DISRUPTIVE ECONOMIC FORCES

PRESENTATION TO UDIA (QLD)ANNUAL DEVELOPERS’ CONFERENCE

SANCTUARY COVE, GOLD COAST – 6TH NOVEMBER 2015

‘Disruption’: a 21 st century word for something that actually isn’t all that new

‘Change is happening ten times faster and at 300 times the scale [of the Industrial Revolution], or roughly 3,000 times the impact’

— McKinsey Global Institute, April 2015

‘The one certainty about the future is that the pace of change will only quicken’— Entrepreneur magazine, January 2015

‘The hurricane of change we’re going currently going through is not some seismic, cyclical thing but rather the “new normal” we all need to get used to. And fast’

— Kim Williams (former CEO of Foxtel and News Corp), May 2015

‘We are suffering … from the growing pains over-rapid changes … the increase of technical efficiency has been taking place faster than we can deal with … technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history’

— John Maynard Keynes, Economic Possibilities for our Grandchildren, June 1930

‘Four global forces breaking all the trends’, accor ding to McKinseys

1. The age of urbanization‘Nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets, 95% of them small and medium-size cities that many Western executives may not even have heard of and couldn’t point to on a map’

2. Accelerating technological changeExponential growth in processing power and connectivity combined with the ‘data revolution’ and the proliferation of technology-enabled business models will enable ‘economic progress for billions in emerging economies at a speed unimaginable without the mobile internet’ while ‘shortening the life cycle of companies and forcing executives to make decisions and commit resources much more quickly’

3. Population ageing‘A smaller workforce will place a greater onus on productivity for driving growth and may cause us to rethink the economy’s potential’ while ‘caring for large numbers of elderly people will put severe pressure on government finances’

4. Greater global connections‘A dynamic new phase of globalization, creating unmatched opportunities, and fomenting unexpected volatility’

Source: Richard Dobbs, James Manyika & Jonathan Woetzel, The four global forces breaking all the trends, McKinsey & Company, April 2015.

Twelve potentially economically disruptive technolo gies

Source: James Manyika, Michael Chui, et al, Disruptive technologies: Advances that will transform life, business and the global economy, McKinsey Global Institute, May 2013.

Some plausible ‘disruptive’ scenarios for the Austr alian economy

� The end of the ‘China boom’– even if China avoids a ‘hard landing’, slower growth driven by different sectors will significantly alter the impact that

China has on Australia’s economic fortunes

� India replicating China’s economic performance– India will have a larger population than China’s in 10-15 years: if it could replicate China’s growth performance of the

past 30 years Australia would likely derive significant benefits – but how likely is that?

� Rising geo-political tensions and changing balance of military power in the Western Pacific– will Australia have to make unpleasant (and unprecedented) choices between its economic and security interests?

� An Australian ‘housing bust’– often predicted but so far not happened – what would be the consequences?

� Australia’s public finances– how fragile (or robust) are they?

� Tax reform– what shape could they take and how likely are they

China’s economic growth over the three decades 1980 to 2010 is (almost) without precedent

ECONOMIC GROWTH RATES OVER 30-YEAR INTERVALS – SELEC TED COUNTRIES AND PERIODS

Note: Growth rates for India are over a 24-year period, 1991-2015. Sources: The Conference Board, Total Economy Database, May 2015; Groningen Growth and Development Centre, The Maddison Project, 2013; author’s calculations.

0

1

2

3

4

5

6

7

8

9

10

China1980-2010

S Korea1965-1995

Taiwan1965-1995

Japan1950-1980

Singapore1965-1995

India1991-2015

Indonesia1967-1997

Israel1950-1980

Germany1950-1980

Ireland1973-2003

Brazil1950-1980

Australia1855-1885

US1880-1910

UK1860-1890

Real GDP Real GDP per capita

% pa

Australia benefited enormously from China’s rapid g rowth and industrialization, especially during the first decade of this century

AVERAGE PRICES OF AUSTRALIA’S EXPORTS AND IMPORTS

AUSTRALIA’S ‘TERMS OF TRADE’

Note: ‘The ‘terms of trade’ is the ratio of the implicit price deflator of exports of goods and services to the implicit price deflator of imports of goods and services.Source: ABS.

