Australia | Nov 14 2006
By Chris Shaw
Size isn’t everything, at least in the view of the Commonwealth Bank. The bank notes New South Wales currently has the weakest economy in Australia, as the state recorded growth of just 1.4% in 2005/06, this after growth of 0.8% in 2004/05.
The major factor behind the poor performance in the bank’s view is the housing sector, where affordability remains very poor. This is having a number of impacts, from forcing people to live at home longer to driving people interstate in the search for more reasonable prices.
As a result the Sydney market is in the midst of its longest period of falling property prices, with the declines starting two years ago in annual terms and continuing through to the present. Not helping are the recent increases in interest rates, as the bank notes this has the effect of keeping investors on the sidelines.
With people moving interstate the state’s population is declining, which is flowing through into the broader economy in two ways. Firstly, the bank notes housing starts in NSW are at their lowest level since on record, a period spanning 37 years. Even factoring in apartment construction, the figures still represent a 19-year low.
At the same time the lack of affordability is encouraging migration, this lower population growth meaning there is less spending, so depressing the retail sector. As evidence, the bank notes retail sales growth has been below the long-term average for the past two years. Magnifying this is reduced household spending power from higher mortgage payments as interest rates increase, meaning there is little light at the end of the tunnel especially when the impact of the drought is factored into the equation.
Given this, the bank sees little prospect for improvement in the NSW economy for at least the next six months, with companies exposed to the retail, financial and building sectors likely to bear the brunt of the poor conditions. The upcoming state election is also unlikely to help, as the bank expects major spending decisions will be put on hold until the political situation has stabilised.
Eventually the bank sees the housing market recovering, though the improvement is not expected to be either strong or fast. The second half of 2007 is its most likely timeframe for signs of a recovery, with signs of property prices having bottomed required before investors regain enough confidence to re-enter the market. Only then does the bank suggest there will be an improvement in the broader economy.