Saturday, 1 December 2007

Perth's Property Boom

At work a co-worker was telling me that she wanted to go to Perth because property prices there were booming. She told me that she planned to move there in one year and that after she moved there she and her family would become "very rich."

I said that there are worries about bubbles in the Chinese sharemarket. For example, PetroChina's price to earnings ratio, which was about greater than 80 suggests the firm is overpriced.

She said, "But that doesn't affect house prices."

But it does. Economic boom in Perth is mainly driven by the Chinese buying iron ore from the Western Australians. Miners, engineers, etc move to Perth, and when they get there they have to live somewhere, which generates demand for houses, which leads to higher house prices.

Ron Woods in a piece titled Mining Boom Teeters shows how well correlated Perth house prices are with base metal prices. He says that the mining boom in Perth looks to be over mainly because of recession in America. What has America got to do with China? Just about everything sold in America is made in China. If the Americans are spending less because of recession and sub-prime worries, that reduces demand for Chinese goods, which reduces demand for the factor inputs that make those Chinese goods, which includes base metals from Australia.

No comments: