Leith van Onselen
BIS Shrapnel was out this week with some startling predictions for the Australian economy and housing markets. It’s worth taking a look, although let’s remember that their recent form on both the economy and housing has been questionable.
For example, in July 2010 – near the peak of Australian house prices – BIS Shrapnel’s chief economist, Dr Frank Gelber, made the following bold prediction on the future direction of house prices in Australia [my emphasis in all quotes below]:
Frank Gelber gave members at a Real Estate Institute of Victoria lunch a very optimistic forecast for house prices, as reported in the Sydney Morning Herald.
“At the end of the day, we haven’t got a bubble in our residential market. We’re undersupplied, not oversupplied … [House] prices will go up another 30 per cent over the next three years”…
“We’re not over-geared, we’re not overvalued and we’re not oversupplied,” he said. ”I can’t remember in the last 30 years a time when I have been more comfortable and optimistic about investment in the market”…
In that same speech in July 2010, Dr Gelber also made overly ambitious forecasts for the Australian economy, noting that it would be largely unaffected by the turmoil in Europe and the USA:
Problems in Europe and America were unlikely to affect Australia’s economic outlook, he said. ”They are real problems … [but] they won’t affect us a great deal,” he said. ”Our recovery now is already well entrenched and they won’t stop it.”
Almost 80 per cent of Australia’s exports go to Asia, Dr Gelber said. ”We’re much more dependent on what happens in China.”
”We’re talking about average growth over next five years of GDP of about 3 to 3.5 per cent,” he said.
Dr Gelber said that while the GFC’s impact wasn’t yet over it had triggered a correction following the financial engineering boom. ”That correction is pretty much over and we’re starting to see the beginnings of a pick-up again.”
AUSTRALIA will slowly move into a broad-based economic recovery in 2012-13 – but Victoria is in danger of missing out, leading forecaster Frank Gelber of BIS Shrapnel predicts.
Unveiling new forecasts in Melbourne yesterday, Dr Gelber predicted that Australia’s growth rate would slowly accelerate from 2.2 per cent in 2011 to 3.5 per cent in the 2012-13 financial year. If realised, that would be its best performance for five years.
But there would be two downsides. Interest rates would start rising again, with the Reserve Bank likely to deliver seven rate rises in the next 15 months. And apart from New South Wales, the south-east of the country will continue to struggle.
”The Australian economy is expected to strengthen further on the back of improving consumer spending and continuing heavy investment in the mining sector,” BIS Shrapnel said. ”However, the recovery is expected to be slow to set in. We expect the increased activity to prompt businesses outside mining to start increasing investment from later this year, after an extended period of underinvestment.
Ahem…seven interest rate rises? If that was to occur, the Australian economy would likely grind to a halt and home prices would suffer sharp falls in value. It would also destroy BIS’ own forecasts of moderate house price growth to 2014.
In my opinion, official interest rates are more likely to fall than rise given the broad-based weakness in the non-mining economy as well as the deteriorating employment outlook.
Nevertheless, BIS does make some sombre comments on Victoria’s growth outlook, which I broadly agree with (see here for my own analysis):
Mining investment would continue to boom, while trade-exposed sectors such as manufacturing, education, tourism and agriculture would continue to shrink. Government would also shrink, while the great mass of other service industries would keep struggling. Victoria would be main casualty.
”We look out two or three years and it’s difficult to see where Victoria’s growth is going to come from,” Dr Gelber told BusinessDay. ”We see investment in Victoria falling.”
BIS Shrapnel predicts building starts in Victoria will plunge 20 per cent in the two years to 2012-13, while all other states would grow by between 6 and 21 per cent. Housing starts would fall 28 per cent, bringing Victoria back to the pack after years of outperforming the rest, while non-residential building would shrink 10 per cent.
”Victoria has weakened considerably over the past six months. It’s lost its drivers of growth,” Dr Gelber said…
”There will be a broadening of investment in Victoria, but what is really missing are infrastructure projects,” he said. ”Investment is the primary driver of growth and Victoria needs better infrastructure to lift its productivity.
”These are things [the Victorian government] could do. But we can’t see the next round of infrastructure projects coming through. Victoria is just falling behind the pack.”
I also agree with Dr Gelber’s assessment that the Federal Government is unlikely to achieve their forecast budget surplus by 2012-13 as well as his recommendation that the Government invest in innovation and reduce red tape:
Dr Gelber hit out at the federal government’s pledge to deliver a budget surplus in 2012-13, but said the collapse of its revenue base would see it fail to get there. ”Fortunately, they won’t achieve it. But they shouldn’t even try,” he said.
He urged the federal government instead to invest in ”soft infrastructure”, such as the CSIRO and other forms of research and development, and to take an axe to the jungle of over-regulation that is clogging up business.
[First home buyer demand] is still weak in Victoria, and one of the reasons why it is still weak is because the state government has tended to keep the first-home buyer incentives fairly elevated, which has pushed forward demand.
“First-home buyer demand is very important because it creates demand at the bottom of the market for the next group of buyers to trade up.
“It’s that turnover and activity that flows to price growth and also brings more investors into the market.”
Zigomanis says this churning of property created by first-home buyers entering the market won’t be felt as strongly in Victoria.
“In Victoria the weakness in first-home buyer demand is permeating through to the rest of the market,” he said…
Victoria’s first home bonus and regional bonus, which awarded grants of $13,000 and $6,500 respectively to qualifying first-home buyers, are both set to expire at the end of 2011-12…
Looking at the overall state of residential markets, Melbourne remains one of the weak spots, with vacancies heading up towards the 3% mark, which indicates a balanced market…
“In fact in some areas of inner Melbourne we feel that the market may even be in slight oversupply. This means there is significantly less pressure in the Victorian property market than is evident in New South Wales,” says BIS Shrapnel.
So there you have it. Some pretty eye-predictions from Australia’s BIS Shrapnel.
