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Housing investment in Australia supports move away from mining


Written by Stefan Kostarelis

A new report by Vanguard research has forecast that in 2017 dwelling investment in Australia will further support the transition away from mining.

The report was a part of Vanguard Research’s 2017 economic and market outlook, which forecasts stabilization, not stagnation for the global economy this year.

Vanguard Research is a division of The Vanguard Group, Inc., which is currently the world’s largest mutual fund company with assets of $USD 3.9 trillion.

In the report, Vanguard assesses Australia’s economy as “rebalancing but vulnerable”, with strong growth in dwelling investment helping to offset declines in mining.

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Currently, mining investment is down approximately 50% from its peak of 8% of Growth Domestic Product (GDP), which it reached in 2012. Vanguard predicts that by late 2018, mining investment will fall back to pre-boom levels of 1.5% of GDP.

Looking at the bigger picture, Vanguard’s economic outlook for the country this year is generally favorable thanks to optimism in financial markets, commodities and trade and housing.

According to Vanguard’s estimated distribution of growth outcomes, the chance of the economy staying on trend or accelerating is a combined 52%. Of all four scenarios (slowdown sub-trend, trend, acceleration) odds of a slowdown are the lowest at 20%

Analyzing the housing market more closely, Vanguard finds that the construction of higher-density dwellings continues to grow at an above average rate in Australia.

High-level dwelling investment is forecast to continue for some time, and in the report a z-score composite indicator was used to aggregate key drivers such as Demand/Supply, dynamics, rental conditions, mortgage serviceability and affordability.

According to Vanguard, Sydney and Melbourne continue to do well in the Supply/Demand category but may suffer due to prohibitively high prices. However, they are expected to continue to perform fine primarily due to sizeable foreign investment.

Unsurprisingly, Perth has the worst Supply/Demand and Rental conditions imbalances due to its exposure to the mining sector.

Adelaide was not included in this analysis, but good affordability combined with limited exposure to mining would suggest a balanced outcome most resembling what is forecast for Brisbane.

In summary, the report finds that overall growth in dwelling investment is likely to support overall economic activity in Australia, albeit at a gradually declining pace.

Examining the reasons behind the decline in mining and rise in housing, there is no doubt that China is a key player.

Iron ore became Australia’s largest export to China around 2006, but has declined in recent years thanks to slowdown in the Chinese economy and thus demand for construction materials.

At the same time, Chinese investors have been buying up big in Australian property. In 2015, they spent over $25 billion on purchases of Australian property (commercial and residential) and a further 2.5 billion on agricultural investments.

With record low interest rates, affordable housing prices and newly opened direct flights to China, it is hoped that South Australia will get a larger slice of Chinese housing investment in 2017.

Mark Butters and his financial advisers at Financial Advice Centre see the residential property long-term outlook is positive in Adelaide.

“We have some key areas such as the Western & Eastern suburbs in the Adelaide metro area, with falls in prices “unlikely” given our lower growth levels over the past few years in the Adelaide metro area compared to the Eastern Australian capital cities key regions of Sydney and Melbourne. This comparison you can see as has been commented in the Vanguard Research Economic and Investment Outlook that included some commentary on the Aussie property market.

“Early 2017 has seen a higher number of new listings in SA than 3 months ago, which is in line with the prediction made by the winner of last year’s “How’s the Market?” competition.”

Brett Pilgrim of Ray White had the winning entry on the 23rd December with his answer to the question ‘How’s the market?’

“2016 finished off strong and we expect it to stay that way over the holiday period,” Pilgrim said.

“The main reason for the strong finish is the lack of properties available for sale in December, everyone will now be waiting for the new year to list their property and this will continue to drive the market into the new year, however it will increase the danger of a downturn in the market if there is an oversupply of property listings after this period.”

Financial Advice Centre can be reached on 8332 4411 or mark@facentre.com.au.

Facts, figures and images obtained by Vanguard Research’s report ‘2017 economic and market outlook: Stabilisation, not stagnation (2016.)

Mark Butters is an Authorised Representative and Credit Representative and SSFS Pty Ltd (ACN 100 654 733) trading as ‘Financial Advice Centre’ is an Authorised Representative of Charter Financial Planning Limited Australian Financial Services Licensee and Australian Credit Representative 234 665

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