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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 21 August 2015

GRP and dwelling price growth

GRP and property

Like Gross Domestic Product (GDP), Gross Regional Product (GRP) is a measure of the market value of all final goods and services produced within a region over a specified time period. 

It's one method of measuring the net wealth generated by a region over time. 

A question for today: is GRP a worthy measure of how a property market could or should perform?

The short answer is that it GRP may be one data series to analyse at in conjunction with a suite of others, but on its own its likely to be a haphazard indicator, particularly in a resources rich country such as Australia.

This is because - unlike measures such as State Final Demand (SFD) which exclude export sales or sales which lead to the accumulation of inventories - GRP includes regional exports, which is rarely a reliable indicator of property market performance, and this is especially true in resources regions. 

Australia's engine room

Take the example of the Pilbara region, sometimes known as the "engine room of Australia", where GRP has exploded from ~$7 billion in 2008/9 to ~$35 billion, thereby accounting for more than 13 per cent of the entire GRP of Western Australia (and more than 2 per cent of Australia's GRP).

GRP per capita in the Pilbara is now approaching an outlandis~$600,000, which is a whopping ~6 times the GRP per capita of Sydney's Parramatta, by way of one point of comparison.

The driver of the GRP eruption in the Pilbara has of course been an unprecedented explosion in iron ore exports, which in turn was initially sparked by an elaborate bubble in iron ore prices following seemingly insatiable demand from China. 

The latest data from the Pilbara Ports Authority shows that the volume of iron ore exports for the month of July 2015 totalled a thunderous 35Mt.

Although this represented a moderate decrease of 775,000 tonnes or 2 per cent from July 2014 - the global supply response now having flooded the market with a glut of ore - the volume of Port Hedland iron ore exports remains well over 60 per cent higher than it was in only October 2012.

The production or export phase of a resources boom also tends to be the least labour intensive, and sure enough property prices are crashing dramatically in the Pilbara region, despite the extraordinary ongoing volume of exports (and thus extraordinarily high GRP).

The wrap

Gross Regional Product can be a useful indicator of the performance of a regional economy, and in fact the sharp rise of GRP in a mining region during the construction phase of a material resources project may indeed take place in tandem with a property boom.

However, GRP also needs to be considered in the context and risk profile of the region in question.

In the case of Port Hedland or the Pilbara, as mines were constructed this dynamic did in fact occur contemporaneously with a property market boom.

However - depending upon what now happens with iron ore prices - the GRP of the Pilbara could continue to rise through the production phase of these iron ore mega-projects while property prices simultaneously collapse as contractors depart town.

Moreover, mining profits generated in the Pilbara are largely remitted back to head office and thereafter are distributed to executives and shareholders, many of whom reside overseas.

In other words, the net wealth generated in the region does not necessarily remain in the region.

It is true that state mining royalties will ebb and flow in sympathy with iron ore spot prices, and to that extent the economic fortunes (or woes) of Western Australia are to some extent dependent on how robust (or depressed) commodity prices are going forward. 

But if you're considering property as an investment, there are are a range of other indicators which need to be considered, incuding projected employment and population growth, the supply of land potentially available for release, the pipeline of dwelling construction etc. etc.