulled back, reflecting restrictions on Chinese capital outflows, constraints on lending to foreign buyers by domestic banks and increased local taxes on foreign buyers. 
We expect these factors to continue to weigh on housing price growth in the coming quarters and forecast national housing price growth to slow from the near double-digit rates of recent years to 3-6% in 2018 (Table 16). 
Click here <a href="https://www.propertyobserver.com.au/images/2018/1/19/FORECAST.jpg" target="_blank">to enlarge.</a>
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We expect housing construction to remain at a high level over the next 6-9 months – given a large pipeline of apartment construction that is already underway – and expect it to be a drag on GDP growth from H2 2018 and in 2019 (Chart 15). 
However, we do not expect a sharp decline in housing prices and expect only a modest decline in construction activity, as both are likely to be supported by strong population growth and low interest rates. Although we see the RBA beginning to lift its policy rate in 2018, we expect only a slow pace of cash rate tightening and some relaxation of current tight prudential settings as the housing market cools. 
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A hard landing is possible, but we believe this would require a negative shock from abroad and a sharp rise in the unemployment rate. In short, we do not see a significant local housing imbalance and view Australia as having had a housing boom rather than a bubble (for more on this see Downunder Digest: Australian housing: Cooling not crashing, 12 December 2017). 
Household debt concerns may be overdone 
A key concern that has been flagged by the RBA, amongst other observers, is that household debt levels have risen in recent years (Chart 17). 
This concern has a number of dimensions. 
First, if new household debt has been misallocated, then falling housing prices or a rising unemployment rate could threaten financial stability. 
While this could be a concern, we see the recent household debt as having been reasonably well allocated, given tightened prudential settings. We also expect the unemployment rate to fall, rather than rise in the coming quarters. 
Second, slower growth in credit, as the housing boom cools, could crimp consumer spending. However, we see little evidence that the ramp up in household debt in recent years has supported much consumer spending. Unlike the housing price and debt boom of the early 2000s, households have been injecting equity into their houses in recent years, rather than withdrawing it (see Downunder Digest: Australia’s shifting consumer, 27 June 2017). 
In addition, although the national household savings rate has fallen, which could be a sign of a wealth effect, it has not fallen in the states that have had housing booms – New South Wales and Victoria (Chart 18). Instead saving rates have fallen in the mining states, which is likely to reflect the end of the mining boom weighing on incomes, rather than a positive wealth effect. 
Finally, it is also worth keeping in mind that although household debt has risen, driven by a rise in new borrowing, on average, existing mortgage holders have been paying down their mortgages faster than required and thereby building up a buffer against negative income shocks. 
One way to measure this buffer is to look at how much funding households have in their mortgage offset accounts.
 As Chart 17 shows, when these account balances are netted out, the climb in household debt has been much shallower. 
In our view, the key to the outlook for consumption growth is the forecast for household incomes. Strong jobs growth is already supporting a pick-up in household income growth and our central case suggests the tightening labour market will also see wages growth lift in 2018, further supporting household income growth and consumer spending.
 There are already signs that consumer sentiment is lifting (Chart 19). 
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We see the RBA lifting its cash rate in 2018
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Given the expected pick-up in growth, tightening labour market and expected rise in wages growth this year, we expect the RBA to begin to normalise its cash rate setting in 2018. 
The cash rate has been at its record low of 1.50% since August 2016 and the RBA has stated that it estimates Australia’s neutral rate to be around 3.5%, suggesting that monetary policy is currently very stimulatory. As the policy rate setting is well below neutral, we see the RBA as likely to want to start lifting its cash rate as soon as it is confident that wages growth is past its trough. 
Keep in mind that wages growth is usually a lagging indicator of the economy. 
Our central case is that the RBA will lift its cash rate in Q2 2018 although the risk is that it takes a little longer for the central bank to be convinced that wages growth is past its trough and underlying inflation is headed back to target. 
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Any 2018 property market hard landing requires a shock from abroad and sharp rise in unemployment: HSBC's Paul Bloxham

