The second most senior official in the Reserve Bank has delivered a surprisingly upbeat assessment on the state of the Australian economy.
Reserve Bank of Australia deputy governor Ric Battellino said in a speech in Melbourne it is now 18 years since Australia has experienced negative year-end gross domestic product growth, marking a very prolonged period of economic expansion.
The recovery will be one, he said, that will go on “for a few years more”.
Led by China, the rebound in Asia is positive for Australia, which dodged the bullet from the global economic downturn this year to emerge in a far stronger state than previously expected.
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Singapore, Thailand, Malaysia, South Korea, Japan and Taiwan are all now experiencing economic growth after the bitter slumps in the early months of 2009. China is helping drag the region out of the red, with Australia being tugged along as well.
Battellino said in the speech that “with the economy having only recently entered a new upswing it is reasonable to assume that we will see this growth extended for a few more years”.
“Over the next few years, Australia is also expected to see a further expansion of the resources sector, including the development of some very large gas projects.
“Mining investment, which is already at record levels as a share of GDP, could rise substantially in the next five years or so.
“If this scenario eventuates, it will have powerful and broad-ranging implications for the economy,” he told delegates attending the 6th National Housing Conference in Melbourne.
He said the strong population growth now happening and the strengthening demand for labour, (will underpin immigration numbers), as well as solidly rising household incomes; all of which will combine to boost demand for housing.
And that could be starting, with the Australian Bureau of Statistics revealing a sharp, across-the-board rise in the value of construction work done in the third quarter, the first significant quarterly output survey to be released ahead of the national accounts.
The seasonally adjusted estimate of construction work done rose 2.2% in the September quarter, after a fall of 0.1% in the June quarter. It was up 6.9% in the year to September, compared with a rise of 5.4% over the June 2009 financial year.
The ABS said there was an across-the-board rise in the value of building (up 2.6%), residential (up 1.8%), non-residential (up 2.3%) and engineering, (up 1.8%) from the June quarter when they were all sharply negative.
Battellino said that while there is a consensus that Australia has not built enough dwellings, this was not because housing investment had been cut back. “In fact, the opposite is true,” he said.
“Over the past decade dwelling investment has been higher — around six per cent of GDP – than it has typically been in the past.”
He said the apparent contradiction between a shortage of dwellings and high dwelling investment had arisen because a high proportion of investment is going into improving the quality of existing dwellings and building accommodation onto to primary residences.
He said a combination of holiday homes, second homes, renovations, or knock-down and rebuilds had sucked in resources that would have normally built new standalone houses to be bought by first or second time home buyers.
Battelino suggested that it was older, wealthier home owners who were driving this diversion of home building resources and finance into rebuilds, second and holiday homes, at the expense of younger home owners and would be owners.
“Many 50–60-year-olds, having benefited from the prolonged economic expansion over almost 20 years and the accumulation of superannuation savings, are in a strong financial position. This has encouraged a change in financial behaviour, with many households in this group being more inclined to stay geared up later in life, using the funds to upgrade or expand dwelling investments.
“It is likely that this changed behaviour has been a significant factor in the housing developments we have seen over the past 10–15 years. In contrast, the typical first-home owner cohort — those under 35 years of age — has experienced a noticeable decline in home ownership over the past 10–15 years.
“It may be that this is being driven by demographic factors — such as the fact that young people are staying in education longer and delaying the formation of new households — but it may also be financially driven.”
In other words, the baby boomers, while moaning about house prices, etc, and the cost of living (among other things on an ever increasing list) are continuing to consume resources at the expense of younger generations.