Why Australian property won't collapse

Stronger than feared profit results and reasonable economic data in Australia, which are consistent with a rebalancing of the economy away from mining, are among the factors steering Australia away from a recession. We discuss this, along with the risk of a property crash and Australia’s declining negative gearing numbers. 

Australian property update – negative gearing numbers

Declining tax claims due to negative gearing in Australia are largely a result of low interest rates relative to rental yields. In other words, the benefit of negative gearing has somewhat declined. There is a broader issue at play however, which is the political debate proposing to restrict negative gearing tax concessions to only new properties. The problem is that the main factor driving expensive property in Australia is constrained supply. Negative gearing also needs to be considered in the context of the tax system as a whole. 

Are we heading for a property market crash?

Australian housing is expensive relative to incomes and rents. And household debt ratios are high. So yes, there is a risk of a sharp drop in property prices at some point. However, this is unlikely unless we see much higher interest rates or a surge in unemployment in the context of a recession. The foresight of the Reserve Bank and what has so far been a successful rebalancing of the economy in the face of the mining downturn mean that both of these scenarios seem unlikely at present. However, there is always a cycle – we’re going to see a 5-10% fall in property prices at some point in the next few years much like we did around the time of the global financial crisis and around 2012. But at this stage it’s unlikely that we’re going to see a property crash. 

How have company profit results turned out?

The latest round of profit results reported by Australian companies related to the December half of 2015 and given recent sharemarket falls, these results have proven to be better than feared. Although resourcing companies saw big falls in profits and cuts to dividends, this was not surprising. More importantly, the remainder of results were reasonably good and showed decent profit growth. A majority of Australian companies are doing reasonably well, particularly those which are aligned to sectors in the economy like housing, retail and health. 

Economic update – global and Australia

The threat of a global recession rattled sharemarkets at the start of the year, and although global data is mixed, there are some signs of improvement. The manufacturing weakness in the US may be coming to an end and the US Federal Reserve (Fed) is slowing down its proposed interest rate hikes. Other central banks are gearing up to provide stimulus and this is contributing to a reasonably positive policy environment. Economic data within Australia has been reasonable and retail sales and housing indicators are quite solid. Confidence levels are hovering around long-term average levels. The Reserve Bank of Australia (RBA) might need to provide more support in terms of interest rate cuts, but there’s certainly no sign of Australia entering into a recession. 

Dr Shane Oliver
Head of Investment Strategy and 
Chief Economist AMP Capital 

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