Australia economy facing headwinds due to falling house prices

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Summary

  • Australia’s economic growth likely to remain decent in 2019
  • Business investment offsetting drought, contracting housing sector and subdued consumer spending
  • Housing sector facing gravity as price growth has outpaced income growth since 2000

Deloitte released a report in Feb 2019 about the Australia economy remaining on track, though there are challenges to economic growth in 2019.

Some of these challenges include housing activity and housing prices starting to reverse, after the frenzied price growth in recent years.

In addition, the current drought the country’s interior is facing is weighing on activity and creating significant difficulty in some regional communities.

While these remain ongoing concerns, Deloitte see’s Australia’s broader economic fundamentals as favourable.

Strong performance is seen in employment growth

Australia’s labour market is consistently adding more jobs than is needed to accommodate the growth of the working age population.

As a result, unemployment has been declining, as participation rate has increased to its highest level on record.

Job gains have been broad based across most sectors, with particular strength in business and household services.

Healthy resource sector supported by elevated commodity prices

Australia’s resource sector has been a strong contributor, with increased resource production capacity from recently completed LNG plants adding to economic growth.

This will be expected over the next 12 to 18 months.

On China’s side, stimulus in response to negative effects of the ongoing trade war is keeping commodity prices elevated, especially iron ore and coal.

However, given that the current strength in commodity prices is a response to broad based economic weakness, high commodity prices are not expected to be permanent.

Housing sector looks bleak

House prices have outpaced growth in national income.

Australia’s former prime minister Paul Keating said that Australia’s last significant recession in 1991 was “the recession the country has to have”.

True or not, it is arguable that the former PM’s sentiment could be applied to the current downturn in Australian house prices.

Since the start of the century, house price growth have outstripped national income growth for every single year.

This has been especially acute in the past 5 years when record low borrowing costs, strong overseas demand (that has not tapered off) and population growth sent demand soaring.

Also read: Australia industrial property benefitting from changes in global shipping

Some of the support has faded recently, as a combination of tighter regulation and cautious lending (due to the Banking Royal Commission) punctuated price growth.

In addition, increased global funding costs has reduced overseas investor interest.

Prices are down 6.1% and 4.5% from their peak in Sydney and Melbourne respectively.

In the historical context, this is not particularly significant compared to the as prices are still respectively 74% and 59% above their previous cyclical trough.

While it looks negative on the housing front, Australia is fortunate that the downturn is occurring at a time of strong employment growth.

This is helping households absorb the impact of falling wealth, which is important as Australian households are among the most indebted in the world (with a 180% debt to income ratio).

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