The Autumn 2017 edition of the NSW Economic Update presents a current snapshot of the NSW economy and provides relevant points of comparison with other Australian States and Territories.
For the fifth consecutive quarter, New South Wales has been the best performing State in Australia. Commsec’s April 2017 State of the States Report found that NSW retains its top ranking on business investment, retail trade, and dwelling starts, while remaining in second place for unemployment, construction work and population growth. However, the driver of much of this economic growth--the overheating housing market--also potentially exposes NSW to a range of ongoing economic challenges. While the impact of expensive housing on first homebuyers and people on low incomes has received considerable community attention in recent months (discussed in the recent NSW Parliamentary Research Service paper, Demand, deposits, debt: Housing affordability in Sydney), it is also becoming increasingly clear that policy responses aimed at reducing or stabilising prices run the risk of negatively affecting the rest of the Australian economy.
At the national level, the Reserve Bank of Australia is caught "between a rock and a hard place" in terms of monetary responses to house prices. If the RBA lowers the cash rate further, people may borrow more even money, and likely increase housing prices even further. If the RBA increases the cash rate, highly indebted households may be more vulnerable to negative economic shocks, which in turn pose risks to financial stability.
At the State level, construction, financial services and rental, hiring and real estate services accounted for over 40% of NSW economic growth in 2015-16: a dependence that leaves the State exposed to economic risks. The increasing reliance on volatile transfer duty for NSW Government revenue presents an additional economic risk, which may lead to increasingly complex budgetary challenges if the NSW housing market experiences a significant downturn.