Thank you to the Australian Financial Review for your invitation to address the AFR Property Summit.
The Summit comes at an important time, against a backdrop of global economic headwinds and the domestic challenges posed by the drought.
Today I want to focus my remarks in three areas:
- the fundamentals of the Australian economy;
- my take on the current state of the property market; and
- the importance of getting the policy settings right to support a strong and efficient property market that meets the needs of Australia’s growing population.
Before I begin, let me turn for a moment to the Final Budget Outcome for 2018-19 which the Finance Minister, Mathias Cormann, and I released last week.
The Final Budget Outcome for 2018-19 shows that the budget was in balance for the first time in 11 years.
The 2018-19 underlying cash deficit was $690 million, which represents 0.0 per cent of GDP. This is a significant improvement of $13.8 billion compared with the estimate at the time of the 2018-19 Budget.
Putting the budget on a sustainable trajectory while guaranteeing Australians the services they need and expect is one of the most important ways that the Government can contribute to a strong economy.
In this environment of considerable global uncertainty, one of the ways the Government can provide business with the confidence to continue to invest is to show we have our own house in order.
By doing so we also help ensure that the cost of borrowing throughout the economy is as low as possible by maintaining our AAA credit rating – one of only 10 countries in the world with a AAA credit rating from the three major rating agencies.
Importantly, by returning to surplus from 2019-20, we also begin to pay down debt, which in turn improves our ability to respond to future economic shocks. This too provides businesses with added confidence that we are in a strong position to meet whatever challenges lie ahead.
And finally, the FBO reminds us that paying down debt will itself create greater capacity to invest in the future – with $15.1 billion in net interest payments incurred in 2018-19 alone that could otherwise have been spent on hospitals, schools and infrastructure.
The economic outlook is challenging but positive.
Turning now to the economy.
In the face of global economic headwinds abroad and a punishing drought at home, the fundamentals of the Australian economy remain strong.
Labour market conditions continue to be strong. The latest labour force figures show that in August, employment grew by 2.5 per cent through the year. Over 1.4 million jobs have been created since the election of the Coalition Government in September 2013.
The participation rate has risen to a record high of 66.2 per cent.
In other words, more working age people remain attracted to looking for work and joining the workforce. This is a validation of the strength of our labour market and the more positive outlook held by jobseekers.
It is also worth noting that while the US unemployment rate is lower than ours, our employment to population ratio is around 2 percentage points higher than the US.
Put differently, it shows that as a proportion of our population, more people remain attracted to looking for work and joining the workforce.
This is another demonstration of the strength of our labour market and the more positive outlook held by jobseekers.
Furthermore, these labour market outcomes have been achieved with annual population growth around 1.6 per cent – one of the highest rates of population growth in the developed world.
Job creation will remain a key focus of the Morrison Government as we work to achieve our target of 1.25 million jobs over the next five years.
Better times ahead for the property market.
This population growth has been an important factor behind demand for housing.
Between 2005 and 2015, the population grew by 1.7 per cent per year or 3.7 million persons.
This was the fastest average rate of growth in our population, sustained over a ten year period, since the 1970s.
Over that period, a city roughly the size of Canberra was added to our population, on average, every year.
From 2012 to 2017, combined capital city housing prices increased by over 50 per cent.
In Sydney, the median house price rose from $600,000 to over $1 million at its peak.
From 2013-2017, dwelling investment growth averaged above 5 per cent per year contributing around 0.3 percentage points to annual GDP growth – significant when you consider that dwelling investment represents just under 6 per cent of the economy.
As new dwellings came on line, the significant increase in supply began to outstrip the pace of population growth and housing prices started falling from late 2017.
Following price declines, new residential building approvals also started to trend down with approvals in July 2019 at their lowest level in six and a half years.
Encouragingly, the housing market and economy more broadly was able to manage the gradual decline in house prices without triggering a more significant slowdown or economic shock and today, prices are still 30 per cent higher than in 2012.
Notwithstanding, dwelling investment is forecast in the 2019-20 Budget to fall by 7 per cent in 2019-20 and by a further 4 per cent in 2020-21, as existing projects are completed and recent weakness in building approvals flows through to activity.
