The week ahead in Australia will no doubt be dominated – at least for those not more enthralled by Eurovision - by the outcome of the election which has seen the Coalition returned probably with a majority or as a minority.

While there will no doubt be much debate about the role played by Clive Palmer’s UAP it seems Australians were not prepared to support the higher taxes, increased government spending and redistribution offered by the alternative. 

The Morrison Government faces four key challenges: 

1. minimising the fallout from the housing downturn to maintain improved affordability and not just set off another housing boom; 
2. getting wages growth up to more reasonable levels and this will require getting growth up and underemployment down;
3. addressing the perceptions of unfairness that have grown since the 2014 Budget; 
4. and solving the climate action/high energy price puzzle which may become essential if support from independents is required to govern. (In terms of the latter it perplexes me deeply as to how we can be world beaters in terms of per capita emissions and in terms of electricity prices!)

Apart from the housing deposit scheme, the Coalition did not promise a lot in this election - which is a good thing - beyond what was laid out in the Budget so its back to business as usual in terms of the immediate economic policy outlook with modest tax cuts for low and middle income earners on track for the next few months. 

Our view remains that growth will average around 2% in the short term, unemployment will move up to around 5.5% and the RBA will cut the cash rate twice this year to 1% with the first cut likely next month. Increased short term fiscal stimulus on the back of a still improving budgetary position (with the 2018-19 budget likely now in or close to surplus) thanks to the still-surging iron ore price is on the cards though but is unlikely to be big enough or come early enough to head off rate cuts.

Will we see a post-election share market bounce?

While Australian shares are typically cautious going into elections the next table shows that after 9 out of the 13 elections since 1983 shares were up 3 months later with an average gain of 4.8%. 

Australian shares before and after elections

With the return of the Coalition with its more pro-business policies and uncertainty now removed around changes to excess franking credits, changes to negative gearing and capital gains tax adversely affecting the property market and increased industrial relations regulation it's possible we will see a bit of a short-term bounce in the share market.

Property related shares, banks and retail shares could be the key beneficiaries. Against this though the Australian share market has already performed pretty well over the last few months and is likely be dominated by issues around global trade, slowing growth, interest rates and the iron ore price and so will quickly move on from the election I suspect.

Federal financial support for first home buyers (FHBs) in Australia is now on the way but don’t get too excited by the First Home Loan Deposit (underwriting) Scheme announced during the election. The scheme will be of some help in enabling FHBs to get in earlier and saving them mortgage insurance which can cost up to $10,000. 

But being capped at 10,000 FHBs a year its pretty small at around 10% of FHB loans in the last year, the borrowers will be taking on even bigger mortgages (when regulators have been trying to reduce the size of mortgages), which will come with a higher risk of negative equity, borrowers will still have to meet the tougher credit standards of recent times and it won’t kick in until next year. So, it’s probably not a game changer at this stage. 

That said, with the budget looking even healthier and probably already in surplus thanks to the surging iron ore price, I suspect that the deposit scheme will morph into a far more attractive home buyer grant at some point. 

This is something we have seen in most major housing downturns in recent times and it will likely add to confidence along with RBA rate cuts, the removal of the threat to negative gearing and the capital gains tax discount and a slowing in new supply next year to help the property market bottom out short of the worst case falls some are putting out there.