It's the wealth effect! That's one of the biggest impacts of...

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    It's the wealth effect! That's one of the biggest impacts of Labor's policies. Disappearing household wealth!

    https://hotcopper.com.au/data/attachments/1552/1552048-a31ddcbd9627c089f736a72daa987ae8.jpg

    From the article below:

    "Economic growth has slumped into a per capita recession after house prices began falling. From a peak of $6.6 trillion in March last year, the value of residential housing, by far the biggest component of household wealth, had fallen to $6.38 trillion by the end of the year."

    " households base current spending on their lifetime wealth. When wealth increases suddenly — especially if the windfall is thought to be permanent — so does spending, and vice versa."

    “As well as lowering net wealth and household consumption, lower housing prices also reduce incentives to build new housing. The decline in household consumption and residential construction activity reduce aggregate demand, which leads to lower business investment,” the RBA says.

    "Repair work on negatively geared property worth $1.8 billion a year could evaporate, according to the Master Builders Association. “Thousands of small mum-and-dad building businesses and tradies in every city, town and region around Australia would feel the impact of Labor’s policy progressively if it is rolled out,” chief executive Denita Wawn says."

    “The ( Negative gearing abolition) policy was bad in principle and bad in practice. It was proposed at the height of the property boom, but circumstances have changed and the policy now must change,” NSW Treasurer Dominic Perrottet says.

    Door open for housing hit

    With wages still sluggish, and wealth now going in reverse, the big question is what this means for a slowing economy.With wages still sluggish, and wealth now going in reverse, the big question is what this means for a slowing economy.

    ....the Labor Party attempts to end negative gearing and increase capital gains tax, which it has promised if it wins government this weekend.

    Negative gearing is a longstanding tax principle, almost unique to Australia, that allows losses from investments to offset wage and salary income for tax purposes. Even though Labor would grandfather existing investors — about 1.3 million taxpayers declared losses on investment properties in 2017 — housing’s appeal to new investors would suffer, sparking fears that the price of all dwellings will be dragged down.

    Falling House prices- a central issue!

    Home prices became a central issue in the last week of the federal election campaign when Scott Morrison announced on Sunday that a Coalition government would offer first-home buyers support with their 20 per cent housing deposit, mirroring a New Zealand scheme. Under the Coalition plan, the National Housing Finance and Investment Corporation would guarantee the difference between 5 per cent of the purchase price and the 20 per cent deposit. “This will make a big difference, cutting the time taken to save for a deposit by at least half and more,” the Prime Minister said.

    Wealth effect

    The wealth effect — the link between net wealth and economic activity — appears to have kicked in already. Economic growth has slumped into a per capita recession after house prices began falling. From a peak of $6.6 trillion in March last year, the value of residential housing, by far the biggest component of household wealth, had fallen to $6.38 trillion by the end of the year.

    Since the 1950s, economists have understood households base current spending on their lifetime wealth. When wealth increases suddenly — especially if the windfall is thought to be permanent — so does spending, and vice versa.

    Until recently, homeowners enjoyed extraordinary gains. The value of household assets have surged from about six times household disposable income in the early 90s to about 11 times.

    “After increasing by around 60 per cent between 2013 and 2017, growth in household wealth has slowed recently because of falling housing prices,” the Reserve Bank of Australia said recently.

    The wealth surge has helped prop up household consumption, the biggest component of gross domestic product, as wage growth has been sluggish. With wages still sluggish and wealth now going in reverse, the big question is what this means for a slowing economy.

    “If there are further sizeable falls in housing prices, this would be expected to result in more persistent weakness in some types of consumption,” the RBA says in its quarterly monetary policy update, released last week, widely seen as paving the way for further interest rate cuts after the election.

    Falling growth shouldn’t be too surprising; the wealth effect bites quickly. A 10 per cent rise in housing wealth increases consumption by 0.8 per cent within six months, according to RBA analysis that examined movements in housing wealth and consumption in the six states from 1988 to last year.

    Put another way, a dollar increase in housing wealth lifts consumption by 3c a year. Cars and household furnishings show the biggest response.

    “As well as lowering net wealth and household consumption, lower housing prices also reduce incentives to build new housing. The decline in household consumption and residential construction activity reduce aggregate demand, which leads to lower business investment,” the RBA says.

    Still falling

    Repair work on negatively geared property worth $1.8 billion a year could evaporate, according to the Master Builders Association. “Thousands of small mum-and-dad building businesses and tradies in every city, town and region around Australia would feel the impact of Labor’s policy progressively if it is rolled out,” chief executive Denita Wawn says.

    The economic bottom line is that a sustained 10 per cent fall in nationwide dwelling prices, not too different from what has already occurred since late 2017, would push up the unemployment rate by 0.4 percentage points and would reduce GDP by 1.2 per cent, the RBA says. “The macro-economic consequences of falling housing prices are smaller and less sustained when monetary policy responds,” it says.

    Financial markets have priced in a further two interest rate cuts this year, which would bring the cash rate to a new record low of 1 per cent. That would lift house prices by about 15 per cent within four years, according to economists Trent Saunders and Peter Tulip. Mortgage rates have a way to go yet; in the US, 30-year fixed rate mortgages are available for under 4 per cent interest.

    Falling house prices and turnover affect state government coffers, too. Three state treasurers slammed Labor’s proposed negative gearing and capital gains tax changes last week.

    “The policy was bad in principle and bad in practice. It was proposed at the height of the property boom, but circumstances have changed and the policy now must change,” NSW Treasurer Dominic Perrottet says.

    The Centre for International Economics estimates the states would lose more than $1.4bn a year in revenue (including $400 million in lost GST) as a result of the capital gains tax increase.

    The NSW government expects to collect $200m less in stamp duty — a reduction of up to 1.3 per cent — across the three years following the change. And Labor’s negative gearing changes would reduce house prices, which in Sydney are already down 11 per cent across the year to April, by an extra 0.5 per cent by the end of this year.

    https://www.theaustralian.com.au/inquirer/door-open-for-housing-hit/news-story/3b3749791c310fd28eb44228f0de6d4a

 
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