More recently, after falling since late 2017, combined capital city dwelling prices rose in July 2019 for the first time in almost two years and national auction clearance rates have also returned back to their early 2017 levels, now tracking at above 70 per cent compared to around 50 per cent this time last year.
The improvement in sales volumes is also reflected in an increase in lending activity in recent months.
After declining for 17 consecutive months, the total value of housing finance commitments has risen since May 2019, reflecting growth in both owner-occupier and investor finance.
An encouraging feature of the turnaround in lending has been the lift in the share of loans for first home buyers. These account for nearly a third of total owner-occupier loans, up from around 20 per cent in mid-2017.
This growth has occurred alongside declines in advertised standard variable rates for new housing, which fell, on average, by 42 basis points, following the combined RBA rate cuts in June and July and interest rates on fixed-rate housing loans also continue to decline.
This stabilisation in the housing sector has occurred against the backdrop of the Federal election, a continuation of strong jobs growth, the passage through the Parliament of the largest tax cuts in more than twenty years and two interest rate cuts by the Reserve Bank.
Noting that it typically takes around one to two years for the full effect of changes in monetary policy to flow through the economy, we should expect the two interest rate cuts by the Reserve Bank to continue to support demand for housing.
In this respect, there are reasons to be optimistic about the outlook for the housing market.
The importance of the property market to the economy
As I said earlier, investment in new housing represents just under 6 per cent of GDP, with almost 1.2 million Australians employed in the construction sector.
Housing accounts for around half of total household assets in Australia, and borrowing for housing makes up around 80 per cent of household debt.
It is therefore no surprise that in the words of the RBA Governor “Australians watch housing markets intensely, perhaps more so than citizens of any other country”.
There is of course a strong link between changes in the property market and consumer behaviour.
Treasury estimates that a 10 per cent increase in house prices could result in a corresponding lift to GDP of about half a per cent.
Similarly, the RBA has said that a 10 per cent increase in household wealth is expected to increase the level of consumer spending by up to 1½ per cent.
This matters because household consumption represents about 60 per cent of GDP.
Given the key relationship between the health of the housing market and the wider economy, it is important that we continue to support the recovery that is underway.
Macro prudential policy
One of the important factors contributing to the stabilisation of the housing market has been the easing of a series of macro prudential measures which were at the time designed to reduce the rapid growth in investor lending and improve the resilience of the banking system.
As is well understood in this audience, between 2014 and 2017 APRA introduced measures to mitigate risks associated with some forms of lending, and to improve lending standards more generally.
It is worth reiterating why these controls were introduced at the time. Had unsustainable lending growth continued, it posed wider risk to the economy and also created elevated risks within the property market and for borrowers.
The measures introduced at the time have achieved their desired objectives, with the RBA concluding: ‘the available evidence suggests that the policies have meaningfully reduced vulnerabilities associated with riskier household lending and so increased the resilience of the economy to future shocks.’
Improvements in lending standards have allowed APRA to unwind temporary limits on investor loan growth and interest-only lending.
In July this year, APRA also updated its guidance on serviceability assessments and interest rate floors. Instead of an interest rate floor of 7 per cent, a serviceability buffer of at least 2.5 per cent is now required.
Together with recent reductions in the cash rate, these changes are expected to further stimulate demand and therefore investment in the sector.
Housing policy agenda
Beyond these changes to the macro prudential settings which impact the flow of credit, the Morrison Government continues to support the sector through a series of initiatives designed to boost supply and demand.
It is here I want to acknowledge the work and leadership of the Minister for Housing and Assistant Treasurer, Michael Sukkar, who has done an outstanding job in leading the development of policy in this area.
National Housing Finance and Investment Corporation
In 2018, the Government established the National Housing Finance and Investment Corporation (NHFIC).
NHFIC’s central role to date has been to administer an affordable housing bond aggregator to provide cheaper and longer-term finance for registered community housing providers.
In that role, I am delighted to say they have already supported the delivery of an additional 560 social and affordable rental dwellings.
NHFIC also administers the $1 billion National Housing Infrastructure Facility which will help finance critical infrastructure — such as electricity, water and sewerage, telecommunications — to help unlock new housing supply.