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Australia is set to ride the global growth wave.
 We forecast above-trend (and above-consensus) growth of 3.2% in 2018.
An improving business sector and tightening labour market should lift wages growth, supporting household spending.
We expect the RBA to start lifting its cash rate around mid- 2018 and see the AUD rising to US84 cents in 2018.
Hangin’ ten on a global wave 
A wave of global growth is gaining momentum and should support Australia’s economy in a number of ways. First, commodity prices have lifted, boosting national incomes, corporate profitability, and tax revenues. Second, rising global demand is supporting demand for exports of energy commodities, high-quality food products, and tourism and education. Finally, the lift in global optimism is supporting a pick-up in business conditions, driving rising local investment and hiring. 
We expect GDP growth to pick up from 2.4% in 2017 to 3.2% in 2018 (consensus is 2.8%). This outlook is underpinned by HSBC’s above-consensus China growth forecast (6.7% versus 6.4%) and our view that the lift in local business conditions will continue to support hiring, which, as it tightens the labour market, should drive a pick-up in wage growth. The lift in wage and jobs growth is expected to support stronger growth in household incomes, consumer spending, and tax revenues. 
Although Australia’s housing construction boom is coming to its end, we expect the drag to be more than offset by a stabilisation in mining investment (after significant declines in previous years), a pick-up in investment in urban infrastructure, and by rising business investment. Overall, investment is set to rise solidly in 2018. 
We see house price growth slowing in 2018, after a five-year boom. However, we do not expect significant price falls, as the market is supported by strong population growth, some expected loosening of prudential settings, and mortgage rates that are still historically low (despite our view that they will edge higher in 2018). 
The clearest signs of improvement in the economy are in the labour market. Jobs growth has been strong and the timely indicators suggest continued solid momentum. We expect the unemployment rate to fall to a ‘full employment’ level in 2018, supporting a pick-up in wages growth. We also expect growth in 2018 to be the most broad-based across regions and industries in more than a decade, which should see increased demand for skills across a wide range of areas, supporting wages growth. 
We expect the RBA to lift its cash rate in 2018, with a first hike pencilled in for Q2. With hikes expected, we see the AUD rising to US84 cents in 2018. 
<a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.  
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Australia in 2018 : Surfs up! Cash rate too! Riding the global growth wave

Australian housing, cooling not crashing: HSBC's Paul Bloxham

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Australia’s current expansion is its longest boom.
GDP growth has been continuous for 26 years, with no ‘technical recession’ during that period.
By some measures, Australia’s is the longest boom of any developed economy, although there is some debate about that. What it means can also be disputed.
For example, Australia has had contractions in per capita GDP, so part of the boom is due to strong population growth. Although the cycle is not dead, its amplitude has been tamed, at least for now. It is also important to understand how it happened. Luck and good management have both played a role. There may also be lessons that can help sustain growth in the future, as well as for other countries. Fiscal reform is a priority if the longest boom is to continue.
Recessions are nasty. They usually result in a rise in unemployment, which is highly positively correlated with ill-health, high crime rates, and other negative social and political outcomes. Recessions can also have lasting effects. Long-term unemployment can lead to skill atrophy, making it harder to find a job even once the economy recovers. Deep and long recessions, like the Great Recession, have had a lasting negative effect on a generation of workers.
Although not recent, examples from Australia’s recessions are still powerful and worth recalling. The impact of Australia’s early 1990s recession (1991) on the labour market was deep and damaging. The unemployment rate rose significantly and did not return to its pre-recession level for 14 years. It caused significant harm. For example, many middle-aged workers who lost their jobs in Victoria’s manufacturing industry, which was hard hit, never worked again. Designing policy to avoid recessions has been the macroeconomist’s ‘Holy Grail’.
Australia’s 26 years of growth are important and worth acknowledging. They will also hopefully yield lessons for the future. However, it is important to be clear about what Australia’s experience is not. It does not mean that the cycle is dead. The world has had a number of periods where sensible observers claimed that this was the case. In 2003, Nobel prize-winning economist, Robert Lucas, famously stated that the ‘central problem of depression-prevention has been solved’, ahead of the Great Recession in 2008. Harking back to earlier days, there was a strong belief in Australia in the 1960s that the Keynesian prescription of active demand management, using fiscal policy, had solved the macroeconomic problem of that time. This was before significant recessions in the 1970s, 1980s, and 1990s. These accounts proved to be hubris.
Australia will almost certainly have a recession at some point. However, what is clear is that over the past 26 years, the volatility of Australia’s economy has been much lower than at any other time in the country’s history and most other countries experiences. This is worth studying. Australia has managed to dodge a number of global shocks, including: avoiding a recession during the Asian financial crisis in 1997/1998, the IT bubble of 2000, and the Global Financial Crisis of 2008/2009. Australia also avoided having a recession at the end of a housing credit and price boom in 2002/2003, during a drought of the early 2000s and at the end of the recent mining investment and commodity price boom, which peaked in 2011/2012.
Part of it has been luck. Australia’s geography has become a blessing. What Australian historian, Geoffrey Blainey, famously described in 1967 as a ‘tyranny of distance’ from Western markets has become the ‘power of proximity’ as global growth has shifted towards Asia. Australia has also been fortunate to have a large stock of high-quality resources, such as iron ore, coal, and gas that have been in high demand.
However, it is not all luck. A strong rule of law has helped. While many other large mining economies, with weaker institutional foundations, have suffered from the ‘resources curse’, Australia has managed to benefit from its large resource endowment. Market reforms in the 1980s and 1990s, including the floating of the Australian dollar, made the economy more flexible and better able to deal with global shocks. There may be lessons for other countries. Although the Global Financial Crisis raised questions about the ability of market-based systems to deliver widespread benefits, Australia stands out as a successful market-based economy.
Good economic management has also played a role. An independent central bank with a clear mandate to flexibly target inflation has proved to be an appropriate institutional arrangement for a medium-sized commodity-producer. The RBA has adeptly managed the cycle maintaining on- target inflation and financial stability and deserves significant credit for the long boom.
There have also been challenges. In recent times it has proved difficult to run balanced budgets, with the federal budget approaching its tenth consecutive year of deficit, despite the earlier boost to national income from the mining boom. Economic reform has also proved difficult, particularly of the tax system, which is becoming increasingly inefficient. Housing supply, energy, and climate policy also need reform and policymakers ought to continue to focus on ramping up infrastructure investment. The lack of reform may, itself, be a consequence of the long boom as policymakers and voters may have become complacent. It would be disappointing to think that Australia might need a recession, with all of its damaging effects to the economy and communities, in order to motivate reform.
Eventually, Australia’s long boom will end. The trigger will most likely be a negative shock from overseas. A sharp downturn in Asia, when one arrives, would prove harder for Australia to deal with than the Global Financial Crisis, which was centred on the developed world. Australia’s high levels of household debt would be likely to exacerbate any downturn.
Australia needs reform to support productivity growth and prepare for the next downturn. The priority should be fiscal reform, which leads to sustained budget surpluses. Measures should include, shifting the tax mix towards more efficient taxes, such as consumption tax, and cutting back on public spending commitments that do not deliver strong economic returns.
If there is one clear lesson from the long boom it is that Australia has benefited from a key part of the policy apparatus that is used for managing the cycle and securing the economy – the Reserve Bank of Australia – being independent from the political process. With this in mind, policymakers ought to consider ceding more authority for reform of other policy areas, such as transport and social infrastructure, energy and tax policy, to independent agencies. This could involve making recommendations by agencies such as the Productivity Commission, Infrastructure Australia, or Australia’s Parliamentary Budget Office, more binding. While politically challenging, the government could consider setting up an independent fiscal authority, akin to the RBA, but aimed at managing fiscal spending and taxation decisions.
As the global economy finally recovers from the lingering effects of the financial crisis, now is the time to focus on reform. It is clear that reform would help if the longest boom is to continue.
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Paul Bloxham is the <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">chief economist</a> of Australia and New Zealand for HSBC.
 
