Australia: Australian economy - economic & market outlook

Last Updated: 19 April 2015
Article by Charlie Viola, Martin Fowler, Haris Argeetes and James Totonjian


Australia's medium term economic prospects have become increasingly uncertain.

There are any numbers of factors responsible for the current predicament including, but not limited to, the following:

  • The failure to address systemic imbalances in the housing market
  • The RBA's monetary policy conundrum
  • The failure to adopt necessary structural changes in labour markets
  • Changes in Government policy that fail to provide business with certainty
  • Poor Government policy that has caused spiralling debt and falling taxation receipts.

In this quarterly update, we will focus on the first two issues. The remaining issues warrant a separate discussion in a future edition.

Failure to address systemic imbalances in the housing market:

Australians have a fixation on residential property. This fixation has created significant wealth for many investors who have capitalised on booming prices over the last few decades. But as in physics, every action has an equal and opposite reaction. With the winners come many losers. The average new mortgage in Australia is now $443,000, and in NSW $544,000. In Sydney the average property price now equates to around 9 times average household income, up from around 4 times 20 years ago. The sheer size of the new mortgages has meant that a disproportionate percentage of household disposable income is now allocated towards paying off a mortgage and therefore less is available to spend on other areas such as food, retailing and entertainment.

Of course while not everyone has a large mortgage, the percentage is not insignificant and this alone creates a powerful drag on economic growth. In theory this drag should only last until the net decrement from spending caused by the large mortgage is eroded by rising wages or falling interest rates. As we have seen in recent years, interest rates have fallen but instead of homeowners spending this windfall, the average mortgage holder has simply maintained their mortgage repayments rather than reducing them. This is largely why the string of interest rate cuts have not translated into much stronger retail sales figures and instead has kept the economic measure known as the Savings Ratio higher than it otherwise would be.

If we haven't seen any significant uplift in discretionary spending when interest rates have been falling and are at historic lows, it is not difficult to imagine the impact on heavily indebted household budgets if interest rates start to rise again.

Of course high mortgages are simply a by-product of high house prices, which is mainly a function of the lack of supply. The only way for household debt to fall to more manageable levels is for house prices to fall. This can only occur if we see a significant increase in supply of properties to offset demand so that we see both a fall in prices and rents. In theory market forces should solve this problem as developers take advantage of high growth (and high profits) by building more dwellings (typically apartments) until supply catches up with demand and prices settle back to more normalised levels. The good news is that this is finally beginning to happen in Melbourne and Brisbane where rampant apartment development has caused a sharp increase in supply. Unfortunately this is less evident in Sydney, in part due to the protracted planning approval process which blows out holding costs (if a developer buys a block of land it might takes years before they can start construction and they are losing money in the meantime by paying interest for no return). The other impediment has been the risk averse banking sector, which has often demanded a high level of pre-sales before it has been willing to commit funds to new developments (a legacy from the property development failures experienced in the late 80's/early 90's when interest rates (%) were in the mid–teens). Government policy that alleviates these issues would certainly help.

In summary, low interest rates have fostered a sharp rise in housing prices and mortgages that has led to below trend levels of household consumption, creating a drag on growth. Supply needs to continue to build, certainly in Sydney, to address the demand equation. Unfortunately there is no easy answer. In the long run, the economy would be better off with house prices 20% or lower than they are today. A sharp fall of that magnitude, however, would almost certainly cause a severe recession, so the best case scenario is a gradual fall (a soft landing) over an extended period of time.

The RBA's conundrum

The RBA continues to face a dilemma as it tries to encourage business investment by lowering interest rates and the exchange rate. At the same time the RBA is mindful of the property boom (chiefly in Sydney and Melbourne) and remain concerned that lowering interest rates will only fuel the bubble that has emerged. To date, it has decided to err on the side of business and ignore the potential perils caused by excessive household debt, but this approach may not end well (to be fair, the RBA was hoping that APRA would have required banks adopt more stringent macro-prudential measures to quell demand).

On a positive note the reduction in interest rates along with the sharp fall of commodity prices has helped the exchange rate fall, which has clearly been a boon for import competing manufacturers and service providers as well as tourism. In addition, the reduction in interest rates has forced investors seek higher yielding (and hence higher risk) alternatives such as property and shares. This has increased household wealth.

Unfortunately the succession of interest rate cuts has to date failed to stimulate any real improvement in business investment and this would be of concern to the RBA. Companies will only invest if they are confident that demand for their products or services will improve sufficiently to warrant the increase in productive capacity. This confidence clearly requires reasonable clarity about the outlook and stability on government policy, both of which are arguably lacking at the moment. Nevertheless, the historical correlation between low rates and higher investment is moderately high and so optimism remains that eventually an improvement will occur.

The most dangerous aspect of the abnormally low interest rate environment is the damage that it can do to future savings intentions. If individuals think that interest rates will stay lower for longer it can create two types of behaviours. The first behaviour of encouraging greater risk taking has been borne out by strength in domestic share markets. Investors are cashing in their term deposits and investing in higher yielding shares. This is the behaviour that the RBA wants to encourage but this is inherently dangerous as it causes asset bubbles (evident in the Sydney/Melbourne property markets and developing in pockets of the sharemarket). The second behaviour is potentially even direr as it encourages investors to save even more than they normally would. As an example, a household who spends $50,000 per annum will need to save about $1 million when interest rates are circa 5% before they retire. If interest rates are at 2%, that same household will need to save $2.5 million to generate the same risk free income stream. So low interest rates don't always generate more consumption, indeed, where individuals are risk averse, it actually encourages them to consume less. Just ask the citizens of Japan and much of Europe.


In the short term, the stimulative impact of low interest rates coupled with positive momentum in residential construction should remain broadly supportive of growth. Beyond 12 months, the outlook is very uncertain given the divergent forces at play. We will continue to monitor developments as they unfold.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions