Dependence on construction can cause housing correction

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The country’s reliance on the construction sector is a concern for Richard Barkham, CBRE's global chief economist, according to a report by the Australian Financial Review.

The economist claimed that the over-dependence on construction could lead to a housing correction that will trigger a wider economic downturn. When more than 7% of an economy’s GDP comes from the construction industry, it can be alarming, Barkham said. The share of Australia's GDP from construction is nearly 8%.

"It tends to send a little bit of an alarm bell for me – in the period before the global financial crisis, GDP in construction crept up in the United States to about 10 per cent, and what that means is that a price correction can very quickly translate into a GDP correction. I suspect that the Australian central bank is observing it closely ... even a reasonably serious correction now is better than having to pick up the pieces of a major property crash later on," Barkham said.

Construction activity over the December quarter was slower than expected, with total home building in Australia dropping 3.6% to $18.9 billion from $19.6 billion in the previous quarter. Australia's economic growth, meanwhile, slid to 0.2% over the same period.

Barkham also observed that the country is very much dependent on China. "China is trying to keep growth going and at the same time trying to restructure their economy away from investment and exports to more domestic growth – it's a very tricky balance and you see it seeping through to the Australian economy," he said.

China, though, have started to stimulate again, which resulted in a rebound in its market. This shift is expected to positively impact the Australian economy.

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