The housing boom might be over but the Australian economy continues to ride high thanks to booming mining and construction activity. In this summary of the ANZ Economic Outlook Report December Quarter 2005 (PDF, 404kb) we explain the factors affecting house prices and where the residential property is heading.

In recent years, Australia’s economy has ridden on the back of rising asset prices. From the mid 1990s to 2003, booming residential house prices fuelled household spending and kept the economy ticking along.

The housing boom is now finished. Over the past year, the average price of established houses in Australia dipped 0.1%. This compares to annual house price growth of 19% in the year to December 2003.

But while the end of the housing boom has led to a slowdown in household consumption and dwelling construction, much of the slack has been taken up by a coordinated pick-up in the mining industry (and related engineering construction). Economic activity, therefore, is now being spurred along by soaring commodity prices, low unemployment and low interest rates.

While a number of risks remain (notably high petrol prices and signs of a slowdown in employment growth), most experts expect the economy to continue growing steadily next year.

World economy growing

One of the biggest influences on the Australian economy (and indirectly, the housing market) is the state of the world economy.

High oil prices have prompted each of the three major downturns in global growth over the past 35 years. When oil prices hit a recent high of US$60 a barrel, many people feared a fourth downturn was imminent.

In fact, the world economy grew by about 4.1% over the year to the June quarter, the tenth consecutive quarter of year-to-year growth and well above the 3.5% long-term trend growth rate. Indeed, over the past three months, leading economic indicators have signalled a renewed acceleration in global economic growth. This will provide further support to the Australian economy over the coming period.

Property cycle nears bottom

Despite Australia’s generally positive economic outlook, concerns remain over housing construction and the overall health of the property sector.

Dwelling investment declined in the second half of last year and in the March 2005 quarter, before rebounding in the June quarter. However recent data on building construction (approvals for building permits) suggests the cycle may not yet have reached the bottom. Dwelling construction permits declined in June, July and August by a total of 18%. The bulk of the fall was in multi-unit developments, raising concerns about the pipeline of construction work into 2006.

That said, most of the long-term fundamentals underpinning the housing sector remain positive. Population growth and household formation are running ahead of housing starts, suggesting demand will outstrip supply. The good news also extends to investors, with new data showing rental vacancies are at their lowest level since the late 1980s.

Further ahead, low interest rates and signs that house prices have bottomed in Melbourne (the median house price increased over both the June and September quarters) suggest the bottom of this property cycle may not be far off.

Click here to read the full ANZ Economic Outlook Report December Quarter 2005 (PDF, 404kb)

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