Latest / Best of Business / Paul Bloxham: HSBC chief economist on the state of Australia's housing slump

Transcript

Paul Bloxham: HSBC chief economist on the state of Australia's housing slump · Best of Business

• 0:09
  Speaker 1: You're listening to a podcast from News Talks B follow
• 0:12
  Speaker 1: this and our wide range of podcasts now on iHeartRadio.
• 0:16
  Speaker 2: It's twenty four away from Sex Now. A housing slump
• 0:19
  Speaker 2: in Australia may not stop until well into next year.
• 0:22
  Speaker 2: That's the warning from HSBC Chief Economist Paul Bloxham, who's
• 0:25
  Speaker 2: with us now.
• 0:26
  Speaker 3: Hi Paul, Good day Heather.
• 0:28
  Speaker 2: So basically your prediction is it keeps falling all the
• 0:30
  Speaker 2: way until the RBA decides to cut.
• 0:33
  Speaker 3: Yes. Yeah, I think, well, until the market starts to
• 0:36
  Speaker 3: believe that the RBA is going to start to cut.
• 0:38
  Speaker 3: I think, you know, two things tend to move in
• 0:40
  Speaker 3: advance of the actual arrival of interest rate cuts or
• 0:43
  Speaker 3: interest rate moves. But I think until that point, yeah,
• 0:46
  Speaker 3: And I think the you know, the primary challenge at
• 0:48
  Speaker 3: the moment is that inflation is still too high and
• 0:50
  Speaker 3: the RBA is still talking as though it's considering maybe
• 0:53
  Speaker 3: even lifting rates a little bit further. There is no
• 0:55
  Speaker 3: discussion really about interest rates coming anytime soon. And we've
• 0:59
  Speaker 3: got a housing market that's already seen declines. If you
• 1:01
  Speaker 3: look at the daily index, Australia's got a daily house
• 1:04
  Speaker 3: price index, it's three and a half percent off its peak.
• 1:08
  Speaker 3: Every major capital city is now declining all most of
• 1:11
  Speaker 3: the regional areas are in decline as well. So you know,
• 1:14
  Speaker 3: we've got a house price correction that's underway, and we're
• 1:18
  Speaker 3: only sitting here in August, so we think, you know
• 1:20
  Speaker 3: that we've got a further set of declines to come.
• 1:23
  Speaker 3: We think they'll probably four for the next few quarters,
• 1:26
  Speaker 3: and that of course, we'll do a couple of things.
• 1:27
  Speaker 3: I mean, one of the things it does is it
• 1:29
  Speaker 3: actually helps the RBA in some ways. It weakens growth
• 1:33
  Speaker 3: in the economy. We know there's a negative wealth effect
• 1:35
  Speaker 3: that feeds from falling house prices. We know that housing
• 1:38
  Speaker 3: press declines tend to weaken the construction cycle to some
• 1:41
  Speaker 3: degree as well, and falling housing turnover tends to weaken
• 1:44
  Speaker 3: consumer spending too, So it's going to weaken the economy
• 1:47
  Speaker 3: further and help them to get inflation down. But I
• 1:51
  Speaker 3: don't think we don't think the RBA is going to
• 1:52
  Speaker 3: be cutting interest rates until well into twenty twenty seven,
• 1:54
  Speaker 3: probably the second half, So I think there's an extended
• 1:57
  Speaker 3: period where house prices will be coming down.
• 2:00
  Speaker 2: So you're at three and a half percent down already,
• 2:02
  Speaker 2: we do you think it's going to go how much further.
• 2:04
  Speaker 3: Well, we're factoring in a sort of peak to trough
• 2:06
  Speaker 3: cycle of about eight percent, but we're also you know,
• 2:10
  Speaker 3: flagging that actually it could be more than that. I
• 2:12
  Speaker 3: think the risk is still that it could be a
• 2:14
  Speaker 3: larger decline than that. That would make it similar in
• 2:17
  Speaker 3: spize to previous cycles we've seen in the last couple
• 2:20
  Speaker 3: of decades. But I think, you know, given we've seen
• 2:23
  Speaker 3: some pretty substantial changes to the tax system that came
• 2:26
  Speaker 3: through in the May budget, the risk is that these
• 2:28
  Speaker 3: things actually play out a bit harder and they do
• 2:31
  Speaker 3: put a bit more downward pressure on house prices for longer.
• 2:35
  Speaker 3: So so eight percent but with some downside risk is
• 2:37
  Speaker 3: the way we're characterizing it. Impact on rents, Yeah, well,
• 2:42
  Speaker 3: rents are likely to rise a bit. I mean this
• 2:45
  Speaker 3: is part and parcel with removing negative gearing as they
• 2:48
  Speaker 3: did in the budget, and the discount to the capital
• 2:51
  Speaker 3: gains tax arrangements, because what it does is it reduces
• 2:55
