WA approaches China with new skepticism

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Asian economic winds may be prevailing across Western Australian property, but they’re not as sure as times past, presenting new challenges for investors

It’s no secret that high stakes mining has been the subject of a lot of political discussion and Western Australia has been a big subject among it. What’s interesting is that the future of the state economy may have a lot more to do with what’s happening 5,000km away.

You wouldn’t expect it from a first glance, but a place like Hunan Province, in China’s south-eastern interior, has a fate that is heavily intertwined with Australia’s largest state.

This part of China is not frequently shown in the news. It is mostly hilly tea country and remains misty through much of the year. Few residents have cars, and being mostly farmers, they carry livestock and produce onto public transport.

Apart from a few highways built in the last 10 years, roads are largely unsealed, snowed under in winter and drowned in mud over summer. Outside of the cities, the mere concept of fast food outlets does not exist. Most people still heat their homes solely with firewood.

Yet, like in much of China, this picture is changing. As the costs of steel production ramp up on China’s heavily developing east coast, some of the production is starting to move westward, and Hunan Province has been a recipient of this change. It’s been a slow move and not one without its difficulties. The province remains heavily underdeveloped and not even the Chinese are building infrastructure fast enough to support future plans for the area.

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It’s been a reminder of a stiff reality for China. Over the years, economists have become used to Chinese economic growth overshooting 10% each year. Hunan Province, as its fledgling steel industry struggles to get off the ground, shows that the country is not quite the miracle economy it has previously been lauded as. It, like anywhere else, faces deep challenges and this will impact how fast the Chinese economy continues to grow.

China and WA

The impact this will have on Western Australia is where the debate starts. As one of China’s largest iron ore suppliers, Australia’s big-west has a fate that is heavily intertwined with the world’s second largest economy. The ebb and flow of Chinese demand will echo into WA’s resources sector, and by association, the entire state economy and property market.

A Deloitte Access Economics report confirms how deeply China affects the state. “China’s main impact on the business cycle… has always been via this State’s project pipeline – just how much the resource sector wants to spend, and how fast,” it says.

“The developments of recent months have finally started analysts re-thinking just how fast China and other emerging nations may grow in the longer term. And the developing answer appears to be “pretty fast, but not as fast as we had thought”.

The report adds that, not surprisingly, this has implications for Western Australia. “[Its] resource riches make it a perfect partner to the rise of Asia. Hence, other things equal, a more modest longer term outlook for Asia will also play out as a more modest longer term outlook for WA.”

Sustainability

For some, more modest projections pave the way for a more sustainable outlook too. AMP chief economist Shane Oliver believes that a slowdown in resources demand may not be as detrimental as many think. “If the mining boom comes off the boil it may take away a lot of the pressure on the rest of the economy that would enable it to record decent growth again,” he says.

As it stands, one sector that looks assured of strong performance is housing construction. Oliver says there remain many positive signs of coming growth. Economic and population growth have been strong and pent up demand is showed in low vacancy rates.

Property impacts

Buyers, for their part, seem optimistic. The Real Estate Institute of Western Australia (REIWA) reports that, spurred on by lower interest rates, first homebuyers now account for 30% of all Perth sales.

“There is no doubting [first homebuyer’s] impact in the market as they eagerly purchase the more affordable properties,” REIWA president David Airey says, adding that overall turnover has also picked up.

Airey says it all adds up to good investment conditions. “Investors still seem hesitant to return to the WA market, but there are signs of this starting to turn around as rental yields improve on the back of rising rents, low interest rates and stable prices. 

“Despite the large number of first home buyers exiting the rental system to secure their own home, pressure continues on the metropolitan rental system through strong population growth,” he says.

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