Housing boom a deliberate choice: Deloitte

In an economic outlook report released this week, Deloitte Access Economics partner Chris Richardson explains how rising house prices play into the broader economy.

“Australia deliberately chose to go from a China boom to a housing price boom,” Mr Richardson said. “And, so far, that’s worked. Growth has been below trend, but still enough to drag unemployment down from its early 2015 peak,” he said.

“Given the alternative of a bigger downturn, that’s been a pretty good outcome.”

Mr Richardson says the boost to growth from lower interest and exchange rates is starting to lose steam. He noted that housing construction is nearing its peak, while retail’s run is moderating.

“On the other hand there’s a bunch of good news. Some of that is temporary (such as a bumper wheat crop) and some of it will last longer (such as huge increases in gas exports and a lift in state spending on infrastructure),” he said.

“That mix should keep the home fires of growth burning by enough to leave unemployment relatively steady, and by enough to see Australia sail past the Netherlands to record the world’s longest ever spell without a recession.”

While the housing boom may be sprouting jobs – directly and indirectly – in NSW and Victoria, job growth has slowed nationally. According to Mr Richardson, the only reason why unemployment has managed to stay steady is because more workers are retiring, and because there has been a switch from full-time to part-time employment (as the nation shares out a flat total number of hours worked).

A closer look at the economic drivers on state level reveals a nation operating at different speeds.

Deloitte rates NSW as the fastest growing state in the nation off the back of a big boost from lower interest rates and infrastructure spending.

“But the joy of higher house prices will eventually evolve into the pain of higher mortgages,” Mr Richardson said.

“Victoria’s resurgence has relied more on lower exchange rates, but very low interest rates and the strongest population growth in the nation have also provided a very handy fillip to growth,” he said.

“But apartments pose a risk, while the magic of lower interest and exchange rates will start to wear off.”

Queensland’s economic growth is on the rise due to exports. But according to Mr Richardson, exports lack a ‘feel good’ factor, with the domestic economy seeing little benefit.

“Apartments are also a risk here too,” he said. “On the plus side, the Aussie dollar is helping boost the number of tourists and foreign students.”

The Deloitte partner noted that South Australia is “battling a critical loss of manufacturing” and is overly reliant on federal funding that is under extreme pressure.

However, he believes the South Australian economy is in better shape than it is often given credit for, despite a number of challenges ahead.

“China’s economic transition means plenty of pain for Western Australia,” Mr Richardson said.

“Business investment is now falling faster, making current conditions an even tougher gig in the west – though that’s an unavoidable phase after the boom the state had. The short-term outlook is ‘more of the same’.”

[Related: Housing on RBA 'wall of worry', says CBA economist]