BACKGROUND

The Australian economy, as a whole, has been a stable and a stronger one among other developed economies for a fairly long time now but, as horrifying as they may be on some occasions, fluctuations in the performance of the economy and the volatility are somewhat the beauty of economics. Australia has shown stable economic figures consistently for the past few decades while it even stood pretty much still post the Global Financial Crisis of 2007 where most of the countries were facing the aftermaths of the disastrous situation (Berry & Dalton, 2007). However, in the present times, the country does have some concerns hovering around though of smaller degrees which include a minute fall in their GDP growth rate, a downsizing mining boom, some education led employment policy approaches and further smoothening of federal – state relations so to regulate the fiscal stimulus and growth more effectively (Measham, Mckenzie, Moffat, & Franks, 2014). The experts claim that the drop in the GDP growth rate is not a big problem and is likely to revamp in 2016 while the slowing down of the mining boom might sustain for some time as it is causing some demographic problems and infrequent social adjustments especially in Western Australia but the authorities aim to help the residents which are, both directly and indirectly, affected by the ground functioning of the sector’s performance and aid them with the changes enabling them to familiarize with the consequences as they do not want any such outcome that might hamper the working of the sector which leads the country’s exports (The Daily Reckoning, 2015).

Part 1

Property Market

Overview of Current Conditions:

Australia, like many other countries, was going through a housing boom prior to the global financial crisis that was backed up by different short – term and long – term aspects and reasons which did shook up to some extent after the crisis spiraled through the better part of the world (Australian Government, 2015). According to Australian Bureau Statistics Report (2015) the house prices rose by 6.8% in the major cities of Australia in 2014. The Australian Housing boom initiated due to the strict lending standards while the government of Australia introduced AU$10.4 billion in 2014 in which First Home Owner Boost Scheme and First Home Owner Grants were included. The upswing in Australian property market started in June 2012, during which Sydney and Melbourne showed higher rate of growth as compared to other capital cities as 14.5% and 6.9% respectively. The graph below shows the annual change in home values.

 

Figure 1: Data for Homes in Capital Cities (Growth Rate)

Source: CoreLogic RP Data

Whereas comparing last few decades it is evident that price weren’t that higher compare to last few years. Hence, this report is to identify the cause behind this issue which is a challenge for economic growth and stability.

 

Figure 2: Australian Quality Real Housing Price Index (1880-2012)

Source: ABS, Stapledon

Above graph show a series exploring 150 years of Australian housing prices. This shows the housing prices to inflation as an indicator of property market analysis (CLRD, 2015). The trend is fairly even over time and there is no strong indication that people favour housing as compared to other goods and services. Every single rise in the real prices has been followed by a downturn (except in 1961-1964).

Challenges

Chinese investment boom

China has a good reputation investing in Australia by many ways but mostly in property market. It was China’s economic growth singlehandedly that saved Australia from the recession many other countries experienced after the Global Financial Crisis of 2008-2009.Furthermore, China invested USD $1 billion in 2010 to USD $10 billion in 2014 in global real estate market. The graph below shows that in the first half of 2015, Australian Property market attracted more than 25% of China’s real estate investment dollars (Yardney, 2015).

 

Figure 3: Chinese Capital Flow into Global Real Estate

Source: ABS, CBRE Research

CBRE estimated that the Chinese investment in the Australian real estate reached at $6 billion in the first half of 2015 i.e. 25% of all offshore Chinese property purchases. The percentage increased from 10% in 2014 and 2013 to 25% this year (CBRE Report, 2015).

Negative gearing tax breaks

Another major driver of the recent residential property price surge is negatively geared investors. In terms of property investment it is highly evident in two major cities –Melbourne and Sydney. Interestingly, respondents saw negatively geared self-managed super funds as even more significant in driving price rises in these two markets’ (Janda, ABC: Australia’s housing market problems laid bare, 2014). Borrowing money will surge the amount that is invested, and certainly intensifies possible gain because there is more of a capital base on which to earn returns.

In terms of Australian law when costs exceed one’s investment income, it permits one in certain ways where he can deduct his borrowing and maintenance costs from his total income. The trend of housing affordability has also increased in Sydney and Melbourne and other capital cities in past few years (shown in the graph below).