  Speaker 3: the incentive for investors to be involved in the housing market.
• 2:58
  Speaker 3: And vestors are typically buying the houses to rent them,
• 3:01
  Speaker 3: and so it creates less rental properties. And so I
• 3:04
  Speaker 3: think that's going to put some upward pressure on rents,
• 3:07
  Speaker 3: but I think there's also some offsetting features. One of them,
• 3:09
  Speaker 3: of course, is going to be you know, this policy
• 3:12
  Speaker 3: is primarily designed aimed at getting investors to step back
• 3:16
  Speaker 3: a bit so that in effect it leaves a bit
• 3:19
  Speaker 3: more housing stock and lower's house prices, so first home
• 3:22
  Speaker 3: buyers can get involved. Now that the sort of people
• 3:24
  Speaker 3: who rent are also the sort of sort of people
• 3:26
  Speaker 3: who tend to end up being first home buyers, so
• 3:29
  Speaker 3: you know, you might very well see people move. You know,
• 3:32
  Speaker 3: that's going to mean the rents don't maybe see quite
• 3:34
  Speaker 3: as much upside because those people actually convert into first
• 3:37
  Speaker 3: home buyers. And then the other thing is the economies
• 3:39
  Speaker 3: in a down swing. We've talked about that. That's what
• 3:41
  Speaker 3: the RBA is trying to do. They're trying to get
• 3:43
  Speaker 3: the economy to slow down, to get inflation to come down,
• 3:46
  Speaker 3: and of course if the economy is in a down swing,
• 3:48
  Speaker 3: they might just not be as much demand out there,
• 3:50
  Speaker 3: and maybe you can't drive those rents that much higher.
• 3:52
  Speaker 3: So I think there's upside to rent rents, but I'm
• 3:54
  Speaker 3: not thinking it's a substantial upside.
• 3:57
  Speaker 2: Listen, you touched on the impact on the economy before,
• 4:00
  Speaker 2: do you guys have the same Is the wealth effect
• 4:04
  Speaker 2: the same for you in Australia as it is in
• 4:06
  Speaker 2: New Zealand, where once our house prices started falling, we
• 4:09
  Speaker 2: really shut our wallets in a big way. Is the
• 4:11
  Speaker 2: same thing going to happen there?
• 4:13
  Speaker 1: Yeah?
• 4:13
  Speaker 3: I think that does happen. But I think we need
• 4:15
  Speaker 3: to understand that there is more than just the mechanism
• 4:18
  Speaker 3: of falling house prices therefore discourage people from doing spending
• 4:22
  Speaker 3: because they're less confident. There's also other channels. Falling house
• 4:26
  Speaker 3: prices tend to mean less housing turnover. People are less
• 4:29
  Speaker 3: inclined to sell their house. If actually house prices are falling,
• 4:32
  Speaker 3: and if there's less turnover, then the fall and turnover
• 4:35
  Speaker 3: itself actually slows consumer spending because people aren't moving between houses,
• 4:39
  Speaker 3: so they don't buy as many durable goods. We know
• 4:41
  Speaker 3: that relationship works quite well, and we also know that
• 4:43
  Speaker 3: there's a whole industry turnover industry if you like, you know,
• 4:46
  Speaker 3: real estate agents, conveyances, lawyers, mortgage brokers, all these sorts,
• 4:50
  Speaker 3: and that all slows down as well. And I think
• 4:52
  Speaker 3: there's a third factor, and that is if house prices
• 4:55
  Speaker 3: are falling. It's actually really quite hard for construction to
• 4:58
  Speaker 3: be as strong because selling houses, building new houses in
• 5:02
  Speaker 3: a rising cost environment sort off. To make it work,
• 5:05
  Speaker 3: to make it work out and want to build those houses,
• 5:06
  Speaker 3: you actually probably need house prices to rise. So you know,
• 5:09
  Speaker 3: we've got a whole collection of factors that are related
• 5:12
  Speaker 3: to the house what happens with house prices that we'll
• 5:15
  Speaker 3: all I think collectively and together sort of slow down growth.
• 5:18
  Speaker 3: But again, you know, come back to that's what the
• 5:21
  Speaker 3: RBA is actually looking to happen. They're looking they're needing
• 5:24
  Speaker 3: the economy to slow down at the moment. We need
• 5:26
  Speaker 3: a downswing to get inflation back to where it needs
• 5:28
  Speaker 3: to be.
• 5:28
  Speaker 2: Yes, they won't be unhappy. Hey, thank you as always, Paul,
• 5:30
  Speaker 2: appreciate it. Paul Blocks some HSBC's chief economists.
• 5:34
  Speaker 1: For more from News Talk sed B, listen live on
• 5:36
  Speaker 1: air or online, and keep our shows with you wherever
• 5:39
  Speaker 1: you go with our podcasts on iHeartRadio.