There were a number of familiar themes in Secretary to the Treasury John Fraser’s opening address to budget estimates. But the section on household finances bears close reading. He says developments in the housing market will remain a key risk to the outlook and the near term the outlook for wage growth remains subdued, reflecting spare capacity in the labour market.
Household consumption has grown in recent years, but below historical rates with average growth in consumption per capita of just 1.1 per cent since the GFC.
This partly reflects weak per capita income growth over this period.
Consumption accounts for around 60 per cent of GDP and almost half of GDP growth so it is a critical factor in determining the strength of the economy.
We expect household consumption to pick up over the forecast horizon and continue to grow by more than household income, as labour market conditions improve and wages growth picks up. This would result in a further decline in the household saving rate.
Still, there are risks to the real economy around the momentum in household consumption – in particular, a change in households’ attitudes toward saving could lead to household consumption being weaker than forecast.
Wage growth has recently been low by historical standards, with the wage price index growing by 1.9 per cent through the year to March 2017.
We expect wages growth to increase as domestic demand strengthens, but in the near term the outlook for wage growth remains subdued, reflecting spare capacity in the labour market.
The near term outlook for inflation is also subdued.
Although full-time employment has strengthened recently, labour market conditions have generally softened after strong employment growth in 2015, with the majority of employment increases over the last 18 months being been in part time employment.
All that said, the unemployment rate remains below 6 per cent and indicators such as job advertisements, vacancies and business survey measures suggest labour market conditions will improve.
Employment is forecast to grow by one and half per cent through the year to the June quarters of 2018 and 2019 and the unemployment rate is forecast to decline modestly through the forecast period – consistent with an improving outlook for business and the economy overall.
Housing and dwelling investment
Household balance sheets have been strengthened by a notable rise in the value of housing and superannuation assets since the GFC, with household assets now more than five times higher than household debt.
We should be mindful that household debt has grown more rapidly than incomes in recent years, driven in particular by increasing levels of housing debt.
Dwelling prices have increased by 16 per cent through the year in Sydney and 15.3 per cent in Melbourne, though there have been some recent indications that this growth is moderating.
It is also important to emphasise that in other cities and regions, prices have been growing more moderately or declining for some years.
There are a number of complex factors that drive the housing market across both the demand side and the supply side.
For instance, there is no doubt that low interest rates have combined with population growth along the east coast to increase demand and support greater dwelling investment.
At the same time, insufficient land release, complex planning and zoning regulations and public aversion to urban infill have impacted the supply of housing.
Residential construction activity was subdued in the mid‑to-late 2000s leading to a state of pent-up demand in the housing market.
But activity has strengthened since 2012 with significant investment in medium-to-high density dwellings.
As the current pipeline of dwelling construction reaches completion over the next two years it is likely that dwelling investment will ease as a share of the economy.
Developments in the housing market will remain a key risk to the outlook, and the Treasury and our regulatory counterparts will be paying close attention to adjustments in the market.
As the steps taken recently by the Australian Prudential Regulation Authority demonstrate, there is a role for sensible and careful measures that can address risks and underpin market stability – and we will continue to focus on these going forward