Figure 4: Housing Affordability Trend in Australia

Source: ABS

Debt outpacing housing supply

People are investing more in properties, many people in Australia own multiple properties therefore, borrowing money and getting house loan tendency has been increased in within the economy. Moreover the boom-bust cycle in the land market was found out to be speculation on rising capital values of the real estate. Debt was peaked in 1893 and resulted into burst of land bubble causing the worst depression ever in Ausrtralia’s recorded history. The boom and bust were followed till 2008 when the highest peak was touched, driving the land boom on record (shown in the graph below) (Australian Bureau Statistics, 2015).

Figure 5: Private Debt and Land Value to GDP Ratios (1861-2012)

Source: ABS

Income ratio is increasing due to investment so; people are borrowing more money from the bank which causes long term debt.

Figure 6: Lending to Investors for New Constructions

Source: ABS

On the other hand, recently RBA said to a Senate committee that they will take some initiative to cut down risky investor lending but it is highly unlikely going to happen since the demand is unmet and they cannot do anything to dent the demand of investment loan (Australian Bureau Statistics, 2015).

 

Federal Budget

Overview of Federal Budget

Some of the key highlights of the 2015 Australian Budget were:

1. Budget deficit of $35.1 billion for 2015/16
2. Unemployment rate of 6.5 per cent for 2015/16
3. Economic growth of 2.75 per cent for 2015/16
4. Iron ore price assumed to be US$48 a ton for next two years (Hutchens, 2015).

According to the Common Wealth of Australia’s Budget Overview (2015) document, the government has key focus on fostering the small business sector and improving the child care system with greater fairness. In terms of the fostering small business sector the budget has allocated AUD $5.5 billion including $5 billion of tax relief (Australian Government, 2015). Additionally as softer measure there will be reduced bureaucracy and unnecessary regulations for small businesses which should also provide better support for startups and entrepreneurs of small businesses. In terms of social support from the federal budget, the budget has allocated a funding boost of AUD 4.4 billion supporting Australian Families (Australian Government, 2015).

This is further demonstrated by the delivery of $3.5 billion reform package to make child care more affordable, and accessible for those in need of these services (PWC, 2015). Additionally, the budget also invests AUD $1.2 billion new funding for national security. The budget also focuses on  a pathway to surplus every year even though this has not been made clear on how specifically this is being implemented or is planned (ABC, 2015). This according to experts is a key issue in the budget 2015 (Blumer, 2015). Having said this the government is expecting to spend $14 billion more in the 2015-16 year compared to the 2014 budget (ABC, 2015).

Some of the opportunities highlighted according to the economic outlook section in Australian Budget are:

1. Sustained growth as it is expected that employment number will decrease and consumers will benefit from the lower prices and interest rates.
2. Major economies such as India and China is likely to strengthen thus this can be good signs for Australian export and also the lower Australian dollar will boost the export and attract foreign investment(Australian Government, 2015).

Challenges

However, there are challenge that have been highlighted in the economic outlook section of Budget. For example, the government revenue is being impacted due to the fall in commodity prices and also declining demand in the Chinese market. Overall because of less prices in commodity it will impact the mining companies, resulting in unemployment and fewer services and overall having a broader impact on the Australian economy (ABC, 2015).

The issues and challenges discussed above will have an impact on both Australian economic stability and growth. An impact on revenue will impact on wage growth, increasing number of unemployment. The slowing down of mining boom with economic uncertainty in China and Europe will have impact on the Australian Export market as well as adversely impacting the investor confidence in the Australian economy.

 

Unemployment and Jobs Growth

Overview of Unemployment and Growth

According to ABS (2015) the current unemployment rate is 6.2% in Australia currently and projected seasonally adjusted unemployment rate (i.e. in September 2015) remained at 6.2 per cent.  ABS (2015) further reports that number of people employed decreased by 5,100 to 11,769,900 in September 2015 (seasonally adjusted) (ABS, 2015). This includes decrease in full time and part time among male and full-time among female. The reports also revealed in terms of trend or past data employment that increased to 11,775,800 in September 2015 as compared to an increase pf 232,400 in September, 2014. The following graph below shows the trend of unemployment rate in Australia since October 2014 (Trading Economics, 2015). The graph clearly highlights slight variation in the rate of unemployment although the rate has been hovering around 6.2%-6.3% over the past one year (Australian Government, 2015).

