Doom and gloom: Property market scaremongers need to pipe down

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Michael Pascoe| Sydney Morning Herald| June 2 2017

http://www.smh.com.au/business/the-economy/doom-and-gloom-property-market-scaremongers-need-to-pipe-down-20170601-gwinkf.html

There’s nothing like a prominent visiting economist spruiking imminent ruination to get plenty of media attention. Heavens, the talent doesn’t even have to be someone prominent – any scaremonger will do.

It’s worth restating the journalist truism that fear sells. Scary headlines win eyeballs. More measured perspective is dead boring.

Sccaremongering season

That’s part of the reason for this week’s outbreak of doom and gloom headlines, along with an apparent competition to see who can downgrade next week’s GDP growth the most. It seems a considerable whack of the commentariat has been seizing on one or two bits of negative news and extrapolating that to the entire economy.

Two key examples: the people catching up with housing approvals having peaked; and the wildly disproportionate coverage given to visiting Citi chief economist Willem Buiter.

Buiter has been forecasting a recession for a couple of years now. If he keeps it up, odds are he will eventually be right. While waiting for that, it’s bemusing that a visiting fireman who apparently is not very well informed about the Australian economy is taken so seriously and granted such wide coverage.

Typical of the Buiter stories: “Australia lacks a list of large, ready-to-go infrastructure projects needed to be ready for an impending downturn in China that will have a significant impact on the local economy, a senior economist has warned.

“And an infrastructure-driven investment buffer is even more important given the threat posed by Australia’s “quite spectacular” housing debt bubble, chief economist at international bank Citi, Willem Buiter, says.”

The reality is that we have more than a “list” of shovel-ready projects, we have an infrastructure boom taking off. As reported before the federal budget, from a cyclical low in 2015-16 of $19 billion, we’re on our way to spending $33 billion on road and rail construction in 2018-19, according to Macromonitor. For all Scott Morrison’s rhetoric, the budget only added about another billion to that immediate peak, so call it $34 billion.

We need further infrastructure investment to continue from the early 2020s and the Federal government could do much more than talk a big game by adding up 10 years’ worth of spending, but Buiter’s initial claim is simply wrong.

It’s not just the foreigner missing the infrastructure reality though. The many one-dimensional stories about housing construction peaking also fail to grasp that infrastructure is growing faster than housing is slowing, thus heading off one economic concern.

Furthermore, on Macromonitor’s figuring, the inevitable calming of housing construction approvals and subsequent starts will pretty much be a matter of retracing some of the sudden boom we’ve had in units.

The promising aspect is that, with the primary exception of Brisbane CBD units, it looks like the housing supply side is correcting before prices fall off a cliff. The regulators’ efforts to curtail investor and lender enthusiasm is likely to end up supporting prices by preventing oversupply. (Sorry, Gen Y and Millennials, housing doesn’t look like getting much cheaper.)

Particularly in the key Sydney and Melbourne markets, the employment and population stories remain strong. For a bubble to pop damagingly, it needs either serious oversupply, a sharp fall in employment or sharpish rise in interest rates. None of those three is evident.

Cue the many China bears, such as Buiter. China has serious debt problems and is undergoing a belt tightening, but a more nuanced understanding of the risks has been provided by the ANZ Bank’s chief economist, Richard Yetsenga. He argues that China is actually is in much better state to the challenges now that it was during its last tightening cycle in 2013.

Yetsenga reckons our main problems are internal, not China:

“Higher GDP per capita (which should naturally bring down rates of growth), mortgage penetration which is very mature, a bank regulatory environment which effectively removes bank credit as a driver of growth (in exchange for structural benefits to be sure) and slower population growth all imply the future will be harder work than the past.

“Certainly Australia can keep growing in absolute terms by virtue of its still robust population growth. But without meaningful change, a return to rates of growth anything close to what the country has averaged historically seems unrealistic.

“It’s surprising then how the onus remains almost entirely on a return to a more ‘normal’ economy to fix the budget, rather than on genuine policy reform.

“Governments typically don’t do the heavy lifting on budget repair; the economy does. The economy this time is missing in action.

“Until the policy debate accepts a more ambitious reform program is virtually the only approach which can take the economy forward – particularly a program which is focussed on removing blockages rather than creating them – Australia will struggle to get closer to the carrot of growth which constantly and tantalisingly seems to remain out of reach.”

Which brings us to key missing ingredient: non-resources business investment. Despite the lower dollar, low inflation, cheap money, solid population growth, low wages growth, an improving international outlook and the best business conditions since the GFC, business has not felt the need to significantly increase investment.

There’s was some hope though in yesterday’s capex figures. The closest the Australian Bureau of Statistics gets to providing a non-resources picture is the category “other selected industries”. The OSI  chief financial officers told the ABS they will invest 6.2 per cent more than they did at this time last year and 6.5 per cent more than they did three months ago.

And remember that the ABS doesn’t count capex in a number of key areas, including health, education and training, agriculture and software, all of which have good stories to tell.

Hopefully the CFOs will hear those stories and not take fright over gloomy seasonal headlines.

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