80

100

120

140

160

180

200

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2000 = 100

Exports

Imports

80

100

120

140

160

180

200

220

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2000 = 100

China’s demand for Australian resources substantial ly boosted Australia’s output and income

AUSTRALIA’S RESOURCES INVESTMENT AND EXPORTS

AUSTRALIA’S REAL GROSS DOMESTIC PRODUCT AND INCOME

Note: Resources investment includes exploration expenditure. Real gross domestic income (GDI) is real GDP adjusted for changes in the terms of trade.Source: ABS.

8

9

10

11

12

13

0

1

2

3

4

5

6

7

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% of [chain-volume] GDP % of [chain-volume] GDP

Resourcesinvestment(left scale)

Resources exports(right scale)

100

110

120

130

140

150

160

170

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2000 = 100

Real gross domesticincome (GDI)

Real gross domesticproduct (GDP)

Australia probably derived more benefit from Chines e growth and industrialization than any other nation on earth

TERMS OF TRADE – AUSTRALIA vs OTHER ‘ADVANCED’ ECONOMIES

TERMS OF TRADE – AUSTRALIA vs OTHER COMMODITY-EXPORTING ECONOMIES

Note: ‘The ‘terms of trade’ is the ratio of the implicit price deflator of exports of goods and services to the implicit price deflator of imports of goods and services.Sources: ABS; US Bureau of Economic Analysis; Eurostat; UK Office for National Statistics; Japan Economic & Social Research Institute; Statistics NZ; Statistics Canada; Statistics South Africa; Instituto Brasileiro de Geografia e Estatistica; author’s calculations.

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

210

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2000 = 100

Australia

US

Japan

Euro zone UK

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

210

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2000 = 100

Australia

Canada

NZ

Brazil

Sth Africa

Australia is more dependent on trade with China tha n we have been on any other single country since the 1950s – and our China trade is fairly narrowly based

AUSTRALIA’S EXPORTS TO CHINA AS A PC OF TOTAL EXPORTS

COMPOSITION OF AUSTRALIA’S EXPORTS TO CHINA, 2014

Sources: ABS; Department of Foreign Affairs & Trade.

0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11 12 13 14

% of total Australian exports

Goods

Services

Iron ore(55%)

Coal(9%)

Base metals(8%)

Gold(8%)

Education(5%)

Tourism (2%)

Wool (2%)Meat (1%)

Barley (1%)Other goods (7%)

Other services (1%)

China’s economic growth rate is slowing – and the ‘m ix’ of Chinese growth is changing

CHINESE REAL GDP SECTOR COMPOSITION OF CHINESE GDP

0

2

4

6

8

10

12

14

16

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% change from year earlier

38

40

42

44

46

48

50

01 02 03 04 05 06 07 08 09 10 11 12 13 14

% of GDP

Manufacturing

Services

Source: China National Bureau of Statistics.

Chinese workers aren’t so cheap any more: and there will be fewer of them from now on

GROWTH RATE OF CHINA’S WORKING-AGE POPULATION

Sources: China National Bureau of Statistics; United Nations Economic & Social Affairs Division, Population Prospects; author’s calculations.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80 85 90 95 00 05 10 15 20 25 30 35 40

% pa (over 5-year intervals)

UN forecasts

AVERAGE WAGES OF URBAN CHINESE WORKERS IN US$

0

1

2

3

4

5

6

7

8

9

10

01 02 03 04 05 06 07 08 09 10 11 12 13 14

US$ 000 (converted atmarket exchange rates)

China’s imports of mineral and energy commodities w ill grow more slowly, or fall, at a time when Australian exports are rising – with obvio us implications for prices

CHINESE IRON ORE IMPORTS

Sources: China Customs Information Center; Office of the Chief Economist, Australian Department of Industry, Innovation & Science.