 

Figure 7: Australian Unemployment Rate

Source: Trading Economics (2015).

In terms of Growth, the Gross Domestic Product Growth Rate in Australia averaged 0.87 percent from 1959 until 2015, reaching an all-time high of 4.40 percent in the first quarter of 1976 and a record low of -2 percent in the second quarter of 1974 (ABS, 2015). According to RBA (2015) growth of Australia’s major trading partners is expected to be around its long-run average in 2015 and 2016 and growth will continue to be supported by generally accommodative monetary policies around the globe and oil prices that remain well below their level of a year ago. The figure below illustrates the GDP growth rate between July 2012 and July 2015 (RBA, 2015).

Figure 8: Australian GDP Annual Growth Rate

Source: Trending Economics (2015)

The outlook for Australia’s terms of trade has been revised down by 4 per cent since the previous Statement as a result of further fall in commodity prices. This is consistent with a slightly weaker demand outlook for a range of commodities, including a more subdued outlook for Chinese steel demand. Also, expectations are that there will only be a limited reduction in global supply from high-cost producers of iron ore, including from China. McKibbin (2015) reports that the Australian economy is expected to grow strongly to 2030 regardless of whether Australia adopts a post-2020 target.

Challenges

According to Pash (2014) five big things will shape Australia future in term growth and other economic activities. These include

1. The ageing population
2. Emerging Asia
3. The rising impact of digital
4. Global capital is “scared” and expensive
5. Key natural resources will become scarcer.

We anticipate that the current projected Australian unemployment and growth rate will be impacted by the five factors and will be play a vital role in the projected growth rate for the Australian economy in the near and distant future (Pash, 2014).

A predicted and less variation in growth rate (unemployment and growth) should help Australian economy reach its future target goals (i.e., stronger growth). However, future stability and growth will be dependent on how events offshore (especially the US, Chinese and Greek market) will unfold, and how policymakers and financial markets will respond (RBA, 2015). Within the domestic economic activities according to RBA (2015) the balance between the growth of domestic demand and supply will affect the employment market and the other major economic measures.

 

PART 2

THE PROPERTY MARKET

Before 2007, when crisis struck and initiated from the US, the Australian housing market was filled up with confidence and the business was prospering; the short – term aspects that helped the cause were the state regulated lower interest – rate levels which probably reflected the government presumption of long – term economic growth.

In December 2014 the banking regulatory body APRA and corporate regulator ASIC announced to tighten up the lending standards and surveillance of banks to slow down rampant sections of the housing market. The mortgage report by Deloitte showed that the big banks started writing less than 70 per cent of the new loans which was higher than 80 per cent in past years (referring to the figure below). The banks tend to increase the home loan rates for meeting more expensive funding cost (Janda, RBA says too early to judge APRA’s home loan restrictions, 2015). However economists believe that the housing boom has peaked due to blizzard of tougher lending policies in order to slow down the lending growth per bank to less than 10 per cent a year (Janda, RBA says too early to judge APRA’s home loan restrictions, 2015).

 

Figure 3: Residential Housing (Total Loans)

RBA observed that the falling commodity prices will also make it much difficult for some of the resource based companies for servicing their debts. Apart from property speculations, RBA also seek a little risk in Australian financial sector along with corporate debts still being very low followed by a massive pay down due to global financial crisis (Janda, RBA says too early to judge APRA’s home loan restrictions, 2015).

As mentioned before, the degree of concern for the Australian authorities was not that much problematic in the first place while the approaches of the government in the form of revival packages were good enough to stabilize the conditions in the housing market and sustain them as well. However, the concerning authorities must not overlook the current price – spikes in the market which are not at all severe currently but who knows, might be adding up as another bubble in the future!

THE FEDERAL BUDGET

Currently the Federal Budget in Australia has lit the light in the labor market as the government focused on jobs creation through stimulating the SME sector. The Federal Budget also announced the changes to childcare support that enabled more skilled workers to return to the workforce. The government also emphasized on the job creation through announcing 100 per cent tax write off for assets costing less than $20,000 (Doran, 2015). This was coupled with the reduction in taxes for small business enterprises so that new employment opportunities can be created and the economy could grow.

