Chat with us, powered by LiveChatThe economy and the housing market - getting back on track

The economy and the housing market - getting back on track

The Budget accordingly has positive implications for Australian housing markets by reinforcing the foundation for sustainable price outcomes in most centres over the medium-term.

Capital city housing markets have softened over the past six months as buyer activity has weakened. Strong house price growth and interest rate rises have dampened demand with auction clearance rates falling and median house prices declining.

Following strong growth in 2009 and into 2010, Sydney house prices fell marginally by 0.4 percent in the March quarter this year with Melbourne house prices recording no growth.

Other signs of the impact of rising interest rates are emerging with indications of increased mortgage stress amongst home owners as reported by a number of banks.

The pace and timing of recovery in housing markets will naturally be dependent on the relative strength of the supply and demand fundamentals of each market.

The Budget is however forecasting a strong economic performance generally for Australia with GDP predicted to grow by 4 percent in 2011-12 fuelled by the resources boom. As with previous resources booms, strong economic activity has a rippling effect through to local economies – a rising tide lifting all boats.

The budget is predicting increasing demand for labour as a consequence of this growth with the unemployment rate expected to fall to a low 4.75 percent – indicating a full-employment economy.

As competition for labour intensifies and significant skill shortages emerge, incomes will rise, providing prospective home owners with increased buying capacity and incentive. Early signs of this are already emerging in some local economies, with the

ABS reporting that Victorian private sector wages rose by 4 percent through the year to March, the highest annual rise since the December quarter 2008.

The Budget has included significant initiatives to optimise Australia’s existing employment capacity and bolster this with increased skilled immigration – another significant driver of housing demand. These policies are designed to moderate the prospects of a wages outbreak impacting on inflation.

Together with an overall reasonably prudent fiscal program this will reduce the pressure on the interest rate rises that are the usual companion to an accelerating economy and the bogeyman for the housing market.

With tight rental markets indicating a shortage of accommodation in most centres – particularly in Sydney and Canberra, expect housing markets to become re-energised with rising demand driven by a strengthening economy. As a consequence modest recoveries in most housing markets should become apparent in 2011 and through 2012.

Source: The Age Domain - Written by Dr Andrew Wilson (a Senior Economist for Fairfax-owned Australian Property Monitors)