Australia | Sep 27 2006
By Chris Shaw
When the Australian housing sector began to cool and interest rates started pushing higher there were concerns for the Australian economy given the wealth effect of higher house prices was an important contributor to growth.
These fears have proven to be unfounded to date, Macquarie suggesting it is in large part because the employment situation has remained favourable, so limiting the financial pressure of weaker house prices and large mortgages.
But as the bank notes, there are some worrying anecdotal signs emerging that the strong employment performance in recent years is showing signs, in some areas at least, of running out of steam.
Mortgagee sales appear to be on the rise in the western suburbs of Sydney, while the continuing soft property market means a number of home owners are likely to be in the position of having negative equity at current prices.
The bank also points out the unemployment rate in the Fairfield-Liverpool region of Sydney has jumped from around 5% in 2005 (it was close to 20% in the early 1990s) to more than 10% now, even as the participation rate has fallen during the same period.
The question then becomes is this an isolated occurrence or a warning sign for the future, which is a difficult question to answer with any certainty. The bank notes there is little sign of such an outcome spreading to other areas yet, though it points out this may be because of factors specific to the Fairfield-Liverpool region.
It notes the region has a significant number of workers in the manufacturing sector, where conditions have become tougher recently thanks to the strong Aussie dollar and increased competition from overseas.
In addition, given much of manufacturing in Australia is aimed at the housing sector the broker suggests this slowdown, plus the fact the region has a high proportion of tradespeople, can also explain its relatively poor performance.
Despite this apparent explanation the broker sees the region as one to keep an eye on, as it cannot be ruled out as an indicator for the broader economy. With this in mind the broker plans to construct a diffusion index to measure unemployment in the Sydney area and the number of regions where employment is falling compared to the number in which it is rising.
It hopes such an index will act as an early warning system for the economy overall, which should be useful given the current uncertainty over the outlook not only for the housing sector but for economic growth.