House Price Declines ‘Credit Negative’ for States


Skyrocketing infrastructure spending and major declines in property-related tax revenue are eroding the cash reserves of the larger east coast state governments.

Moody’s Investor Services said that house prices declines have wiped a massive $5.51 billion from previously budgeted stamp duties for 2020 from the property peak in 2018.

House prices have declined an average 7.3 per cent in the 12 months to May, with Sydney and Melbourne prices declining an average 10.7 per cent and 9.9 per cent respectively.

“This has adversely impacted state revenues for fiscal year 2020 compared to pre-housing correction levels,” Moody’s senior credit officer John Manning said.

Moody’s is among economic forecasters predicting a bottoming out in 2019, before a modest increase in 2020.

Manning said a largely debt-funded capital spending pipeline of $231 billion over the next four years will cause debt to rise more rapidly than revenue — tipping states into credit negative.

“Capital spending could also increase materially above the budget forecasts in several states, with major new multi-billion-dollar infrastructure projects in their early planning stages largely excluded from 2020 budgets.”

A drop in Commonwealth transfers and transfer duty revenues leave Australian states vulnerable to fiscal deficits

Long term issuer ratingOperating marginDebt burdenTransfer duty revenuesCommonwealth transfer revenues
Western AustraliaAa110.8%151%4.0%33.7%
South AustraliaAa16.9%76.6%4.0%57.7%
Northern TerritoryAa3-1.9%143.4%1.3%73.7%

Source: FY2020 budget papers

Infrastructure boom won’t come to the rescue

The federal government is also putting pressure on the states to step up infrastructure spending and “bring forward the schedules” of major development projects.

Capital Economics economist Marcel Thieliant said that state infrastructure spending won’t come to the rescue.

“There are good reasons to think that capital spending by the states will indeed decline before long,” Thieliant said.

“First, federal capital grants to the states will fall to 0.4 per cent of GDP this financial year, the lowest in at least a decade.

“We estimate that annual growth in public investment reached a two-year high of around 8 per cent in the second quarter, which would lift GDP growth by 0.4 percentage points.

“However, we expect that contribution to fall towards zero by 2021 as states curb their budget deficits and reduce capital spending.”

Australia’s house price downturn — the largest on record — and a protracted period of low wage growth has subdued consumption across Australia, with the domestic economy slowing to a below-trend 1.8 per cent and is expected to drop even lower in the June quarter.

Moody’s analysts said the softer domestic economy also squeezes revenue, reducing the forecast size of the Goods and Service Tax pool.

“This is squeezing state revenues on the back of a smaller project GST pool size and large declines in stamp duties.

“While we do not expect an immediate recovery in stamp duties to 2018 peaks, a return to more stable, sustainable levels over 2019-23 is likely.”

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