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Conditions right for sustainable gains

PROPERTY is part of the fastest growing sector of the WA economy. Recent strong growth in property and business services is a major reason why Australia was one of the few countries that avoided economic recession over the past 12 months.

The property and business services sector accounts for around 20 per cent of the State’s total economic output, second only to the contribution of the mining sector. Also according to the Australian Bureau of Statistics, the property and business services sector employs approximately 12 per cent of the total workforce in WA.

The property sector employs more than 10,000 people in WA, including real estate agents, settlement agents and property developers. In 2001 real estate business in WA processed more than $12 billion worth of property transactions and generated almost $5 billion of income.

The property sector is also a significant generator of downstream economic activity, such as engineering work on new developments and building inspectors for house sales.

During the past two years it is this positive downstream economic activity that has helped to sustain the local economy while the international economy has deteriorated.

Low interest rates and the first home buyer’s grant helped to spark home buying activity when the residential property market slumped after the GST. These initiatives also coincided with a cyclical upturn in the property market.

The housing market in early 2002, in particular, has outperformed expectations and it is significant that the annual growth rate for the median house price in Perth has exceeded 10 per cent in the current year.

It also is notable that property values have risen in regional WA. This is evidence that the State’s regional economy is picking up after being down for a long while.

What is happening in the housing market today is typical of the latter stage of the regular cyclical upturn in the market that occurs every five or six years.

There is a perception that the current market is in an unprecedented boom condition, however this cycle is actually weaker than previous market upturns in 1994 and 1988, when stronger booms were occurring in WA. But the current market is resulting in solid increases in property values and good returns to investors.

It is likely that these gains will be more sustainable than the gains in previous booms after the market peaks, which is likely to be in the second half of 2002.

The WA housing market has also avoided excessive over-building in this cycle, which means we should not expect an oversupply of housing, such as plagued the local market after the 1994 boom. In fact the seeds are now being sown for a much stronger boom in the next cycle, which is expected to gather pace within two years.

In the meantime, the rate of growth in the property market is likely to slow. The recent State budget included an expectation by Treasury that investment in new dwellings will decline next year.

However, the easing in the residential property market will probably coincide with a pick-up in the commercial property market if the expected surge in business investment occurs.

There are significant mining investments in the pipeline and this usually means an increase in demand for commercial property, particularly to service the industrial sector.

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