From national treasure Tim Toohey at Goldman Sachs:
Lower potential growth implications for asset prices and tax
We deploy the Gordon Growth model to test the impact of lower potential growth. We find that the equity market has not yet lowered its implied perpetuity growth rate and that lowering ‘potential growth’ by 75bps would lower equity valuations by approximately 12%. House price valuations are highly sensitive to the discount rate, and we estimate that for a domestic buyer house prices are currently 20% overvalued and this would rise to 36% overvalued on lower potential growth. We use the same valuation approach to show that a foreign investor buying with cash and with different risk parameters may look at the same property and conclude that it is close to 40% undervalued. The implication is that the Australian housing market will become increasingly bifurcated and current macro-prudential policies will likely prove ineffective. We also show why the recent run of monthly Budget surpluses is unlikely to last and why the AAA rating remains at risk via weaker future commodity prices and potential growth.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
