An update on the economy
Division Director, Macquarie Group
When you look at the data, it is no wonder Melbourne's median house prices have increased roughly 16%* compared to this time last year: $200 billion stockpiled on Australian personal and business balance sheets, $36 billion released from Australian superannuation accounts, record low interest rates and government financial support for hundreds of thousands of Australians unlike anything we have seen before.
The doom and gloom predictions, and the discussion of a prolonged recession that we thought would be brought about by the pandemic, have not eventuated. Globally and locally the economic conditions look strong thanks to low rates, fiscal support, consumer sentiment and vaccination progress.
Recent activity data has been significantly better than expected in Australia. GDP growth is now forecast to be 4.75 % over 2021 and 3.5%* over 2022.
Employment has also been strong. In fact, not only has Australia’s unemployment rate tumbled to its lowest level since the start of the pandemic, dropping by 2.4% with 303,700 more jobs created in only 12 months, but it is now also sitting at a record historical low of 4.9%*.
At the same time, job vacancies are continuing to rise. Macquarie Division Director and commentator Martin Lakos says these statistics are evidence of an improving employment position: ‘A lot of job vacancies are not being filled, and at the same time hours worked around the country are increasing.'
Various social assistance measures such as JobKeeper played a crucial role in boosting household income over the past year. Whilst largely these programs have wound down, growth in employment has cushioned the effect of the programs expiring.
According to the RBA, household wealth has increased strongly of late, mostly because housing prices have risen, but also because households accumulated an unusually large amount of additional savings through 2020 due in large part to a reduction in discretionary spending throughout the pandemic. For example, in 2018–19 more than 10 million Australians took overseas trips, the majority of which were for holiday purposes and equivalent to $43.2 billion. With overseas trips not possible since early 2020, this discretionary spending has ended up in consumers’ pockets. Aside from consumption spending rebounding rapidly as restrictions have eased, Martin Lakos says there are other signals of confidence:
Businesses and households are once again servicing their debts and we’re forecasting the strongest earnings recovery since the 1980s.
*Source: AFR, REIV, ABS
You can’t underestimate the demand. In broad terms, the conditions for housing are positive: construction is rising, housing turnover has increased, and many properties are only on the market for a short time before being sold.”
Further, as at 30 June 2021, the Australian sharemarket broke new ground and claimed a historical record high, closing at more than 7,500* points. This was more than a 50% increase on its lowest point in 2020 at the start of the pandemic.
Economic outlook, jobs growth and household savings were contributing to a feeling of confidence amongst Australians. This confidence was reflected in demand. However, the situation in Sydney and other parts of the eastern seaboard in late winter are somewhat starting to dampen this confidence.
In the established home market, we know that prices are rising rapidly, and demand is high. Martin Lakos says the market will continue to be buoyant for a few years yet:
You can’t underestimate the demand. In broad terms, the conditions for housing are positive: construction is rising, housing turnover has increased, and many properties are only on the market for a short time before being sold.
These strong figures and continued growth beg the question: At what point will there be any macro intervention to slow the escalating prices? In terms of interest rates, the RBA reaffirmed that interest rates were remaining steady in the short-term and that they were committed to 'maintaining highly supportive monetary conditions to support a return to full employment in Australia'*.
However, several banks have already begun factoring tightening monetary policy and an increase in RBA interest rates into their pricing decisions, with longer term home loan fixed rates on offer rising to more than 2%* for the majority in the market.
In addition, there have been some early signs of the banks taking more of a risk averse approach to home lending and factoring in a potential increase in RBA rates over the coming years in their credit assessments, with the Commonwealth Bank of Australia (CBA) increasing its serviceability floor rate by 0.15%* in June, 'to ensure that CBA continues to lend responsibly in the current record-low interest rate environment'.
Victoria’s population growth has been significantly impacted by the pandemic. According to Martin Lakos the state that was once the strongest in terms of population growth is the one that has thus far been impacted most by the closure of the international borders and internal migration to Queensland, but Victoria will benefit once the borders are permanently reopened.
*Source: ASX, AFR, Mortgage Business, ABS - 4th May 2021
© Jellis Craig 2021