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Australia’s longest boom: How Australia did it and can it keep growing?

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GUEST OBSERVER
 
At this low level of the cash rate it seems that the hurdle for cutting further is very high.
One aspect of this is that the exuberant housing market remains a concern.
Another aspect is that despite the recent surprising fall in Q3 GDP, the RBA still expect GDP growth to pick up to an above trend pace of ‘around 3 percent over the next couple of years’ and for inflation to pick up to above 2 percent in 2017.
We agree with these forecasts and see the RBA on hold through 2017 before lifting the cash rate in 2018.
The RBA kept its cash rate steady today at 1.50 percent, as expected by 27 of 28 economists in the Bloomberg survey.
Just prior to the decision the market was pricing a 4 percent chance of a 25bp cut and a 15 percent chance of a 25bp cut by May.
The RBA seemingly has very little appetite to even consider cutting the cash rate further, with today’s statement not even describing it as an option.
Part of the reasoning is that the current low cash rate is already delivering a housing price boom in Sydney and Melbourne and there are increasing concerns about the exuberance of these housing markets.
It is also worth keeping in mind that Governor Lowe had already told us in a speech in November 2016 that cutting rates further may not be in the ‘public interest’ if it further boosted household debt even if it got inflation back to target more quickly.
The hurdle for a rate cut at this point in the cycle is clearly very high.
While we see the financial stability concerns as a key factor that kept the RBA on hold today, we also note that the central bank’s own take on the global and local economies remains quite positive.
On the global economy, the statement noted that growth in China had been stronger over the second half of 2016, that global business and consumer confidence had generally picked up and that inflation rates had generally moved higher.
It also stated that the recent lift in commodity prices was boosting Australia’s national income.
On the local economy, the statement (which was the first public comment from the RBA on the Q3 GDP numbers) suggested that the fall in GDP in Q3 was due to ‘temporary factors’ and that ‘reasonable growth’ was expected in Q4.
More importantly, the central bank re-affirmed that the RBA is still forecasting growth to pick up to an above trend pace of ‘around 3 percent over the next couple years’.
At the same time, it still sees inflation lifting back to the target band.
Focus will now shift to a speech the Governor is scheduled to deliver on 9 February and the official statement, due to be published on 10 February.
<a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 
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