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‘Horror Budget’ will not dampen property market – Richard Wakelin

May 22, 2014

The ‘Horror Budget’ is unlikely to hinder the residential property market. Although it may sound counter-intuitive, the sustainability of the property recovery will actually be helped by the response of consumers to the Federal Government’s austerity measures. It greatly reduces the likelihood of over-exuberance in the property market – which is already performing very strongly – and this subsequently transmitting into price inflation.

It was the real threat of a resurgence in price inflation that was the greatest threat to the continuation of the property market’s recovery. Inflation had been stirring in recent months. Indeed it reached 2.9% in the March quarter, up from 2.2% six months earlier. If this trend persists it will inevitably force the Reserve Bank to raise the cash rate, possibly more than once.

It now appears the RBA is confident that inflationary pressures are easing – mostly off the back of wage restraint and its view that the property market is coming off the boil – and it has presaged an extended period of stable interest rates. But observers of monetary policy will know that the Reserve Bank’s attitude can change in a relatively short time.  For instance, were the Australian Bureau of Statistics to report a spike in recorded inflation in July, when they next publish, then the pressure to raise interest rates could mount.

Is a spike in inflation likely? Before Budget night I was concerned that the Reserve Bank might be getting incorrect signals about the ongoing strength of the property market in Sydney and Melbourne. We believe these property markets are stronger and have more momentum than the impression conveyed by data providers. If this is the case then this might ignite inflation. We have seen time and again that a period of sustained property price rises invariably spills over to elevated consumer confidence, then consumer price inflation that triggers the painful countervailing response from the RBA – an increase in the cash rate.

But I think the Treasurer’s efforts last week may have done enough to temper exuberant behaviour – both in the shops and at auctions – though not so much that it would extinguish positive sentiment altogether.

So despite the broad criticism of the Treasurer’s first Budget, ultimately, it is much less damaging to the economy – and the property market – that inflation is reined in by an austere fiscal policy rather than the Reserve Bank raising the cash rate – which is a very blunt instrument that often takes months to exert the desired effect.

In and around the hype of the Budget, it remains the case that interest rates are at a historic low. So once the doom-laden commentary of recent days dies away I expect Australians will continue to spend and buy property, albeit in a moderate manner.