Australia Faces Weaker House Prices If Government Changes: RBC

(Bloomberg) -- Australia is likely to see weaker property prices and diminished productivity under policy proposals by the opposition Labor party that’s on track to win government, says Royal Bank of Canada.

House prices could fall 15 percent under plans to curb property investment tax breaks, while proposed changes to other investor perks could shave up to 0.2 percent from annual consumption, Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC, said in a research note. A general election must be called by May at the latest.

“We expect a small negative reaction from the currency and equity markets to a change of government,” Ong said in a research report. However, the economy should still see “ongoing Australian fixed-income outperformance against much of the dollar bloc, especially the U.S., and a lower Australian dollar.”

Australia’s conservative government has trailed in most opinion polls since its 2016 re-election and lost one its safest seats in the country last weekend amid a deepening voter backlash. Like administrations of both sides over the past decade, the government is riven by infighting that’s seen two leader changes since its election in 2013, with Saturday’s byelection triggered by the ouster of former Prime Minister Malcolm Turnbull.

Surplus Promise

Labor’s policies hew to a traditional line of higher taxing and spending to finance additional spending on areas like education and health. However, that doesn’t imply a deteriorating budget bottom line, with the party’s finance spokesman Chris Bowen promising to deliver larger surpluses than the incumbent Liberal-National coalition.

On housing, Ong says it’s possible prices won’t fall as much as her estimate through 2020, as regulators could ease macro-prudential measures; or the Reserve Bank of Australia could extend its interest-rate pause; or hiring might intensify and wages unexpectedly accelerate.

“A weaker housing market and softer household income may well keep the RBA on hold for longer, while we expect a commitment to budget surpluses and RBA independence to be confirmed,” Ong said.

Plans to reverse legislated tax cuts could also prove problematic, she suggests, given the 45 percent top tax rate kicks in at a lower level than many global peers. The proposals could hurt competitiveness and productivity, and drive skilled workers overseas.

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