Row of houses are seen in the Millers Point district of Sydney as Lend Lease Group’s Barangaroo South redevelopment stands under construction. Sydney has led the housing boom with prices up 13.2% in November from a year earlier, according to CoreLogic RP Data’s home value index.
Bloomberg
Sydney
Australia’s two-speed economy is back — only this time Sydney is leading an east coast boom while mining states lag.
Australia’s biggest city contributed 38% of the country’s growth in the year through June, up from an average of 22% in the past 24 years, consultancy SGS Economics & Planning Pty said in a November 27 report. Companies such as retailer Dick Smith Holdings Ltd are making hay as data showed sales of homewares, electrical goods and garden supplies in New South Wales state surged in October by the most in 14 years.
The conundrum for central bank governor Glenn Stevens is that record-low interest rates designed to rebalance growth are too low for Sydney, where house prices have soared, and too high for the rest as mining investment falls, new jobs fail to keep pace with population growth and confidence slides. As the brakes on growth override the drivers, two of Australia’s four major lenders forecast policy makers will cut the benchmark rate next year, having held it at 2.5% for 16 months.
“Sydney has been the epicenter of residential investment that has driven up house prices and provided a wealth effect,” said Stephen Walters, JPMorgan Chase & Co’s Sydney-based chief economist for Australia. “Elsewhere, households are suffering income compression as falling terms of trade suppress wages and squeeze the budget, requiring benefit cuts and tax increases.”
That’s a reverse from the peak of the resource boom in 2010-11 when Stevens ran developed-world high interest rates as Australia’s north and west vacuumed up labour to build mines, while the south and east, including Sydney, stagnated. Challenged over tight monetary policy at the time, the governor said the Reserve Bank of Australia had to set rates on an aggregate basis for the economy.
Government data released this month showed that every Australian state shrank or stagnated last quarter in final demand terms, which exclude exports, apart from New South Wales, of which Sydney is the capital. Mining powerhouse Western Australia contracted 2% while manufacturing hub Victoria dropped 1.6%.
“Sydney’s role as a major financial hub has also provided access to global capital flows” as markets over the past few years have been “flooded with liquidity,” Terry Rawnsley, an economist at SGS, said in the report. “The strong growth in Sydney’s largest industry and low interest rates helped support growth.”
The divergent trends in the national economy have prompted a split in economists’ forecasts. Seven are predicting the RBA’s board will cut rates to a new record low in 2015, nine are forecasting increases and 11 see unchanged borrowing costs.
Traders are pricing in at least one 25 basis-point rate cut in the next 12 months, swaps data compiled by Credit Suisse Group show.
The economists predicting rate cuts highlight the falling terms of trade, or export prices relative to import prices, as the price of iron ore plunges. They also predict unemployment, which is already at a 12-year high, will increase further.
Data on employment by industry from November showed 44,200 mining jobs and 20,900 manufacturing positions have been lost from a year earlier. Over the same period, 58,700 construction jobs have been created as the RBA’s loose monetary policy boosts home prices and encourages residential building. Sydney has led the housing boom with prices up 13.2% in November from a year earlier, according to CoreLogic RP Data’s home value index.
Sales growth at Dick Smith, Australia’s largest own-store electrical goods retailer, is running about 4 percentage points higher in New South Wales than the rest of the country, according to David Cooke, director of investor relations and corporate affairs. Whether the state continues to outperform depends on several factors, he said.
“If housing remains strong, yes,” Cooke said by phone. “But if housing comes off the boil a little bit, which there is some talk of, then maybe that 4-point differential might come down a bit.”
Similarly, Ikea of Sweden AB plans to open its third store in Sydney next year with sales in New South Wales having climbed 9% in the period since September 1, the retailer’s country manager in Australia, David Hood, said in an interview.
“New South Wales has been very strong for us,” he said. “A buoyant housing market will generally be favourable to Ikea” no matter where it is in the world, Hood said.
The strength of Sydney’s economy prompted the state government to last week revise up its budget forecast and predict a surplus for the fiscal year that began July 1 from a June forecast of a deficit, fuelled by a 12% rise in revenue from levies on home purchases.