400

500

600

700

800

900

1000

09 10 11 12 13 14 15

Mn tonnes (12-mth moving total)

CHINESE COAL IMPORTS

0

50

100

150

200

250

300

350

09 10 11 12 13 14 15

Mn tonnes (12-mth moving total)

AUSTRALIAN IRON ORE EXPORTS AUSTRALIAN COAL EXPORTS

0100200300400500600700800900

1000

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Mt

Years ended 30 June

Forecasts

050

100150200250300350400450500

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Thermal

Metallurgical

Mt

Years ended 30 June

Forecasts

India has the potential for faster economic growth than China over the long term

INDIA & CHINA PER CAPITA GDP COMPARED INDIA & CHINA ECONOMIC GROWTH

Source: International Monetary Fund World Economic Outlook October 2015.

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005 2010 2015 2020

US$ per head

China

India

IMFforecast

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

% change from year earlier

China

India

IMFforecast

15

20

25

30

35

40

45

50

80 85 90 95 00 05 10 15 20 25 30 35 40

Years

China

India

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80 85 90 95 00 05 10 15 20 25 30 35 40

China India

% pa

India’s demographic profile is much more conducive to rapid economic growth than China’s

GROWTH RATE OF THE WORKING AGE POPULATION

MEDIAN AGE

Source: United Nations Economic & Social Affairs Division, Population Prospects.

But on most other ‘fundamental’ indicators of devel opment prospects, India is less well placed than China

DEVELOPMENT INDICATORS – CHINA AND INDIA COMPARED

Sources: United Nations Human Development Program, Human Development Report 2014; World Economic Forum, The Global Competitiveness Report 2014-15; The World Bank, Doing Business 2015; International Monetary Fund, World Economic Outlook October 2015.

0

20

40

60

80

100

120

15 and over 15-24

Literacy rates2005-12

ChinaIndia

%

0

10

20

30

40

50

60 Infant mortality Child malnutrition

Child health2008-12

China

IndiaNo per 1000/%

010203040506070

Women with some2ndary education

Female labour forceparticipation

Gender inequality2012-13

ChinaIndia

%

0

20

40

60

80

100

120Transport Electricity

Infrastructure rankings2014-15

ChinaIndia

Rank

0

25

50

75

100

125

150 Competitiveness 'Ease of doing business'

Competitiveness rankings2014-15

ChinaIndia

Rank

0

10

20

30

40

50

60

Investment Saving

Saving and investment2010-14

ChinaIndia

% of GDP

Because India runs current account deficits and is less open to foreign direct investment, it is more vulnerable to external shock s than China

INDIA AND CHINA – CURRENT ACCOUNT BALANCES

Source: International Monetary Fund, World Economic Outlook October 2015; UN Conference on Trade and Development, World Investment Report 2015; Thomson Reuters Datastream.

-6

-4

-2

0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

% of GDP

China

India

INDIA AND CHINA – FOREIGN DIRECT INVESTMENT STOCK

0

5

10

15

20

25

30

35

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

% of GDP

China

India

INDIA AND CHINA – EXCHANGE RATES vs US DOLLAR

35

40

45

50

55

60

65

70

6.0

6.5

7.0

7.5

8.0

8.501 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Yuan per US$

Chinese yuan vs US$

(left scale, inverted) Indian rupee

vs US$(right scale,

inverted)

Rupee per US$

Australia’s trade with India has been shrinking in recent years, and it too is narrowly based

AUSTRALIA’S EXPORTS TO INDIA AS A PC OF TOTAL EXPORTS

COMPOSITION OF AUSTRALIA’S EXPORTS TO INDIA, 2014

Sources: ABS; Department of Foreign Affairs & Trade.

0

1

2

3

4

5

6

7

8

01 02 03 04 05 06 07 08 09 10 11 12 13 14

% of total

Goods

Services Coal(46%)

Education(16%)

Base metals(10%)

Gold(6%)

Tourism (3%)

Fruit & veges(3%)

Wool (2%)

Iron ore (1%) Other goods(11%)

Other services (3%)

Some key messages for Australia

� India isn’t going to be the answer to any difficulties that developments in China may pose for Australia

– India will almost certainly not be able to match China’s growth performance of the last three decades

� There are no more Chinas or Indias after China and India

– those countries which are yet to experience anything like the sustained rapid economic growth and industrialization which China has undergone over the last thirty years are a lot smaller than China or India – and most of them aren’t starting from as far behind as China was in 1978 or India in 1991

– and most of them are more self-sufficient in commodities than China or India

� Australia needs to broaden and deepen its economic relationships with Asia

– in particular by increasing its exports of agricultural commodities, and personal & business services

– recognizing that we will face much more competition in these areas than we have in iron ore or coal

– preferential trade agreements will help but are not a ‘magic bullet’

Australia has experienced sub-trend growth, declini ng real per capita incomes and rising unemployment since commodity prices peaked i n 2011

AUSTRALIA – REAL GDP GROWTH

Note: Real net national disposable income (NNDI) is real GDP adjusted for changes in the terms of trade, minus net factor income and transfers overseas, minus depreciation.

GROWTH IN REAL NET NATIONAL DISPOSABLE INCOME PER HEAD

UNEMPLOYMENT RATE

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% change from year earlier

-8

-6

-4

-2

0

2

4

6

8

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% change from year earlier

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% of the labour force

Source: ABS.

Australia is relying on record-low interest rates a nd a (now) below-its-long-term -average Australian dollar to support economic growt h

AUSTRALIAN INTEREST RATES AUSTRALIAN DOLLAR

Source: Reserve Bank of Australia.

0

2

4

6

8

10

12

14

16

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% pa

Cash rate

Standard variablemortgage rate

0.50

0.60

0.70

0.80

0.90

1.00

1.10

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

US$ per A$

Post-floataverage

The RBA has long been frustrated by the weakness in business confidence: the change in political leadership may well have ‘fixed ’ that problem

BUSINESS CONFIDENCE AND CONDITIONS

Source: National Australia Bank Monthly Business Survey; author’s calculations.

EMPLOYMENT & CAPEX EXPECTATIONS

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Net balance - trend estimate (%)

Business confidence

Business conditions

-25

-20

-15

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Net balance - trend estimate(%)

Employment

Capex

Record-low interest rates stimulated a substantial rise in housing demand, housing prices and (eventually) housing supply – but the eff ect now appears to have peaked

LENDING FOR HOUSING

Note: grey lines in first and third charts above show seasonally adjusted data; thicker coloured lines are the ABS ‘trend estimates’ Sources: ABS; CoreLogic – RP Data.

CAPITAL CITY RESIDENTIAL PROPERTY PRICES

RESIDENTIAL BUILDING APPROVALS

0

2

4

6

8

10

12

14

16

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Investors

Owner-occupiers

A$bn per month

200

300

400

500

600

700

800

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

$000

CoreLogic - RP Data

ABS

100

120

140

160

180

200

220

240

260

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

000 (at annual rate)

Foreign investors have had much less influence than Australian investors on prices of established dwellings, but are doing much more t o add to the supply of housing

PURCHASES OF / BORROWING FOR PURCHASE OF ESTABLISHED DWELLINGS

Sources: Foreign Investment Review Board, Annual Report; ABS, Housing Finance, Australia (cat. no. 5609.0).

PURCHASES OF / BORROWING FOR PURCHASE OF NEW DWELLINGS

0

20

40

60

80

100

120

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Foreigners Australian investors Australian owner-occupiers

A$bn

0

5

10

15

20

25

30

35

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Foreigners Australian investors Australian owner-occupiers

A$bn

Note: data foreigners is value of purchases approve d; data for Australian investors & owner-occupiers is value of loans committed (ie excludes equity com ponent)

Australia now has relatively high residential prope rty prices (by international standards) and very high levels of household debt

REAL HOUSE PRICES – AUSTRALIA vs OTHER OECD COUNTRIES

HOUSEHOLD DEBT ̶ AUSTRALIA vs OTHER OECD COUNTRIES

Note: OECD average for household debt to income ratio based on a limited number of countries.Source: International Monetary Fund, Australia: Selected Issues, Country Report No. 15/275 (September 2015), p. 4.

