Commodities are a really interesting predictive tool.
Research exists showing that current commodity prices can indicate future movements in anything from GDP growth, to something as specific as student enrolments in engineering courses.
It makes sense then that commodities exported from Australia could provide insight into housing market movements.
The relationship might be particularly distinct in the resource-oriented markets of Perth and Darwin.
In Graph 1, changes in iron ore export values are plotted against annualised capital growth in Perth and Darwin’s house and unit markets.
Graph 1: Change in Iron Ore Export Values vs. Capital Growth in Resource Dwellings
At first glance, it almost looks as if the two factors have an inverse relationship
However, it is more likely to be a lead lag effect.
This means that when higher volumes of iron ore is demanded, it takes a while for the benefits of this to flow into the housing market.
A number of commodity prices have tumbled in the last year. The iron ore price averaged just AUD $69 per dry metric tonne over the month of July, which is a 13.88% reduction from the previous month.
Australian Thermal Coal remained steady over the last month, averaging AUD $85.75 per pound. However, this is a significant reduction from the peak price in 2008 when coal averaged over AUD $200.
World Bank data shows that resources boomed in the early 2000’s, following a long period of low valuation between the 1970’s and the 1990’s.
While it appears that commodities are in a correction period, values have not fallen so drastically that prices are below what they were a decade ago.
In response to the decline in commodity prices, many suppliers, including BHP Billiton and Rio Tinto, chose to increase efficiency and cost cutting as opposed to reducing supply.
This is likely due to larger producers taking advantage of the fall in commodity values to pressure smaller suppliers out of the market.
In line with cost cutting, thousands of mining positions have been terminated across South Australia, the Northern Territory and Western Australia.
This, coupled with the completion of mining construction projects, is exacerbating economic downturn in the resource states.
Deterioration may be slightly offset in the short term due to the devaluation of the Yuan, which will make Chinese steel exports more competitive and drive demand for Australian Iron Ore, an input in steel production.
As commodity prices stabilise at significantly lower levels, the Darwin and Perth dwelling markets could also be on a bumpy road towards stabilisation at a lower level.
These markets were the worst performing capital city markets in the year to July, with Darwin unit values declining a significant 6.41% while Perth house values contracted 4.34%.
However, as with commodity values, long term price stability may not be as dire as many make it out to be
To put the current growth cycle in perspective, the historical House Price Index (HPI) data for Perth and Darwin is presented in Graphs 2 and 3.
Graph 2: Perth HPI
Graph 3: Darwin HPI
The graphs show that, like commodity values, dwellings in the resource capitals are no longer in a stage of rapid growth as they were between 2000 and 2008.
The Perth and Darwin markets are currently in a correction period, which is indicated by the downward movement of the HPI.
However, putting the dwelling positions into a larger historical context shows they have not drastically collapsed.
During the mining boom, the Perth market saw annualised growth rates as high as 40 per cent in 2006.
However, these growth rates were met with corrections of 10 per cent in 2009.
The end of the mining boom has restored growth cycles that are much more subdued than these levels.
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