“No signs of a crash” – Dr Shane Oliver

“No signs of a crash” – Dr Shane Oliver


We’ve heard the dire warnings of a property market crash from the doomsayers, we’ve heard that the Australian economy will take a big hit because of the downturn in mining and the effects of Brexit and financial crisis in Greece… but where do we actually stand? How is the Australian economy actually tracking? Dr Shane Oliver, Head of Investment Strategy and Economics, and Chief Economist at AMP Capital joins us to answer those questions.



Kevin:  We hear different reports all the time – don’t we – about how the property market’s going. Especially after the mining downturn, we have doomsayers saying it’s going to crash; others say it’s not in such a bad state. A man we like to talk to all the time is Dr. Shane Oliver, who is the Head of Investment Strategy and Economics and Chief Economist at AMP Capital. He joins us.

Doctor, thank you very much for your time.

Dr. Oliver:  My pleasure, Kevin. It’s great to be here.

Kevin:  We’ve heard those dire warnings about the market crashing, haven’t we? I’d be interested to get your insight as to how the Australian economy is actually going right now.

Dr. Oliver:  Yes, you’re right. We often hear these calls of some sort of property crash, and certainly, even an economic recession. In fact, these calls have been quite common ever since the mining boom ended about four or five years ago.

Of course, you can go back over a decade or so through which people have been talking about some sort of property crash, whereas at the end of the day, the market remains reasonably resilient. We occasionally get these corrections, but certainly not the crash that people have been talking about. Part of that, I guess, is because the economy has been reasonably solid.

I think if you’re looking for a property crash, you really have to have some sort of collapse in the economy causing a big rise in unemployment such that people can’t service their mortgages anymore, whereas the reality is the Australian economy has help up reasonably well over the last few years, despite the end of the mining boom.

Unemployment has gone higher, but it’s not disastrous, and that sort of rebalancing of the economy we’re seeing – mining has slowed down but other parts of the economy have picked up – has, I think, helped support household incomes, and consequently, we haven’t see anything close to a property crash. In fact, the property market has remained relatively resilient.

Kevin:  Are there any signs on the horizon that we could be in for tougher times?

Dr. Oliver:  I think there are some signs on the horizon; you might call them clouds on the horizon. The biggest problem, I guess, is that we’re seeing a lot of cranes around, across many Australian cities, in fact. After many, many years of not building enough residential property, we have seen over the last few years a big spurt in the supply of apartments hitting the market, which is probably a good thing.

If we want more affordable property in Australia over a long period of time, we probably need to see more dwellings hitting the market, but there’s always a danger that that property, all those apartments, will hit the market all at one time, causing a bit of indigestion.

I suspect we could go through a patch of softness in terms of unit prices or apartment prices, particularly in the major capital cities. So Brisbane, Sydney, Melbourne and Perth I think could be at risk of a bit of weakness on that front. But in terms of regular homes – standalone dwellings that most Australians aspire to – there’s certainly not an oversupply problem. If anything, there’s still an undersupply; we’re still not building enough of those.

My feeling is, yes, at some point in the next few years when interest rates eventually start to rise – it looks like being a fair way away; it could be 2018 perhaps – then we could go through a bit of a correction in home prices. But I think that would probably be concentrated in Sydney and Melbourne, because Sydney and Melbourne have had a very strong growth in property prices over the last four years, so they would probably be more vulnerable.

But other cities, particularly Brisbane, haven’t seen anywhere near the gains that Sydney and Melbourne have, so therefore, I think any decline in standalone home prices in Brisbane would be very modest if it were to occur.

But really, to get to that point, you have to see higher interest rates, and we’re not anywhere near that at the moment.

Kevin:  Yes, the RBA we hear all the time are really focusing very much on facing some of the issues that face us as a country, and they try to protect the Australian public from financial pain. How do they go about that, and what are some of the issues they’re watching?

Dr. Oliver:  The Reserve Bank does have a difficult task, because you’re balancing across a whole bunch of competing interests, and I think that’s one of the biggest issues. You can make an argument, for example, that interest rates in Australia at the moment are set too low for Sydney and Melbourne, because those two cities have seen strong economic growth and very strong house price gains, but the Reserve Bank, of course, has to set interest rates for the average of Australia, and all the other capital cities have been seeing a far more modest growth in house prices, and some of them – Perth and Darwin – have seen house prices falling, which is actually an argument for lower interest rates.

The Reserve Bank has to balance this out and, of course, set interest rates for the average, and that’s what they’ve been doing. It’s why we’ve been seeing interest rates come down as the mining boom has come to an end.

Now, of course, they do need to manage things getting too hot in Sydney and Melbourne. They’ve been trying to do that by relying on APRA. APRA is the regulator of the banks, the Australian Prudential Regulation Authority, and it has introduced measures, particularly last year, to try to slow down lending to investors.

That was on the back of concerns on the part of the Reserve Bank that investment activity in some of our cities was getting too hot and needed to be slowed down, and of course, we have seen that happen. The banks have slowed their lending to investors and have also tightened their lending standards in terms of how much you can borrow against the value of the house or relative to your income.

I think some things have been done to cool it down a little bit, but the Reserve Bank does face a difficult balancing act, and at the end of the day, people might have different views on what the Reserve Bank is doing, but at the end of the day, they do have to manage interest rates for the average of Australia. They can’t just do it for one city or one part of the country.

Dr. Oliver:  I’m talking to Dr. Shane Oliver from ANP Capital.

Doctor, in terms of growth and the state of our academy, how do we compare with other developed countries?

Kevin:  That’s a very important question, because we in Australia are often inclined to get a bit gloomy about things. A lot of the commentary out there seems to be gloomy. Some statistics come out, you can always find something wrong with them, and that, I think, sometimes leads to this sense, the impression that Australia is in a constant state of crisis, whereas the reality is that our economic growth rates on the most recent numbers has been 3.1%, which is bang in line with the 100-year average.

That’s what it’s been averaging over many years – hundreds of years – and it’s also far stronger than virtually all other developed countries. Of course, an emerging country like China or India will report a stronger growth rate. I think in China it’s over 6%, in India it’s over 7%, but they’re starting from a very low base, so we shouldn’t really compare ourselves to them; we should compare ourselves to the US. Most recently in the US, economic growth has been just 1.2%.

In Europe, it’s about 1.5%, and in Japan, it’s around 0.5%, so in the great scheme of things, we’re actually doing pretty well, despite the impression some might get that things are pretty gloomy. The reality is that the Australian economy has done very well, and I suspect it will continue to do so.

Kevin:  Thank you very much for your time and for that insight into what’s happening in Australia, Dr. Shane Oliver, I appreciate it. Thank you very much, Doctor.

Dr. Oliver:  It’s been my pleasure. Thanks for having me on the program.

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