However, with the proposed changes the unemployment rate in Australia is likely to go up for a short period of 12 months (Doran, 2015). The changes in childcare will stimulate more skilled workers to return to the workforce but unemployment will rise if the new jobs vacancies are not outpacing the rises in participation rate. Current situation implicates that the employment growth neglects to keep pace with population growth, bringing about an observable ascent in the unemployment rate throughout the following five years (as shown in the figure below).

 

Figure 4: Employment Growth Rates

The Australian government has been spending more than what they raise for a fair bit of years now and yet, they have been unable to tackle this problem from the inside and depend upon the generic ways to balance their budget (Randolpha, Pinnegara, & Tice, 2013). However, the gap between the public income and the public spending does not put huge pressures on the economy but this is not something that can be ignored until it starts doing so.

The Australian Government has decided to provide over $330 million in order to implement a Youth Employment Strategy for improving the employment outcomes for Australia’s young people (McKenzie, 2010). While the Government is also committed to ensure that every Australian has the best chance to find and keep a job by providing the job seekers intensive support and to overcome challenges and get sustainable employment.

The authorities need to redefine the powers and the responsibilities which are at the disposal of both the federal and the state level governments as early as they can so that the inefficiency in certain governmental efforts to increase public welfare can be removed and the economic growth opportunities can be properly redeemed (Tulip, 2014). A more productive approach would be to shift and increase the share of tax collection and other revenue generating operations within the states because once they start doing so, the responsibility would automatically shift to their shoulders and all of such ventures that involve the provision of public goods & services would start to rest with the state authorities in a more decentralized and hence efficient manner which would also result in the eradication of any such deregulation and corruption within the administrative departments and might even raise the overall tax to GDP – ratio.

UNEMPLOYMENT AND JOBS GROWTH

The numbers of unemployment seemed to remain at a stable level of 5.7% where the major share consisted of the middle – aged group, in 2013. The youth unemployment rate was a mere 1.1% for the same year which was somewhat promising as far as the recent slowness of the economy is concerned (OECD Economic Survey, 2013). The national authorities have stated to address the issue, in the coming future, by increasing the time length of the unemployment benefit waiting period while they also look forward to introduce reforms in the higher education system of the country; restructuring the tuition fees and other measures that can help and support the students to make choices regarding the subjects which interest them and that will lead them to better professional careers, these actions of the governments will also help making the access to higher education more convenient while the odds are that this will raise competition and hence elevated future outcomes (Tulip, 2014). Most of the policy approaches by the federal government are focused to address unemployment among the youth but the problem might continue to persist as the direction of these approaches seems to be a bit off course.

 

References

ABC. (2015, May 12). Budget 2015 gets mixed reviews from economists. Retrieved October 17, 2015, from http://www.abc.net.au/news/2015-05-12/budget-2015-gets-mixed-reviews-from-economists/6464990

ABS. (2015). Australia’s unemployment rate at 6.2 per cent in September 2015. Canberra: ABS. Retrieved October 17, 2015, from http://www.abs.gov.au/ausstats/[email protected]/latestProducts/6202.0Media%20Release1Sep%202015

Australian Bureau Statistics. (2015). Key Economic Indicators. Melbourne: ABS.

Australian Government. (2015). 2015 Budget Overview. Retrieved October 17, 2015, from www.budget.gov.au/2015-16/content/…/Budget-2015-Overview.pdf

Australian Government. (2015). THE RIGHT TIME FOR BUSINESS TO INVEST. Australian Government. Retrieved October 8, 2015, from http://www.budget.gov.au/2015-16/content/highlights/jobsandsmallbusiness.html

Berry, M., & Dalton, T. (2007). Housing prices and policy dilemmas: a peculiarly Australian problem? Urban Policy and Research, 69-91.

