The biggest threat to the Australian economy? The current housing slump blog image

The biggest threat to the Australian economy? The current housing slump

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Sydney and Melbourne may be labelled as rivals but they have much in common, especially their economies.

Knowledge-intensive service industries have transformed both cities over the previous 20 years. The four biggest markets by output in both Sydney and Melbourne are financial services, professional services, healthcare, and construction. These industries employ some of Australia’s most efficient and well-paid workers.

Our economy’s performance is likewise hugely reliant on the fortunes of these cities. Together, they contributed 44% of the whole output of the Australian economy last fiscal year.

And now, Melbourne and Sydney are in the midst of a house price downturn.

According to CoreLogic figures that were released last Monday, the cost of the average home in Sydney is down 9.5% since the residential or commercial property market peaked in July last year. At the same time, Melbourne’s median price, which peaked in November 2017, has actually fallen by 5.8%.

How much of a drag on the wider economy could falling costs become?

Reserve Bank’s deputy governor, Guy Debelle, stated the answer was still very unsure. Although, he did say our economic guardians at the RBA “are paying pretty close attention”.

Dr Shane Oliver, a specialist on asset booms and busts and AMP’s chief economist, is less circumspect: “It’s probably the biggest threat to the Australian economy at present,” he states.

According to Mr Oliver, the housing slump is far from over. He anticipates residential or commercial property prices in Sydney and Melbourne to fall by 20% from peak to trough.

 

However, Melbourne and Sydney are fortunate that the house cost downturn has come at a time of relative economic strength. Low unemployment and solid population growth make a devastating house rate crash unlikely. A pipeline of infrastructure projects in Victoria and New South Wales will help offset weaker conditions in home building. Nonetheless, a lot will depend upon how homes in Sydney and Melbourne react to the unfolding housing downturn.

 

This article first appeared in smh.com.au.

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