Correction, crunch or crash?

23/10/2007 - 22:00

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Housing markets are providing a timely reminder that the gravitational pull of cycles can be hard to avoid, even in a booming state such as Western Australia.

Correction, crunch or crash?

Housing markets are providing a timely reminder that the gravitational pull of cycles can be hard to avoid, even in a booming state such as Western Australia.

Despite a rampant economy, the state’s housing sector has taken a turn for the worse over the past 12 months. Approvals have fallen by one-third and price growth has flattened out, even turning negative in the second quarter of 2007.

The question now is whether this is just a correction or something more serious. Is this a pause for breath – a consolidation at high levels – or something more sinister?

The starting points to answering this question are a lack of affordability and a worsening shortage of housing stock.

Housing affordability has deteriorated across every city in Australia during the past five years, but by far the biggest relative decline has been in Perth.

It’s not looking so hot on the supply side either. While WA’s housing market is not currently oversupplied, this may change over the next 12 months.

Unlike the rest of the nation, WA has seen strong building activity over the past two years, and much of this building is only just reaching completion. There are about 23,000 dwellings – about a year’s worth of supply – still in the construction pipeline that will be completed over the next six months.

The resulting increase in supply won’t necessarily result in a glut, or even a significant overhang of stock, but it does mean affordability problems will tend to weigh more heavily on the WA housing market.

However, there are significant ‘X factors’ at work in WA.

Generous stamp duty concessions are providing some relief.

More importantly, the minerals boom does make circumstances different out west. It’s drawing in resources from across the nation and attracting migrants, and the resulting step up in population growth (which we suspect is being understated by official figures) means any surplus housing stock should be absorbed quickly.

We may even see shortages emerge in one to two years’ time if construction falls off sharply and migration picks up, which seems likely. 

Overall, the extent of affordability problems, the prospect of a rush of completions over the next 12 months and an imminent rise in interest rates points to more short-term weakness for WA housing markets.

However, 2007-08 is not looking good; the strength of the state’s minerals boom-fuelled economy should see the sector through over the medium term.

It may be more than a mild correction, but markets still don’t look to be headed for a serious crunch or fully-fledged ‘crash’.

•Matthew Hassan is a senior economist at Westpac.

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