During the 2019 election campaign, the Government went further and announced that it would be establishing a Research Function within NHIFIC.
This function will look at consolidating more effectively data that is produced by governments across Australia and other bodies and where there are gaps relating to data regarding housing supply and demand, look to produce this data.
Effectively, NHFIC will become a “Centre of Excellence” for housing data which will be used to better inform housing policy decisions across Australia.
First Home Buyers
Assisting more First Home Buyers into the market has been and remains a key area of focus for the Government.
Under our First Home Super Saver Scheme which allows potential new buyers to save for a deposit on their first home inside their super, more than 3,700 individuals have already accessed over $45 million of their savings, or around $12,000 per person, to help buy their first home.
Building on the First Home Super Saver Scheme, earlier this month we introduced legislation into Parliament to implement the First Home Loan Deposit Scheme.
For many, saving a deposit has become a more significant barrier to entering the housing market than the ability to service a home loan. It can now take ten years for the average first home buyer to save a 20 per cent deposit.
The First Home Loan Deposit Scheme will commence in 2020 and enable up to 10,000 first home buyers, per year, to purchase a home with a deposit of as little as 5 per cent, allowing them to get into the market earlier.
Applicants will be subject to eligibility criteria, including having taxable incomes up to $125,000 per annum for singles and up to $200,000 per annum for couples.
Importantly, the Scheme is designed to complement the First Home Buyer Super Saver Scheme as well as other State based Schemes to help low and middle income earners to get their foot on the first rung of the housing ladder.
The property caps, which will vary by region, will be announced by the Minister for Housing and Assistant Treasurer. They will be set at an appropriate level to ensure that the Scheme is properly targeted.
Lenders Mortgage Insurance (LMI) will still be an important option for many first home buyers and the Scheme will be designed to complement the LMI market – not to replace it.
Notwithstanding the importance of these various initiatives, they are no substitute for strong and competitive credit markets. And central to achieving this is the appropriate application of responsible lending obligations.
These obligations, which are designed to protect consumers, apply to the provision of consumer credit including home loans, credit cards and personal finance.
They require lenders to make reasonable enquiries about a consumer’s requirements and objectives, to take reasonable steps to verify a consumer’s financial situation and to assess whether the credit will be unsuitable for the consumer.
While these obligations were first legislated back in 2009, the shadow of the Royal Commission and recent litigation has given rise to uncertainty as to how they ought to be implemented in practice.
To date, ASIC has adopted a principles-based and scalable approach.
This has allowed flexibility for lenders to appropriately take into account the facts and circumstances of each case and vary the degree of inquiry and verification depending on the customer risk involved.
Common sense dictates that a sensible balance needs to be struck because an unduly restrictive application of these obligations can do as much harm as an overly lax one.
Clearly, the risk that the provision of credit may cause substantial hardship to some should not result in a significantly reduced ability to access credit by the vast majority of consumers.
It is in everyone’s interest that the aspirations of hard working families are not collateral damage in this regulatory process.
The values of personal responsibility and personal accountability must remain central to our society and if the pendulum swings too far in the abrogation of these values, then it will inevitably reduce the availability of credit and increase its price.
Should responsible lending laws be applied too stringently, they will also negatively impact consumer behaviour with consumers more likely to remain with their current provider than go through the red tape burden associated with looking for alternatives.
Indeed, an existing borrower could save up to $850 a year in reduced interest payments by being treated as a new borrower, as highlighted by the ACCC’s Residential Mortgage Price Inquiry which was released last year.
Ladies and gentleman, today’s inaugural summit is an excellent opportunity to reflect on the economic significance of the property market.
With over half of Australia’s household wealth tied up in the housing market and the level of economic activity in the sector directly impacting the nation’s GDP, it is vitally important that the housing market remains strong.
This requires a stable domestic macro-economic environment, supply and demand side measures which the Government is implementing including those designed to help first home buyers, and a sensible balanced approach to the application of responsible lending laws so that they do not unnecessarily constrain the free flow of credit.
Our plan, the Morrison Government’s plan is for a strong property sector and a strong economy as we secure a better future for all Australians.