economics

Return to form

Which state will be the first to pull out of the COVID-19 recession? HIA Economics looks at the data and the predictions may surprise you.

Author

Thomas Devitt
HIA Economist

Heading into the pandemic, Victoria was the strongest performing residential building market in the country. For more than two years now, it has continually outperformed other states across a range of housing data and grown year-upon-year, with an increasingly robust economy.

This is a remarkable achievement.

Victoria’s strong and sustained population growth has made it the strongest residential market for most of the past decade. But this record-breaking run looks set to be broken.

Just as the mining intensive states were starting to improve their performance, the COVID-19 restrictions hit; and these restrictions are likely to pose a greater threat to the cornerstones of the Victorian economy compared to any other state.

As its name suggests, the ‘Education State’ receives a greater economic benefit from foreign students and tourists than its counterparts. The resulting population growth has been a significant boost to demand for housing, especially apartment-style living and short-stay accommodation. Victoria has also continued to attract skilled workers from across the country due to government investment in major infrastructure projects.

To a lesser extent, NSW has also benefitted from the increased numbers of overseas students, which also led to an increase in the numbers of people employed building multi-unit apartments. COVID-19, however, has undermined the growth in these student numbers, and without ongoing population growth, the number of apartments commencing construction will slow down rapidly in the second half of 2020.

economics

The ‘Education State’ receives a greater economic benefit from foreign students and tourists than its counterparts. The resulting population growth has been a significant boost to demand for housing, especially apartment-style living and short-stay accommodation

As we see a slowdown in employment in the apartment market this will have an adverse impact across the wider economy. NSW had already been hit hard by the credit squeeze in 2018 and hadn’t yet recovered its confidence before this change in market conditions. The number of housing starts remains over one-third lower in NSW than just 18 months ago. Compounding this bad run, HomeBuilder will be of limited support given the cost of a house and land package in Sydney.

At the other end of the spectrum is Western Australia.

WA started 2020 at the bottom of a deep and sustained depression in the home building market. But because of this weakness it has not been attracting skilled workers, tourists or students from overseas. This weakness has seen the state miss out on a phase of job creation for the past five years. Up to the imposition of the COVID-19 restrictions, this lack of diversity was the millstone that burdened the WA economy.

In the COVID-19 recession era, this vice could be WA’s virtue. Not only is the east coast looking less attractive for those seeking jobs, but employment in the mining sector is continuing to grow.

The population continued to grow in WA through the worst of the mining downturn. This has created more and more potential home buyers just waiting for the opportune moment to enter the market. The growth in house prices in the second half of 2020, and more importantly the growth in rental prices, are promising signs for WA. Added to this is the expected surge in home building that will follow from HomeBuilder and the WA Building Bonus.

With the change in circumstances brought on by the pandemic, it is easy to see WA being the first state to pull forward from the COVID-19 recession.
economics

WA's population continued to grow through the worst of the mining downturn which has created more potential home buyers just waiting for the opportune moment to enter the market

Queensland’s outlook, like that of WA, is also promising. The ‘Sunshine State’ has been consistently underperforming across the range of home building indicators since the 2013–2016 home building boom. The state seems to suffer from a crisis of confidence rather than anything fundamental. 

Queensland has been successful in attracting thousands of interstate migrants to retire, and despite COVID-19, this trend is likely to continue. Add to this that investment in mining and infrastructure, particularly in the north, is looking to grow again, and the state could give WA a run for its money as the first economy back to growth. Unfortunately, the loss of overseas tourists will impair this recovery and no amount of domestic tourism can offset the loss of international flights.

While the markets in WA and Queensland have been through a boom and bust over the past decade, South Australia remained unremarkable. Stability has been the hallmark of this home building market. Impressively, the state held strong while the credit squeeze pulled down other markets, and overall has defied the volatility of other markets over the past 20 years. 

A recent surge in multi-units under construction supported jobs in construction and the wider economy. While the shock to population growth associated with COVID-19 border closures will undermine housing demand and possibly jeopardise many of these jobs, SA does not have as far to fall as some of the eastern states. Larger shocks in the east may even convince some of SA’s interstate migrants to remain locally.

There is a lot of uncertainty regarding the outlook for the residential building market. Changes to government policy and global factors will impact our market in coming years. 

Fortunately, Australia had an insurance policy entering 2020. Our public debt situation going into the pandemic gave us the scope to respond with unambiguous strength and purpose to support Australia’s people while getting on top of the virus. The Australian Government’s public debt to GDP ratio was 28 per cent before the pandemic, compared to well over 100 per cent among many of our advanced economy counterparts.

There are few countries around the world that can make the same boast. For this reason, a return of migration, and especially skilled migration, can play an important role in pulling our economy as a whole forward again.

Related Articles

2020 the comeback kid?

2019 was a challenging year for home builders but indicators show things may be looking up as we head into the new decade.

Same but different

Who looks after granny better? When it comes to planning and building secondary dwellings there are differences between what our states and territories allow.

Canary in the coalmine

Opinion is split as to whether Australia’s economy will experience growth or decline in 2019. HIA Economics weighs in on implications for housing.

Slippery slope

Although the biggest loser from the recent federal election is the reputation of pollsters, the major parties have little to crow about.

Join more than 120,000 like-minded subscribers