Premier State shows power to surprise

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Amid the tidal wave of negative media reports last year about the apparently doomed economies of Europe and North America, Australians are increasingly waking up to a reality of their own. The evidence for it has been there all along, but there’s a different feeling now. People are taking it to heart. And in New South Wales it is making a big difference.

“This reality is that many of those [overseas] markets have little impact on the Australian economy at all,” says Tim McKibbin, chief executive of the Real Estate Institute of NSW (REINSW).

McKibbin believes the fact that Australia’s economic performance fared better than Europe and the USA last year is slowly starting to sink in for most everyday Australians, and this has resulted in a marked improvement in sentiment.

“Over the last six months, Australians have realised that our economy and our trading partners are reasonably robust. The confidence that has come from that realisation has begun to surface and is evident through an improvement in the share market,” he says.

McKibbin adds that the effect of improving sentiment should never be underestimated, especially in NSW. Australia’s Premier State has seen two sectors of its economy struggling of late – retail and housing construction – and the performance of both rely heavily on consumer confidence. Up until this stage, sentiment had been largely negative, but a more confident consumer outlook will do much to repair these sectors.  

As Australia’s most heavily geared state, NSW has also had a lot to benefit from interest rate cuts. McKibbin says they have breathed new life into the property market and the state economy as a whole.

“We’ve seen an improvement in property prices and the NSW government announced that employment rates are also improving,” McKibbin says.

This is evident in RP Data figures which show Sydney median house prices have grown 8.5% in the 12 months to February, while unit prices have also enjoyed a good run at 4.3% growth. The three months to February were kind to areas outside of Sydney too, with median house prices growing 7.2%.

Interest rate opportunity

That interest rates have opened the property market up is something of understatement.

Reserve Bank of Australia data shows that Australian banks lowered discounted variable rates by 105 basis points in the year to February, the lowest since November 2009. Considering that 85% of mortgages granted in December were variable, this is a significant sign of where the market is at.

In addition to variable cuts, fixed mortgage rates over the same period plunged 85 basis points to an average 5.45%, according to RBA figures, the lowest level since the central bank began collecting data in 1990.

Deloitte Access Economics’ Business Outlook report says the phenomenon has been fuelled by fears of a slowdown in the mining sector. It says the Reserve Bank is making a bid to increase activity in the more traditional sectors of the economy – manufacturing, tourism, international education – all of which have a strong base in NSW.

“With a resource construction peak fast approaching, the Reserve Bank is cutting rates in the hope that ‘interest rate sensitive sectors’ will lift up to help fill that approaching pothole,” it says, adding that this is a business backdrop that puts NSW in reasonably comfortable position.

“NSW’s share of the resource construction boom is modest anyway, so the strength that Australia is losing will be less of a loss for the Premier State… the interest cuts have the potential to drive a bigger upside for NSW than is true for the other states,” the report says.

For McKibbin, the cuts present a strong opportunity. “Property prices are now returning to more traditional levels ... We should also see transaction levels increase, particularly in the more affordable areas of the market,” he says.

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