Housing market weakness to ‘erode’ government revenue

Following its analysis of mid-year reviews (MYRs) released by Australia’s state governments, Moody’s Investors Service has stated that revenue pressures from the housing market correction would “partly erode” gains from the federal government’s GST reform, “all while debt levels remain elevated”.

“Additional GST top-up payments underpin a strengthening in average revenue growth to 2.7 per cent over the forecast period of FY2019 (fiscal year ending 30 June 2019) through FY2022 in the MYRs, compared to 2.6 per cent in the 2019 budgets.

“However, a weaker housing market will offset these gains,” the credit ratings agency observed.

“Despite already projecting lower property-related revenue in their FY2019 budgets, the larger states of New South Wales and Victoria now forecast further declines in transfer duty and land tax revenue as a result of weakening residential property market prices and falling sales.”

The extent of the slowdown in housing market conditions has been highlighted by the latest data from the Australian Bureau of Statistics, which has reported a 2.5 per cent fall in the value of home loan approvals in November 2018, in seasonally adjusted terms, with housing approvals also falling, plunging 32.8 per cent in the year to 30 November 2018.

Figures provided by property research firm CoreLogic have also revealed that national dwelling values have slumped by 4.8 per cent nationwide, driven by a 6.1 per cent drop across Australia’s capital cities, led by an 8.9 per cent fall in Sydney and a 7 per cent decline in Melbourne

Moody’s added that state governments may also face additional revenue pressure as a result of an increased infrastructure spending projections.

“Overall infrastructure spending projections increased by $3.6 billion or around 2 per cent over previous estimates, largely driven by NSW’s $2.7 billion increase,” the ratings agency continued.

“This spending primarily targets transport, road and rail infrastructure to support population growth. We see scope for capital spending to increase materially above MYR forecasts in some states given ongoing population growth.”

Moody’s also expects the state government’s debt burden to be higher than originally anticipated, noting that capital expenditure would weigh on cash reserves, hence prompting governments to issue additional debt.

“Although projected debt levels are broadly manageable, further sustained increases in debt combined with narrowing operating margins would weaken states’ credit profiles,” Moody’s added.

The ratings agency also predicted that states would face rising costs for education and health over the forward estimates, which could “erode fiscal balances and operating margins”.

“This vulnerability will be higher for larger states such as NSW and Victoria, as well as Queensland, which has recently experienced rapid population growth,” Moody’s noted.

[Related: New residential building starts fall by 6%]