Perth Property Boom? How Government Spending Affects the Property Market (Part 1)

Over the next decade, the Australian government will have sunk $8 billion into expanding Perth’s HMAS Stirling – already the largest naval base in the country. Estimates predict that the plan will create around 3000 new jobs and provide a significant economic boost to both local industry and the rest of the state.

Except for some outlying cases, it is generally true that government investment is a positive thing. When a government starts pouring money into their economy, many of the important numbers (things like GDP, unemployment, exchange rates, etc) begin to move in a positive direction.

The massive investment in Perth’s infrastructure, particularly in the expansion of HMAS Stirling, is bound to have a ripple effect on the property market. We can expect overall improved economic performance to translate into property market growth, through a couple of simple pathways:

1. Population growth

As mentioned, the project is expected to create around 3000 new jobs. This influx of job opportunities will likely attract a significant number of people to the region, increasing the demand for housing. A surge in demand, according to the law of supply and demand, will drive up property prices.

2. Income growth

The economic boost is not confined to the naval base alone. Local industries and businesses are expected to flourish due to increased government spending. This, in turn, could lead to a rise in the average income of the residents, making properties in the region more affordable for more people.

How does defence spending compare to other types of spending?

To explain growth, economists often refer to the neoclassical models of growth (sometimes called the Solow-Swan model). These models attribute growth to three factors:

1. Capital, or investment (both public and private)

2. Labour Growth

3. Technology

One important feature of the model is that investment and labour growth are both subject to diminishing returns. Technological advancement is the only factor that creates sustained, continued growth over time.

In the neoclassical model of growth, government investment is a critical factor that can spur economic development. Defence spending, one subtype of government investment, has a unique role in this dynamic, and can even produce better outcomes compared to other types of government spending. Let’s explore how:

1. Technological Advancements

Defence spending often leads to technological advancements. The defence sector is known for pioneering innovations, which sometimes find applications in the civilian sector. This aligns with the neoclassical model’s emphasis on technology as the only driver of sustained economic growth. In the case of Perth, we know that the advancements at the HMAS Stirling are being directed both at the size and scale of the base, as well as the cutting-edge technology required for new nuclear submarines. These advanced naval vessels require advanced infrastructure and support systems.

As often occurs, it’s entirely possible that these kinds of innovations might spill over into other sectors, fostering broader economic growth through shared technological advancement. Furthermore, thanks to this role in technological progress, the growth created by defence spending may be less prone to the effects of diminishing returns than other types of government expenditure.

2. Skilled Job Creation

Unlike all other public infrastructure projects, defence projects often require highly skilled labour, potentially creating a workforce capable of greater productivity. This enhanced labour growth contributes positively to the economy, potentially boosting the property market further than another equivalent volume of unskilled workers otherwise would.

3. Risk

The permanence of a significant military installation could also contribute to lower levels of risk for the local property market. Often, the performance of a local economy and its property market can be pegged to the success of just one or two major industries. If these key industries should fail, it will of course have major ramifications for the region. Regional Australia is riddled with extreme examples of this, with once thriving mining towns now completely abandoned. Military-dependant economies, like that surrounding the crucial HMAS Stirling naval base, are highly unlikely to be exposed to such a drastic boom-bust cycle.

As we’ve explored, defence spending can act as a major catalyst for economic growth, and HMAS Stirling may well contribute to a Perth property boom. While the massive investment hints at a promising future for the market, investors should approach with caution and due diligence. It is essential to understand the types of investment and market trends, alongside a measured long-term vision.

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