POST COVID-19 - The Economy
Having looked at the possible impacts of changing population and demographic trends as a result of COVID-19, it logical to now examine some of the key economic trends taking place, and most at a remarkable pace.
There are a range of issues from a greater emphasis on locally based manufacturing, employment, the need for structural change including taxation reform, the deficit, interest rates and extending to climate change. All of these will sooner or later directly impact the entire population, and many will flow-on to impact the shape of property markets and I’ve expanded key topics here.
Delving into some of these topics a quick summary shows how property could be impacted by our evolving economic issues and highlights some of the key hurdles highlighted by COVID-19.
Above all if we see a wider second wave of cases spreading from Victoria the current return from lockdown may be very fragile placing greater strain on health services and the economy, in particular income support.
We then see credit markets having to adjust and although the demand for housing finance has fallen, it’s existing loans that may be in trouble and construction and development finance is also harder to access. The demand for ready cash – even lifeline cash, is evident across many sectors.
Slowing migration and that includes far fewer international students may have an even bigger impact if recovery stalls.
Then we have the really big question hanging over the question of higher unemployment, as high-levels can soon translate into bad news for the housing market, and for first time buyers in particular.
How much support the market will gain from low interest rates, falling supply, some possible offshore ‘safe-haven’ buyers and demand from buyers looking to regional markets is still difficult to qualify.
The COVID-19 pandemic has acted as a stark reminder of how dependant many areas of the Australian economy are on imported materials and goods, it’s an impact being experienced across diverse sectors of the economy from manufacturing to agriculture.
It’s a reality that has led to an ever louder call for Australian made and manufactured products for both social and economic reason. COVID-19 has left us feeling exposed and vulnerable, but there’s also call for much more Australian made goods to help ease unemployment, while we address an over reliance on international imports.
We’ve seen some very poor quality imported building products impact the construction sector and this has already caused a much greater emphasis on quality as the industry seeks to address perceptions of poor quality.
The current debate is mainly that we should reinvent manufacturing which will not result mass or large scale production, it’s more a picture of specialised firms and some of those might use existing facilities or there could be new industries in for example regional areas.
Regional areas look appealing if costs are lower and it may well make economic sense to manufacture in Cowra and not China, this would also help boost regional property markets.
We’ve already seen during COVID, that among some local manufacturing industries that have remained in Australia, have proved to be very versatile shifting output and so maintaining jobs.
If Australians support local manufacturing this will further boost employment and a strong sector will also be good news for the housing market. As a direct impact of COVID-19 it’s already apparent that many consumers are looking for greater security of supply than cheaper prices.
Unemployment resulting from the impacts of COVID-19 is easily the biggest threat to the economy and a robust housing market and that directly translates to a big negative impact on the construction sector.
It’s easy to understand why various incentives and government grants both are currently available and being newly rolled out to boost the housing and construction sectors.
The re-imposition of restrictions this week in Melbourne shows how quickly COVID-19 is still an ongoing threat even as we were starting to adjust to a ‘new-normal’.
There are varied reports on the actual extend of unemployment and perhaps the Roy Morgan unemployment measure is the most sobering, but at the same time realistic.
For June the measure shows 2.05 million Australians were unemployed and that’s a 14.5% of the workforce along with an additional 1.41 million 10.0% under-employed. In total 3.45 million Australians were unemployed or under-employed and little change unchanged since May.
ABS (official) figures, which lag actual numbers, show 927,000 unemployed which is a rate of 7.1% and an underemployed rate of 13.1% and there’s forecasts that unemployment may soon reach 10%.
In NSW unemployment according to Roy Morgan was 12%. Unemployment also declined in South Australia but was largely unchanged, or slightly up, in other States. All of these figures show how many jobs will be needed to reemploy the 1 million Australians now unemployed prior to the COVID-19.
This new spike around Melbourne has created the fear of the possible close-down of entire city back onto Stage 3 restrictions. This would further depress prospects of any improvement in employment across Australia.
A further threat to employment will result if the Government does go ahead and withdraw the JobKeeper support however, this looks unlikely. According to the Treasury around 3.5 million Australians are now relying on the JobKeeper wage subsidy due to run out at the end of September.
However, for the housing market, which has already seen a big decline in the demand for new loans it’s also the level of underemployment that’s worth more attention.
This figure includes families and couples where possibly two incomes were being used to both meet existing loan repayments or in the case of first time buyers to save a home deposit. And while we see a big and immediate take-up of various new housing and builder related grants these figures are a concern for the residential market.
Taxation and the need for tax reform
Australia could end up with an estimated $1 trillion national debt post-coronavirus. That’s a big figure, but it may well trigger some sensible and positive re-thinking around tax reform and some of those reforms will impact the property market.
As the economy comes under ever greater pressure the calls for tax reform have increased and in particular tax incentives that can help business investment, economic growth and create importantly as noted above create jobs.
Here are some of the most popular reforms which have been suggested by Tax experts from UNSW Business School:
• A reduction in company tax rate
There have been ongoing calls for the lowering of company tax rates to hopefully direct funds towards growing business and make Australia more attractive destination for new businesses.
• Incentives to employ more people
JobKeeper subsidy is an example of how the government has helped to keep people employed – a more targeted incentive might be needed, again tied to holding down unemployment.
• Incentives to invest
An example we are already familiar with is the instant asset write-off temporarily introduced to support businesses needing to buy assets to keep their businesses going.
• Restricting franking credits
An example (if unpopular) would be a return to only allowing credits to offset tax owed and not refund any surplus.
• Capping the Capital Gains Tax exemption on homes
This exemption is projected to cost $41 billion in the 2020-21 fiscal year; however, some savings could be achieved by setting a limit possibly $2m above which the gain is taxable.
• Restricting negative gearing
This was well-debated during the election but continues to come around yet again.
• Broadening the tax base
Australia’s coffers have a high dependence on income tax 40% while, GST contributes around 12% to Australia’s revenue compared to the OECD average of around 20%.
• Reforming GST
Another unpopular idea, but this review could either removal of some exemptions and/or a rate increase. Australia’s 10% rate is comparatively low compared to New Zealand’s 15% for example.
• Reforming state taxes
The most frequently mentioned solution on is replace stamp duty with land tax. The idea is to capture increased asset prices and make it easier for the young to buy houses.
From these few points it’s easy to see how reforms like this would impact property markets, inspired by COVID-19 or not.