Blumer, C. (2015). Budget 2015 cheat sheet: What You Need To Know. Retrieved October 17, 2015, from http://www.abc.net.au/news/2015-05-12/budget-2015-cheat-sheet-charts/6446436

CBRE Report. (2015, July 22). About: China Outbound Real Estate Investment Reaches US$10 Billion Milestone. Retrieved October 17, 2015, from http://www.cbre.com/about/media-center/2015/07/22/expanding-role-of-chinese-capital

CLRD. (2015). Property Capital Market Report. Retrieved October 17, 2015, from file:///D:/UserData/ahmedf/Downloads/capital-markets-report-march2015-online.pdf

Cook, T. (2015, May 13). Australian unemployment levels continue to rise. Retrieved October 8, 2015, from https://www.wsws.org/en/articles/2015/05/13/jobs-m13.html

Doran, M. (2015, May 12). Budget 2015: Joe Hockey to announce $330 million unemployment package, waiting time for benefits reduced to four weeks. Retrieved October 8, 2015, from http://www.abc.net.au/news/2015-05-12/budget-2015-joe-hockey-announce-330-million-unemployment-package/6464146

Hutchens. (2015, May 13). Federal budget 2015: Your five-minute budget summary. Retrieved October 17, 2015, from http://www.smh.com.au/business/federal-budget/federal-budget-2015-your-fiveminute-budget-summary-20150512-1mzhu0.html

Janda, M. (2014, October 13). ABC: Australia’s housing market problems laid bare. Retrieved October 17, 2015, from http://www.abc.net.au/news/2014-10-10/private-surveys-lay-bare-australian-housing-market-problems/5805196

Janda, M. (2015, March 25). RBA says too early to judge APRA’s home loan restrictions. Retrieved October 8, 2015, from ABC News: http://www.abc.net.au/news/2015-03-25/rba-says-too-early-to-judge-home-loan-restrictions/6346872

Koutsogeorgopulou, V., & Tuske, A. (2015). Federal-State Relations in Australia. OECD Economics Department Working Papers No. 1198.

McKenzie, F. H. (2010). Fly-In Fly-Out: The Challenges of Transient Populations in Rural Landscapes. In F. H. McKenzie, Demographic Change in Australia’s Rural Landscapes (pp. 353-374). Perth.

McKibbin Software Group. (2015, August 20). ECONOMIC MODELLING OF AUSTRALIAN ACTION UNDER A NEW GLOBAL CLIMATE CHANGE AGREEMENT. Retrieved October 17, 2015, from https://dfat.gov.au/about-us/publications/Documents/economic-modelling-australian-action-under-new-global-cc-agreement.pdf

Measham, T. G., Mckenzie, F. H., Moffat, K., & Franks, D. M. (2014). An expanded role for the mining sector in Australian society? Rural Society, 184-194.

OECD Economic Survey. (2013). Economic Survey Australia. Organization for Economic Co-operstion and Development.

OECD Report. (2015). How Does Australia Compare? Employment Outlook. OECD.

Pash, C. (2014, June 5). These 5 Huge Trends Will Determine Australia’s Future. Retrieved October 17, 2015, from http://www.businessinsider.com.au/5-huge-trends-that-will-determine-australias-future-2014-6.

PWC. (2015, May 13). Australian Federal Budget: Prepare for Repair. Retrieved October 17, 2015, from http://www.pwc.com.au/tax/assets/federal-budget/Federal-Budget-Analysis-2015.pdf

Randolph, B., Pinnegar, S., & Tice, A. (2013). The First Home Owner Boost in Australia: A Case Study of Outcomes in the Sydney Housing Market. Urban Policy and Research, 55-73.

Randolpha, B., Pinnegara, S., & Tice, A. (2013). The First Home Owner Boost in Australia: A Case Study of Outcomes in the Sydney Housing Market. Urban Policy and Research, 55-73.

RBA. (2015). The Australian Economy and Financial Market. Retrieved October 17, 2015, from www.rba.gov.au/chart-pack/pdf/chart-pack.pdf

Royal Bank of Australia. (2015). Household and Business Finances. FINANCIAL STABILITY REVIEW, 35-44. Retrieved October 8, 2015, from http://www.rba.gov.au/publications/fsr/2015/mar/pdf/household-business-finances.pdf

The Daily Reckoning. (2015, May 27). Falling Investor Home Loan Approvals May Hasten the RBA’s Next Rate Cut. Retrieved October 8, 2015, from http://www.dailyreckoning.com.au/falling-investor-home-loan-approvals-may-hasten-the-rbas-next-rate-cut-2-cw/2015/05/27/

Trading Economics. (2015). Australia GDP Growth Rate. Retrieved October 17, 2015, from http://www.tradingeconomics.com/australia/gdp-growth

Tulip, P. (2014). The Effect of the Mining Boom on the. BULLETIN, 17-22.

