The economy is flatlining, but the property market is very much alive

The latest economic growth figures have underlined the Australian economy's overall weakness and strengthened the case that the next move in official interest rates will be down, not up.

However, the continuing shortfall in housing—amid strong population growth—means that the momentum driving property prices and rental growth is unlikely to slow any time soon.

The details

New data from the Australian Bureau of Statistics (ABS) shows Australia’s economy grew just 0.1% in the quarter between December last year and March 2024.

In annualised terms, that means between March 2023 and March 2024, national GDP was just 1.1%.

In layman’s terms, the economy is barely ticking over.

But when you dig into the ABS numbers (see the above chart), you’ll see that on a per capita (or per person) basis, Australia’s economy has just experienced its fourth consecutive quarter of negative growth.

We are well and truly in a “per capita recession”.

It’s why you hear so many people complaining that they are doing it tough; slammed by higher prices, wrestling with high interest rates on their mortgages, and depleting their savings to make ends meet.

It’s why you hear retailers complain that sales are weak and businesses grumble about poor future orders.

“We are seeing consumption has slowed down, that is a key driver of this slowdown in growth that we're seeing,” says NAB Senior Economist Taylor Nugent.

But Mr Nugent says it’s not all bad news.

“There's a broader story of resilience where households have - in aggregate, of course - have been able to find some money and maintain some level of spending.”

“As a consequence, they're saving less out of their income,” he told ABC News.

What’s keeping the Australian economy barely afloat is the continuing economic lift from population growth - largely through overseas migration, which is still high, but falling from last year’s record numbers which saw 660,000 people added in the year to September.

Interest rates

It’s worth noting that Australia’s economic slowdown has been deliberately engineered by the Reserve Bank of Australia (RBA), as part of its strategy to tame runaway inflation, which peaked at 8.4% in December 2022.

Despite no less than 13 hikes in the official cash rate, inflation remains what economists call “sticky”, coming in at 3.6% in April 2024.

The RBA has set a deadline of the end of next year for returning inflation to its 2-3% target range and has made clear it considered raising the cash rate for a 14th time at its last board meeting, but decided against it.

With income tax cuts from July and energy bill relief in the Federal budget, fears have been raised that another rise in interest rates could be in the offing to stem another inflation break-out. 

In a none-too-subtle public message to the Reserve Bank, Federal Treasurer Jim Chalmers was quick to seize on the weak growth numbers as evidence that his recent national budget would not overstimulate the Australian economy and re-stoke the inflation fire.

“Today’s National Accounts confirm the economy barely grew in the first three months of 2024,” he tweeted.

“These numbers show we got the Budget right and justify our approach to fighting inflation without smashing the economy when growth was already soft, and people are under pressure.”

NAB Senior Economist Taylor Nugent also thinks the weak GDP numbers demonstrate there’s no need for the RBA to raise rates again.

“Our central case is still for (a) November (rate cut),” he says. 

Housing 

So, what are the implications of the weak GDP numbers on the property market?

The answer is probably very little.

While traditionally weak economic growth means a slowdown in property market activity and low, or possibly even negative, price growth, the fundamentals are very different this time around.



In a recent economic note, AMP’s Chief Economist Shane Oliver estimated that high overseas migration at a time of very low rates of new home building has created an accumulated housing shortfall of around 200,000 dwellings.

“This is a conservative estimate,” he says, “If the decline in the average number of people per household seen in the last few years is sustained, then the accumulated shortfall could be around 300,000 dwellings.”

“Unfortunately, the housing shortfall looks like it will get worse before it gets better,” Dr Oliver says.

“Immigration levels are likely to slow over the year ahead but still remain high, and housing construction is likely to remain depressed in the face of cost pressures and capacity constraints.

“In fact, approvals are now running around 160,000 new dwellings a year, which is well below government objectives to be building 240,000 dwellings a year over the five years from July.”

In short, housing supply will continue to fall behind demand for the foreseeable future, keeping a floor under home prices and keeping rents high.

As a result, AMP is predicting that home prices will increase 5% nationally this year, with the strongest gains in Perth, Brisbane, and Adelaide.