Strong GDP figures don't necessarilly translate to strong property value growth

The strength of the Australian economy surprised most of the economic community when GDP figures were released earlier this week.  The seasonally adjusted figures showed the Australian economy grew by 1.2% over the June quarter and 3.3% over the year.  The broad expectation was for a 0.9% increase in the rate of economic expansion.

It’s logical to think that a strong economy is likely to propel the real estate market into another growth phase.  Around 95% of the participating workforce is employed, official interest rates have stabilized, consumer confidence remains positive and the mining sector is continuing to see solid demand which underpins the economy.

Despite the strong economic foundations, we would be surprised if Australian home values did continue to climb.  As the graph below highlights, home values don’t always move in concert with economic conditions.  The housing market generally softens as the economy slows down, but the opposite is not always true.

National GDP vs property values

The property boom that kicked off in 2000/01 provides a recent example.  Looking specifically at Sydney, the property growth cycle peaked in June 2002 when capital city home values had recorded 22.5% growth over the previous 12 months.  At the same time annual GDP growth reached a peak of 4.5% then gradually declined to 2.3% a year later.   When GDP started once again to skyrocket on the back of the mining boom (reaching an annual growth rate of 4.9% in March 2004), Sydney property values actually continued their downwards trend, moving into negative growth between June 2004 and March 2006 despite annual GDP growth remaining above 2.5% the entire time.

Sydney GDP vs property values

The Melbourne market behaved quite similarly, however the downturn was rapid and the market recovered reasonably quickly and growth rates have mostly outperformed the national average over this period.

Melbourne GDP vs property values

The one thing to take from this analysis is that strong economic fundamentals don’t always drive property markets.  The stage of the market cycle has a strong influence over growth rates and the momentum of the cycle is difficult to break.  

There are quite a few parallels that can be drawn between the market back in 2004 and the one we are seeing today.  At the end of 2003 the market was emerging from a strong growth phase led by Melbourne and Sydney.  As the market was winding down the resources sector was starting to heat up.  GDP growth was healthy, unemployment was in the low 5%’s and trending down and consumer confidence was high.  The markets that showed the most growth at this time were firstly Brisbane followed by Perth.

The same may be true in the current market conditions.  In Brisbane and Perth growth rates have been subdued since 2008 and the economies are much more intertwined with the resources sector than in other states.  See how Brisbane and Perth performed post 2003 in the graphs below.

Brisbane GDP vs property values

 

 

Perth GDP vs property values

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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2 Responses to Strong GDP figures don't necessarilly translate to strong property value growth

  1. Amanda Segers September 8, 2010 at 12:37 pm #

    It will be interesting to see what impact yesterdays announcement has on the property growth and whether the fact that we know who is in government will have an impact or whether the instability will play a role. Interesting times ahead for both GDP and the housing market.

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