Franklin Templeton's Toby Hayes explores how the slowdown in China and the global commodity slump have weighed on Australia's growth prospects.
Global investors have been paying more attention than ever before to the downward trajectory of China's economy over the past two years, where growth slowed and fell to 6.8% in 2015, according to the International Monetary Fund.
Forecasted growth for 2016 in the country is set to be lower still at 6.3%, which is its slowest pace in six years.
This slowdown in China has had effects beyond the country's own borders, particularly in commodity-exporting countries and China's main trading partners such as Australia.
Export economy
Australia has been a significant trading partner with China in recent years and the country's previous prosperity has cascaded into Australia's export-driven economy.
Meanwhile, rising wages in Australia combined with low interest rates have both contributed to a protracted and significant rise in Australian property prices in recent years.
Amid double-digit gains in housing prices since 2009, speculators, particularly foreign investors, increasingly comprised a larger portion of Australian home buyers.
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The precipitous rise in home prices was particularly acute in cities such as Sydney, with a report last year stating that the median house price for Sydney exceeded A$1m for the first time.
The slowdown in China and the recent and sudden decline in prices across the commodity sector, which reached a six-year low as of November 2015, have exposed how reliant the Australian economy is on these two areas, however.
Indeed currently, Australia's significant trade relationship with China and the rise in Australian housing prices both seem to present what many consider a 'frothy' housing market.
Mortgage arrears
Credit ratings agency Moody's last month forecast Australian mortgage arrears would rise from the current low levels over 2016 because of the slowing housing market and a sub-par economy.
A high proportion of the worst performing regions were in areas where employment is highly reliant on industries directly or indirectly related to mining and resources.
In particular, the Western Australian economy is heavily reliant on the resources sector and has already begun to slow as a result of falling commodity prices and weaker demand for iron ore from China, according to a Moody's.
Australian regulators have taken pre-emptive actions including capping loan growth, placing more restrictions on borrowers, and limiting interest rate-only mortgages. The Reserve Bank of Australia also cut interest rates to a record low of 1.75% this month to help avoid an economic downturn.
A rising unemployment rate, combined with the slowest pace for wage growth, suggests the domestic economy is not accelerating at the same pace as the housing market anymore.
Challenging conditions
Meanwhile, China's deceleration in growth has had an effect on Australia's economy as when growth slows, imports also slow which leaves the country with nowhere to export to.
As Australia has struggled to find new sources of economic growth, policymakers have tried to boost other sectors, for example, the banks which have been increasing the amount of housing loans to enhance the housing sector in replacement.
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But economic conditions have been more challenging in recent months, which have dampened support for housing demand in Australia.
The country's rising unemployment rate, combined with the slowest pace for wage growth, suggests the domestic economy is not accelerating at the same pace as the housing market anymore.
Added to this mix is the fact Australian policymakers have recently tightened the restrictions on foreign investments as an attempt to curb the housing bubble.
Yet with domestic home buyers priced out of the market and foreigners prohibited from purchase, who will be left to invest in these properties?
The impact of such regulations is not limited to the property sector either. For example, Australian banks are also open to vulnerability from any correction in housing prices as they account for 89% of market share for housing loans.
For investors, taking all of these factors into consideration is now paramount when investing and we believe long exposure to the Australian equity market provides a reasonable hedge to a possible rebound in commodity prices from multi-year lows.
From a risk management perspective, this strategy may also offer diversification in relation to strategies based on global disinflation expectations and those related to the strength of the US dollar.
