Will September deliver a 'fiscal cliff'?

by Sarah Megginson17 Aug 2020

There has been much talk andspeculation about the fact that many of the government stimulus packages and loan schemes are due to run out in September, prompting the term "fiscal cliff" to gain momentum. But is it really likely that the Australian economy will grind to a halt in September, precisely six months after the pandemic began to wreak havoc across the country?

Or is it more likely to be, as economist Shane Oliver argues, a “fiscal slope”?“

The thought of various government support measures expiring in the months ahead, causing some sort of fiscal cliff over which economies and share markets will plunge, has caused much consternation,” says Shane Oliver, chief economist at AMP Capital.

“But as with the original fiscal cliff of December 31, 2012, in the US, it’s likely to be tapered into a fiscal slope, particularly with so-called ‘second waves’ of coronavirus reaping havoc with the economic outlook. Of course, this will add to the public sector’s debt burden associated with the coronavirus shock, in turn adding to concern about some sort of fiscal day of reckoning down the track.”

While it made sense for many of the expensive coronavirus government support measures to expire at the end of September as initially planned, it is “increasingly clear” that support will be needed for a more extended period, Oliver explains.

Shane Oliver, chief economist at AMP Capital
Shane Oliver, chief economist at AMP Capital

This will be largely driven by the ongoing escalation of a second wave of COVID-19 cases  throughout Victoria, which has seen the state government return Melbourne to a ‘stay-at-home’ six-week lockdown.

“For good-quality investments such as blue-chip shares or property, a market that is affected by panic can be a great opportunity for the savvy investor to take advantage of ” David Hancock, director and senior financial planner, Montara Wealth

This will inevitably slow the economic recovery. AMP Capital forecasts an estimated direct impact on the Australian economy at around the $5bn mark, a figure substantial enough to knock around 1% off GDP this quarter.

The fiscal cliff“There is a high risk that this will impact confidence in other states as people self-isolate, and that other states may also return to a lockdown if cases spread, with NSW most at risk,” he says.

“With social distancing requirements and travel restrictions in place, it will also take much longer for some industries – travel, events, culture, accommodation, restaurants and housing construction – to get back to normal than others.”

With private sector spending hit by COVID-19, it makes sense for the government to continue to help fill the gap and support the economy, which it has confi rmed by way of an ongoing yet adapted JobKeeper program and an increase in the value of loans off ered through the government-backed SME guarantee scheme – with loans now available for up to $1m each.With an Australian recession most likely set to become a reality, many are understandably proceeding with caution. However, David Hancock, director and senior financial planner at Montara Wealth, argues that now is an optimal time to focus on building wealth in the short to medium term.

“In the past, many investors have not only weathered the uncertainty of recessions, but they have also actually made money during recessions,” he says.

“Generally, a good strategy is to buy and hold for the long term. For good-quality investments such as blue-chip shares or property, a market that is affected by panic can be a great opportunity for the savvy investor to take advantage of and pick up quality investments at a reduced cost.”

This could be an opportunity for brokers who count a fair chunk of investors in their database to review these clients’ financial situation and get an overview of the options available to them, should they decide to pursue a property investment opportunity in this market.

David Hancock, director and senior financial planner, Montara Wealth

David Hancock, director and senior financial planner, Montara Wealth

Of course stability of employment here is key.

“If you’re interested in investing during a downturn, you need to be in the best possible financial position to do so. This is about asking questions like: Do you have sufficient cash flow and buffer? Is your income likely to be disrupted during a recession, or are you in a stable position with savings in the bank to take advantage of investment opportunities?” Hancock says.

“As the nation progressively opens up and household incomes improve with it, large parts of Australia will have intense pressure on rents in the near term” Simon Pressley, head of research, Propertyology

“The goal when investing during a recession is to find discounted or bargain investments with long-term potential, such as blue-chip property. It’s all about striking the balance between picking up an investment cheaply without taking on too much risk. Of course everyone’s situation is different, so those who are able to take advantage of opportunities during a recession are generally in a better savings and cash flow position than others. Again, the key is to understand the risks and what level of risk you’re comfortable with, and invest accordingly.”

One of the major uncertainties that could dissuade investors from taking the plunge on a property asset purchase right now is the risk of the tenant not paying their rent due to COVID-19-related financial pressure.

However, Simon Pressley, head of research at Propertyology, says many cities and suburbs across the country continue to see demand from quality renters.
Simon Pressley, head of research, Propertyology

Simon Pressley, head of research, Propertyology

He adds that it’s a matter of looking at markets outside of Sydney and Melbourne to find investment opportunities that show promise, and that have tight rental markets to match.

Generally, it’s considered that a vacancy rate below 2% suggests a tight rental market in which median rents are rising. A market with a vacancy rate below 1% is ridiculously tight.

Contrary to the current situation in the inner-city rental markets of Sydney and Melbourne, where markets are in a technical ‘oversupply’ situation, with Sydney at 3.8% vacancies and Melbourne at a 3%, the rest of Australia currently has the tightest housing supply conditions in more than a decade, Pressley says.

“As the nation progressively opens up and household incomes improve with it, large parts of Australia will have intense pressure on rents in the near term,” he says.

“Right now, 39 out of 52 Australian towns – or 75% of the country – currently have an undersupply situation. Nine locations have a balanced market, and the remaining four are oversupplied: Sydney, Melbourne, Gold Coast at 4%, and Geelong at 3.5%. Large parts of Australia have seen several consecutive years of low volumes of properties purchased by investors, and as local demand continues to rise, the pressure continues to push rents and yields higher.”

According to Pressley, areas from Wollongong to Coff s Harbour to Orange and several other locations in NSW have very tight rental markets. All areas in Queensland, from Toowoomba to Townsville, are under intense rental pressure, and “almost every Victorian location outside of Melbourne, the entire state of Tasmania, and the rental market of every location in Western Australia is currently under pressure”.