75

100

125

150

175

200

225

250

275

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

1995 = 100

Australia

UKSweden

NZ

Canada

US

OECDaverage

60

70

80

90

100

110

120

130

140

150

160

170

180

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% of annual disposable income

Australia

UK

Sweden

NZ

Canada

US

OECD average

Australia’s home ownership rate is now lower than a t any time since the 1950s –despite two decades of low interest rates and $bill ions on first home buyer assistance

HOME OWNERSHIP RATES AT CENSUSES

Sources: ABS; Advisory Council for Intergovernment Relations, Australian Housing Policy and Intergovernmental Relations, Discussion Paper No. 14 (1982), Appendix B.

45

50

55

60

65

70

75

1911 1921 1933 1947 1954 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

Censuses

HOME OWNERSHIP RATES AT ABS INCOME DISTRIBUTION SURVEYS

65

66

67

68

69

70

71

72

1994–95

1995–96

1996–97

1997–98

1999–00

2000–01

2002–03

2003–04

2005–06

2007–08

2009–10

2011–12

2013–14

%

Surveys

Home ownership rates among households headed by peo ple aged 25-55 have dropped by an average of 9 pc points since 1991

HOME OWNERSHIP RATES AT CENSUSES, BY AGE GROUP OF ‘ HOUSEHOLD HEAD’

Source: Professor Judith Yates, Submission to the House of Representatives Standing Committee on Economics Inquiry into Home Ownership, June 2015.

46

48

50

52

54

56

58

60

62

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

202224262830323436

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

15-24 year olds

25-34 year olds

707274767880828486

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

626466687072747678

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

35-44 year olds

45-54 year olds

727476788082848688

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

727476788082848688

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

%

45-64 year olds

65 year olds and over

Home ownership rates have dropped by 3½-4¼ pc point s among the middle-income households since the turn of the century

HOME OWNERSHIP RATES BY INCOME QUINTILE, 2000-01 TO 2013-14

Source: ABS.

58

60

62

64

66

68

70

72

74

76

78

Lowest Second Third Fourth Highest

2000-01 2002-03 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14

%

At current interest rates, households can fairly re adily service their mortgage debts: and unlike the US, most of the increase in borrowin g has been by rich households

MORTGAGE INTEREST BURDENS AND MORTGAGE INTEREST RATES

Sources: ABS; RBA; author’s calculations.

4

6

8

10

12

14

16

5

6

7

8

9

10

11

12

13

14

90 95 00 05 10 15

% % pa

Household interest paymentsas a pc of household

disposable income (left scale)

Standard variable mortgage rate

(right scale)

PROPERTY LOANS OUTSTANDING BY HOUSEHOLD NET WORTH QUINTILE

0

50

100

150

200

250

300

350

400

Lowest Second Middle Fourth Highest

2003-04 2005-06 2009-10 2011-12 2013-14

$ bn

Net worth quintile

Two-thirds of the increase in propertyborrowings since 2009-10 has been by the wealthiest 40% of households, and only 6½% by the poorest 40% of households

Overseas experience suggests that housing price ‘bu sts’ occur when demand declines abruptly after an extended period of rapid growth in housing supply

Sources: ABS; US Commerce Department; UK Office for National Statistics; Eurostat; CoreLogic; S&P; Bank for International Settlements;.

HOUSING COMPLETIONS – AUSTRALIA AND OTHER SELECTED COUNTRIES

HOUSE PRICES - AUSTRALIA AND OTHER SELECTED COUNTRIES

0

50

100

150

200

250

300

90 95 00 05 10 15

2000 = 100Australia

US

Spain

Ireland

UK

0

50

100

150

200

250

300

350

90 95 00 05 10 15

1990s average = 100

Australia

UK

US

Ireland

Spain

The supply-demand balance in Australia’s housing ma rket is likely to change quite significantly over the next three years

Source: ABS.

HOUSING COMPLETIONS vs POPULATION GROWTH

150

200

250

300

350

400

450

500

75

100

125

150

175

200

225

250

80 85 90 95 00 05 10 15

'000s (annual rate)

Dwelling completions

(left scale)

Population growth(right scale)

Change from yearearlier (000s)

0

50

100

150

200

250

300

350

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

'000s (4-qtr moving total)

NET IMMIGRATION TO AUSTRALIA

Changes to ‘negative gearing’ or (more likely) the capital gains tax discount could be another potentially ‘disruptive’ influence

Source: Australian Taxation Office, Taxation Statistics, 2012-13.

