What the housing downturn in Australia could mean for New Zealand

Sydney and Melbourne where many buyers load up with as much debt as possible to enable them to compete with other homebuyers.

On top of that, regulators have placed a brake on the amount of money banks can lend for investment properties. Adding to pressure on property investors is the possibility of a Federal Labor government taking power next year. Labor’s pledge to wind back the favourable tax treatment of investment property will deal another blow to the housing sector.

While consumers will be more cautious, the average household will save about $10 a week from lower petrol prices and that will provide some support to household spending, says Shane Oliver.

There is also the prospect of large income tax cuts this year. At its midyear economic update in late December, the Government announced the deficit was shrinking and the 2019-20 year was on track for the first annual surplus in a decade.

More importantly for consumers (and voters) the Government has put aside A$9.2b for what the Treasury papers coyly calls “decisions taken but not yet announced”, which are actually tax cuts. Treasurer Josh Frydenberg will hold off the details until closer to the election due by May, although analysts estimate they will be worth about A$6 a week to middle income earners. Low income earnings are already in line to receive a A$500 tax refund in July thanks to previously announced tax cuts.

While the Government insists the return to surplus is due to its good economic management, in reality it’s due to higher commodity prices, infrastructure spending and higher company tax collections.

But the Treasury papers suggest the economy will slow to 2.75 per cent growth in 2018. Investment bank UBS has a similar forecast — growth of 2.7 per cent in 2019 and of 2.5 for 2020.

The slowing growth and benign inflation will keep the Reserve Bank of Australia on the sidelines and keep the official cash rate at 1.5 per cent, where it has remained steady for the past two and a half years.

Certainly, UBS economist Carlos Cacho doesn’t expect a rise in interest rates until after 2020, particularly as lower oil prices keep inflation low. “We don’t think they’re going to hike any time soon. With soft consumption, falling house prices, it’s not an environment they want to hike into,” he says.

Cacho says a rate cut is also unlikely, unless the economy deteriorates further. “The housing market is the key downside risk to the domestic economy, mostly to the consumption channel but also through employment and the construction sector if we do see activity slow down,” he says.

For his part, McGuinn is optimistic about the property market and economy. “At some stage, probably in the next month, in the next six months, things will bottom. And then, people will say, ‘S***, the whole world didn’t blow up. Property prices doesn’t go back down to pre-2000 numbers. It did drop back a bit, but they’re still better than they were in 2014. Now is a good time to buy — while the market’s bottomed’,” he says. “And then, all of a sudden, there’ll be a change.”