Swan bets big on a housing recovery

AgH20 · Oct 23, 2012

http://www.theage.com.au/business/swan-bets-big-on-a-housing-recovery-20121023-282o2.html

Michael Pascoe on Swanny's Grand Plan to Turbo Charge Australia's Economy

Never mind the rats and mice and smoke and mirrors that have gone into pulling a surplus out of the budget hat this financial year, Wayne Swan is betting the next financial year on housing and farms.

Treasury's MYEFO forecasts for the 2013-14 domestic economy make grim reading with predictions of flat or declining performances in all but two areas: dwellings investment and farm product.

It's a very brave decision, Minister, to get into the long-range weather forecasting business, but that effectively is what Treasury is doing by predicting that farm product will rise by 6 per cent in 2013-14, an upgrade from a 1 per cent rise guessed in the May budget papers.

More important for the credibility of the government's outlook is the belief that the housing industry will finally turn the corner.

Says Treasury: "Dwelling investment is forecast to be flat in 2012-13, before growing 4 per cent in 2013-14. Dwelling investment declined 3.3 per cent in 2011-12 on the back of continued weakness in the detached housing market. Conditions across the sector are expected to improve gradually over the remainder of 2012, consistent with the solid growth in dwelling approvals and commencements seen in the June quarter.

"The recovery is expected to gather momentum into 2013-14, driven by a pick-up in home buyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period."

It's only housing and farm product and what seems a marginal improvement in net exports that hope to maintain real GDP growth at 3 per cent next year.

In nearly every other sector there are sharp downgrades to the outlook, which perhaps would have dominated headlines if the media hadn't been sucked into Canberra's immediate surplus fixation that political exercise.

Skating by unnoticed, Treasury's revisions of investment expectations indicate Canberra has taken a darker view than anyone of the resources boom peaking.

The May budget forecast total business investment growth would slow from 2011-12's incredible 21.3 per cent to 12.5 per cent this financial year and 8 per cent in 2012-13. The MYEFO cuts those figures to 11 and 6.5 per cent respectively.

Non-dwelling construction was forecast in the budget to enjoy 14 per cent growth this year and 7.5 per cent the next. The MYEFO maintains this year's prediction but cuts next year's growth to 5.5 per cent.

Machinery and equipment is down from the budget's 12.5 and 8.5 per cent to 9 and 7.5 per cent for the current and next financial years respectively.

And the mystery of how Wayne Swan can still record a surplus this year after a dive in revenue without a further weakening of final public demand (total state and federal government spending) is solved: some of that contractionary pain has been flicked into the next year. Treasury is maintaining final public demand's impact on this year's GDP at half a per cent, but has added a quarter per cent contraction next year.

With so much of the economy predicted to grow more slowly next year, it becomes a very big bet indeed that housing construction will be robust enough to maintain GDP growth at the predicted 3 per cent and keep unemployment steady at 5.5 per cent, with employment growth of 1.25 per cent and a convenient dip in the participation rate.

Which is where forcing the Reserve Bank to cut interest rates comes in. The Prime Minister, Treasurer and Finance Minister have all persisted with the euphemism of their surplus pursuit "making room" for the RBA to cut rates "if it sees so fit".

Rubbish. Canberra effectively is forcing the RBA to cut as the budget only works if further cuts stimulate demand in general and housing demand in particular. The assumptions in Treasury's modelling are based on the money market's own bet that there are several more rate trimmings to come.

And then there's the little matter of higher population growth the great unmentioned economic fundamental that politicians on both sides prefer to ignore, lacking the brains, heart or gonads necessary to explain its importance to a dumbed-down electorate.

While Treasury spells out the various assumptions and forecasts necessary to come up with its outlook, you have to go digging to find a population figure. It's tucked away in the fine print of discussion about GST distributions to the states: the assumption that Australia will have 22,834,444 people at the end of this year, up 1.56 per cent on the previous year.

That fits with the prediction previously made here that rising net overseas migration will see population growth of 1.6 per cent by the end of the year.

Plenty of those migrants had better be builders and plenty of Australians had better be tempted by yet lower interest rates into wanting to buy a new home.

Michael Pascoe is a BusinessDay contributing editor.

Read more: http://www.theage.com.au/business/s...ng-recovery-20121023-282o2.html#ixzz2A5O349wr
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Guest · Oct 23, 2012

"The recovery is expected to gather momentum into 2013-14, driven by a pick-up in home buyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period."
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Demand by whome and with what means?

The US is running on ZIRP/NIRP and their housing sector is completely fuxord.

Besides, no matter what the repayments are, who would consider taking on massive loans when so many sectors of the business economy are downsizing, going bankrupt or laying off staff (government itself included).

The ONLY reason why the housing sector is still where it's at right now is not because of low interest rates, but because of tax incentives and loose lending standards giving the illusion of affordability.

Given the international markets are going now where but down, Australian dollar remains 3rd highest in the world on the back of international currency wars destroying our export markets just WHERE are the future jobs of this nation going to come from in order to maintain this ridiculously over heated credit ponzi?

Mining?

Aren't they already calling an end to that little gravy train?

What else? Manufacturing? Tourism?

Or maybe just looking for more publically owned shit to pawn off to the highest international bidder?

Unless the government plans on stepping FURTHER into the market with more regulation, bailouts, incentives and (if necessary), nationalisation, the real markets disagree quite sternly with this idiot's predictions.

I think *at best* we have a very long period of stagnation ahead whilst wages seek to play catch up and in this climate, wages are going DOWN and not up at all, being further siphoned by cost of living increases and a maniac government seeking to balance the budget.

Face it, our markets are screwed and the idiots in charge are still high thinking we're going swell.

Shaddam IV · Oct 23, 2012

Is this the same Swan that last year was bleating that the ming boom would carry Australia for many years?

This is what happens when you put the shop steward in charge of the company. When the dictionary wrote the definition of "failure" they used Swan as a case study.

hiho · Oct 23, 2012

puddle duck in a muddle hey?

southerncross · Oct 23, 2012

Everytime I see his head on telly I want to kick it (not the telly). It's like watching a worm talk, you can't believe it's happening. Then you can't believe what it said.

Fykus · Oct 23, 2012

how disconnected from reality is this government. first they blow the surplus that was left to them on nothing at all - giving everyone 900 dollars for nothing, then they decide itd be a good idea to start over taxing the only industry that was keeping us from an official recession, then they bring in a carbon tax to increase the already high cost of living and now he wants to start taxing businesses every month instead of every quarter, just so he can get 14 months tax in the first year to bring his precious budget back to surplus. If it werent for his idiot decisions in the first place then he wouldnt need to be doing all this to get back to surplus.

He really needs to take off those rose tinted glasses of his and see whats really happening here in australia.

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