TAXPAYERS WITH RENTAL INCOME

10

11

12

13

14

15

16

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Financial years ended 30 June

% of total individuals

INTEREST PAID ON RENTAL BORROWINGS

0

5

10

15

20

25

30

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Financial years ended 30 June

$bn

NET RENTAL INCOME

LOSS-MAKING RENTAL PROPERTY INVESTORS

-10

-8

-6

-4

-2

0

2

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Financial years ended 30 June

$bn

50.052.555.057.560.062.565.067.570.072.5

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Financial years ended 30 June

% of taxpayers reporting gross rent

Subsidizing property investment borrowing costs thr ough the tax system is a very expensive way of boosting housing supply

FINANCE COMMITMENTS FOR THE PURCHASE OF HOUSING, BY TYPE OF BORROWER

Source: ABS.

LENDING FOR CONSTRUCTION OR PURCHASE OF NEW HOUSING AS PC OF TOTAL

0

2

4

6

8

10

12

14

16

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Investors

Owner-occupiers

A$bn per month

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% of total (ex-refi)(12-month moving average)

Owner-occupiers

Investors

Other changes to the tax system may also be on the horizon

� The Turnbull Government appears to be positioning itself to seek a mandate for increasing the rate and/or broadening the base of the GST at next year’s federal elections– any changes to the GST would require ‘compensation’ to low-income households, which would have to be funded by

the Commonwealth in the first instance, either by cutting specific purpose payments to the States & Territories or out of other Commonwealth revenues

� Ideally changes to the rate or base of the GST would be part of a broader suite of tax reforms– including broadening of the income tax base by modifying the current preferential tax treatment of, eg,

superannuation, capital gains or fringe benefits (but probably not dividends)

– some of the revenue gain from which could be used to fund reductions in personal or company income taxes

– but some will also likely be applied to reducing prospective budget deficits

� Changes to State taxation may also be on the agenda– there is growing support (albeit from a low base at the moment) for replacing stamp duties on land transfers with a

more broadly-based land tax (similar to what is now being phased in in the ACT)

– but there is unlikely to be much enthusiasm for reducing the overall tax take from property

Budget forecasts of a return to surplus by 2019-20 are based on unrealistic economic assumptions and a reliance on ‘bracket creep’

AUSTRALIAN GOVERNMENT ‘UNDERLYING’ CASH BALANCE

Source: Australian Government, 2015-16 Budget Paper No. 1.

AUSTRALIAN GOVERNMENT PAYMENTS & RECEIPTS

AUSTRALIAN GOVERNMENT NET DEBT

21

22

23

24

25

26

27

90 95 00 05 10 15 20

% of GDP

Receipts

Payments

Fiscal years ended 30 June

2015-16Budget

forecast

-5

0

5

10

15

20

90 95 00 05 10 15 20

% of GDP

30 June

2015-16Budget

forecast

-60

-50

-40

-30

-20

-10

0

10

20

30

90 95 00 05 10 15 20

$bn

Fiscal years ended 30 June

2015-16Budget

forecast

Summary

� ‘Disruption’ itself isn’t new – it’s just the sources of disruption that change

� ‘Disruptive change’ can occur gradually, before reaching a tipping point – rather than just ‘appearing out of nowhere’ – although that doesn’t necessarily make disruptive changes easier to predict

� The Australian economy is no less exposed to risks from ‘disruptive changes’ than any other– we’re more exposed to potentially disruptive changes emanating from China than any other ‘western’ economy

– we can’t really expect India (or other ‘emerging’ economies) to offset downside risks associated with ongoing or sudden changes in the Chinese economy

– we’re less well placed to offset external shocks than we have been over the past two decades

� Potential ‘disruptive forces’ for the Australian property sector include– changes in the balance between the demand for and supply of housing – potentially a ‘tipping point’ in 2-3 years’ time

– long-term changes in housing tenure preferences and capacities

– changes in federal and state tax systems

– technological and environmental changes

� Note that many of these changes are ‘evolutionary’ in their time-span, but could be ‘revolutionary’ in their impact

For more details…

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