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Hockey’s big bet on a housing bubble

Michael Pascoe is one of Australia's most respected finance and economics commentators with 37 years in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.

Joe Hockey’s first budget is promising Australia lower economic growth and higher unemployment over the next financial year. And he’s betting on housing prices continuing to surge – or it will be worse.

For all the rhetoric of a “growth and infrastructure” budget, the reality of the Treasury forecasts for 2014-15 are real GDP growth falling to 2.5 per cent and nominal GDP of just 3 per cent.

Unemployment, running at 5.8 per cent over the past two months, is forecast to rise to 6.25 per cent and stay there. The promised increased in infrastructure spending doesn’t happen until the 2015-16 year.

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And then the federal government contribution isn’t nearly as big as the rhetoric would have you believe.

The budget’s revisions of Hockey’s doom-and-gloom mid-year economic and fiscal outlook figures (MYEFO) were a mixed bag.



The government is assuming that private investment and non-dwelling construction are going to be worse than forecast in December. Only partially balancing that, the dwelling investment and household consumption forecasts have been upgraded.

The dwelling investment upgrade to a big 7.5 per cent growth rate reflects the surge in building approvals this year that should turn into actual building in the new financial year.

From MYEFO’s miserable 2 per cent household consumption growth for this financial year, the budget acknowledges the past several months of strong retail sales figures with a forecast of 2.5 per cent this year and 3 per cent in 2014-15.

A half-per-cent rise might not sound like much, but household consumption accounts for most of the economy, 60 per cent or so, so a 0.5% matters quite a lot.

But if you would like to worry about something, the budget forecasting of increased household spending is dependent on the wealth effect of house prices continuing to rise because wages growth is anaemic.

Wednesday’s ABS wages index showed annual wages growth of just 2.6 per cent – the lowest since this ABS survey started in 1998. Wages are barely keeping pace with inflation, depending on how you want to measure that. It’s not a formula for increased housed consumption.

On top of that, both the major consumer confidence surveys showed the budget was taken hard by consumers, reducing their confidence about the year ahead. And remember that forecast of lower economic growth and rising unemployment.

The budget papers actually spelt out that the hope for increased consumer spending rests on increased household wealth, meaning housing prices – already high – going higher. Said Treasury: “Further gains in household wealth are expected to support a further modest decline in the savings ratio, enabling consumption to grow faster than income.”

It’s not the sort of planning that puts Joe Hockey in danger of winning any Treasurer of the Year awards on the international stage.