What’s going to drive our economy now?

Australia’s economy was sheltered from the worst of 2008’s infamous Global Financial Crisis by a fortuitously timed resources boom, spurred on by China’s insatiable appetite for almost anything we could dig out of the ground.

However, although the mining sector has in no way breathed its last breath, the end of the construction phase of this boom as well as lower commodities prices have heralded a significant industry slow down.

Fact is we’ll never have another big mining boom like this again so the question many are asking is…what will drive our economy forward from hereon in?

One of the answers lies in our rapidly expanding and internationally sought after services sector, while the other is right over our heads - our housing markets.

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An investment in bricks and mortar is an investment in our future

The government has been counting on the property sector to buoy up our economy, not just to accommodate our ever-growing population, but also to keep the money moving in the new economic era.

Where once real estate was all about the ‘Great Australian Dream’, a wave of property investment that started around four years ago, and really got rolling as interest rates steadily fell, has slowly but surely transformed our relationship with housing in this country.

It’s now become a delicate balancing act for financial regulators as speculative investor activity has become so prevalent, especially in sectors of the Sydney and to a lesser extent Melbourne property market, that they recently had to step in to stem an ever-increasing flow of investor related property loans.

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Our homes are indeed our castles

It’s important to remember that rising property prices are generally driven by two forces: supply and demand (read population growth) and our wealth (which dictates affordability.)

Of course rising house prices are one of the few things currently giving consumers confidence in Australia’s economy – just ask Tony Abbott who’s openly admitted he wants them to keep rising.

In other words, to preserve and maintain a perception of national wealth, the property markets must remain buoyant and clearly the government and the financial services sector have a vested interest in the ongoing stability of bricks and mortar as much as you and I do.

The good news is, the 2015 Intergenerational Report forecasts continued population growth with predictions that we’ll almost double in size to 39.7 million people by the year 2055.

However the number of aged folk will also increase dramatically, with just 2.7 working-age Aussies for every over 65 year old by 2055.

This means the government must bring in more ‘new blood’ through favourable immigration policies to boost our cache of appropriately qualified professionals, to support the next big industry set to lead our economy forward; and this will be the services sector…

Services will drive long term growth

A report released by ANZ and Price Waterhouse Coopers entitled ‘Australia’s job future: The rise of Asia and the services opportunity’, points to continued domestic growth driven by a rapidly expanding services sector.

Interestingly service related industries like finance, engineering, education and tourism already employ 9 out of 10 people and account for 75 per cent of Australia’s GDP and it’s the service sector that’s nurturing the relationship we built with China during the mining boom.

The report suggests services could be worth $163 billion in annual exports to our Asian neighbours by 2030, supporting over one million local jobs.

As a property investor this is the industry sector you need to know about, because this is where employment opportunities will lie for our future generations and the many new immigrants who will seek accommodation close to their workplaces.

Historically speaking property prices have always increased more in urban areas close to Australia’s major CBD centers. The reasons are obvious – employment, amenities and infrastructure,` all more widely and readily available in and around the ‘big smoke’.

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Given that most service industries are city-centric and regional unemployment levels are on the rise, it’s fair to assume that the majority of future economic and jobs growth (and in turn wages growth) will be localised to pockets of inner Sydney, Melbourne, Brisbane and Perth over the coming years.

Sought after postcodes near our big cities is where we can anticipate a spike in accommodation demand, with people wanting convenient access to their high paying, city based jobs.

What’s more, modern day YUPPIES (remember them from the eighties? - Young Upwardly Mobile Professionals) are willing to, and will be able to afford to, pay a premium for housing in higher priced, inner urban locations to avoid a hellish outer suburban commute each day.  

At the same time Australians are embracing apartment living in ever-greater numbers, and as competition for inner urban dwellings becomes increasingly fierce these more affordable, higher density living options will likely gain increased favour with younger generations of homeowners and tenants.

This means we can expect the already considerable price gap between popular inner and middle ring suburbs and outlying regions to widen further, which makes an investment in quality apartments or townhouses in areas popular with tenants and homebuyers working in the service industries a sound prospect.

Michael Yardney is a director of

Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.