Economic growth drives city markets

Posted on 6/12/2017  
Economic growth drives city markets

Why have Sydney and Melbourne prices grown so much, and other cities so little? It's all about the strength or otherwise of the local economy. I discuss a new report showing that most of Australia's economic growth has been happening in our two biggest cities. And answer the question: where next?

I want to pose the question: why is it that Sydney and Melbourne have had such strong property markets, such strong growth in their prices over the last three to four years, but nowhere else in Australia has replicated that growth. Because if you ask the average economist their reasons for Sydney's boom, for example, their answer will be "record low interest rates".

First Home buyers continue to be undercounted, partly by excluding rentvestorsOf course, this begs the question: if it's record low interest rates, why has not all of Australia had a property boom with price growth similar to Sydney's? The answer is, of course, that it's got very little to do with the level of interest rates. Nor does it have much to do with the level of foreign investment. Nor does it have a lot to do with negative gearing tax benefits.

What it does have a lot to do with it, and this explains the differences between what's happened in Sydney and Melbourne and other parts of Australia, is that it's all about the strength of the local economy. Not the national economy, not national factors such as the level of interest rates, but the strength or otherwise of your state and territory economy.

The strongest economies in Australia for the last three or four years consistently have been No.1 New South Wales and No.2 Victoria. That's been a standard in the quarterly reports published by CommSec, the State of the States reports every quarter for the last 3-4 years - also influenced by high levels of spending on infrastructure.

Sydney has been the strongest economy and the strongest property market. Melbourne has been the second strongest economy and the second strongest property market - and those two things lining up together are no coincidence.

Smart buyers will buy in perth next yearThis week we saw some figures published by SGS Economics and Planning, which tended to confirm my view on this. This found that 2/3 of Australia's economic growth in the last financial year has occurred in Sydney and Melbourne.

SGS claims that 41% of Australia's economic growth has actually happened in Sydney. It's the economic powerhouse of the country right now. This has been the major reason why Sydney has had such strong property price growth.

Melbourne has the second strongest economy. The two cities together, according to this report, recorded 2/3 of the economic growth achieved in the 2017 financial year - and this is the principle reason why these two cities have had such strong price growth, whereas cities located within weak local economies - such as Perth and Darwin - have had prices going backwards. It's as simple as that.

So, where to from here? Where next for improved economic growth? The Western Australian economy is improving and we're starting to see improvements in the Perth property market. In a recent post, I talked about my belief that next year the smart money will be buying in Perth.

South Australia is also rising. The South Australian economy has been elevated in the most recent CommSec State of the States report from sixth place to fourth place - and there are other things happening there that lead me to believe that we're going to see better things in the Adelaide property market next year.

Where to buy in Perth

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