Yardney, M. (2015, July 23). Smart Company Reports. Retrieved October 17, 2015, from http://www.smartcompany.com.au/finance/investment/47761-do-australian-property-markets-need-to-worry-about-china-s-slowing-economic-growth.html

 

APPENDIX

The property market is the leading segment in Australian economy. It is often the case that economic recoveries in Australia are led by the property sector especially housing sector. However property value is increasing immensely which is a recent concern. According to Reserve Bank of Australia (RBA) all this investment is resulting in a lot of extra debt (Yardney, 2015). The investor demand continues to push the housing and mortgage markets with low interest rates and strong competition among the lenders translating into robust growth in investor lending (especially in Sydney). The conditions did change after the crisis and the housing sector of the country did undergo a downfall. However, the results were not that much disastrous as they were in the other countries while the government also responded accordingly with different policies to avoid the ramifications and rebuild the confidence in the sector so that the structure could be productively restored. One of such initiatives was the ‘’First Home Owner Grant’ (FHOG)[1] which was initiated by the federal government that provided financial incentives or subsidies to people were first home – owners (purchased houses for the very first time) and also helped in stimulating demand in the housing market so that the employment in the sector could also be shielded from all such adversaries (Randolph, Pinnegar, & Tice, 2013). The housing loan approvals have significantly increased by 150 per cent over past three years in New South Wales (Royal Bank of Australia, 2015) as shown in the graph below.

Figure 1: Housing Loan Approvals by State

The indicators of the household financial stress also remained low coupled with low interest rates and rising asset prices. This came despite of the slow pace of wage growth and weakened labor market conditions along with declining non-performance rates for housing and non-housing related bank lending (shown in the figure below) (Royal Bank of Australia, 2015). Moreover, most of the issues escalate because of the widening gap between the federal and the state governments that needs to be addressed and bridged as soon as possible so that the efficacy of the state duties and responsibilities for several socio – economic endeavors can be raised and rejuvenated (Australian Government, 2015).

 

Figure 2: Non-Performing Household Loans

The Australian authorities primarily depend on direct taxes as a source of revenue over indirect taxes while currently; the system has transitioned towards a more centralized approach where substantial funds are transferred into the states from the federal governments while revenue that is raised by the state itself is not enough to effectively meet their needs (Koutsogeorgopulou & Tuske, 2015). This specific regime has somewhat affected the performance and provision of state – owned or public goods and services as it makes the responsibility of both the governments a bit unclear; for instance, with funds being passed on into the states by the central government, the states tend to declare the placement of certain duties and responsibilities to rest within the authority of the federal government and out of their jurisdiction (Koutsogeorgopulou & Tuske, 2015).

On the other hand, the federal government claims likewise at demands the state – level governments to take certain actions in certain situations. Studies show that this particular friction between the power houses hindered efficient and productive provision of many services and sectors including the health sector (Koutsogeorgopulou & Tuske, 2015). However, this does not at all means that everything about this collaboration between the federal and the state led governments is negative but actually, this joint functioning, in some situations proves to be pretty much fruitful. Though the duties bestowed to both of the authorities are pre – defined in the country’s constitution but because of this joint indulgence into certain activities, the lines of jurisdictions and limitations tends to get somewhat blurred while the public is on the receiving end in such situations, mostly. Another macroeconomic concern for the Australian authorities is the prolonging fiscal deficit which they have failed to overturn in their own favor (Cook, 2015).

Moreover, the policy makers also have to devise plans which can comprehensively address the lasting problem of the national fiscal deficit. They might need to, once again, look upon the country’s mining sector as historically it has done wonders for the Australian economy (OECD Report, 2015). The present situation of the sector is somewhat undermining than the earlier levels of production, output and employment while one of the major reasons is of the disturbances that mining activities creates in the areas where it is done which I have already mentioned above as well. What needs to be done is that authorities may have to increase their involvement at the micro level and cater for the problems such as labor market fluctuations and the short – term migration that arise in the areas so to achieve optimal prosperity and extraordinary results at the macro level (OECD Report, 2015).

 

[1] Randolpha, B, Pinnegar, S, Tice, A.  (2013). The First Home Owner Boost in Australia: A Case Study of Outcomes in the Sydney Housing Market. Urban Policy and Research , 55-73.