During the Global Financial Crisis, Australia’s real estate market never experienced anything near the crash in housing prices suffered by its developed-world peers. Indeed, the trough for the country’s housing market was relatively shallow.

As a result, unlike the US, where home prices must rise by significant percentages in order to exceed the prior cycle’s highs, Australia’s dwelling prices have risen 10.6 percent over the past year and are already 5 percent higher on average than they were at their previous peak. As such, some analysts are worried that the country’s housing market is in danger of overheating.

Although the Reserve Bank of Australia (RBA) is closely monitoring the situation for speculative excess, particularly among real estate investors, it believes the gains thus far are within the normal range for the cycle at this juncture.

However, the RBA did note that household gearing and indebtedness are near historic highs, which increases the risk of financial instability, especially when considering that the unemployment rate is at a 10-year high, recently at 6 percent, and is expected to continue rising in the near term.

Even so, the central bank is hoping that the non-mining sectors will assume leadership of the economy from the resource space. In an era of historically low interest rates, the real estate sector seems like a prime candidate to drive the economy. In fact, the RBA foresees a boom in residential construction over the next two years.

And at least for now, the real estate sector can expect continued accommodation from low mortgage rates, as interest rates aren’t likely to head higher anytime soon. Following its latest meeting, the RBA announced the short-term cash rate would remain at 2.5 percent, an all-time low.

In its statement on monetary policy, the central bank reiterated its previous stance that “the most prudent course is likely to be a period of stability in interest rates.” Translation: The cash rate will probably remain at its present level for at least another year.

One of the ways to monitor the trajectory of the country’s real estate market is to watch for monthly data on building approvals. The Australian Bureau of Statistics’ latest report shows that dwelling approvals rose 0.7 percent in trend terms during February, the 26th consecutive month in which this statistic has increased. Private-sector houses showed particular strength, up 1.9 percent sequentially.

In seasonally adjusted terms, however, total dwelling approvals actually dropped by 5 percent, to 16,669 dwellings. That result fell short of the consensus forecast among economists, who had predicted a decrease of 2 percent. Similarly, approvals for private-sector homes declined by 2.1 percent, to 9,293 houses.

Economists with Westpac noted that January’s 6.8 percent jump in approvals may have been overstated due to seasonal issues, and that they had already expected a retracement in approvals following their surge over the past six months. Regardless of the short-term volatility in these data, Westpac expects investment in new dwellings will grow by double digits this year.

Given the statistical noise in seasonally adjusted month-to-month readings, a more instructive comparison would be to examine dwelling approvals over a longer-term period. Indeed, dwelling approvals are up 23.2 percent year over year on a seasonally adjusted basis.

And over the past 12 months, the year-over-year rise in approvals has averaged 20 percent per month, with eight consecutive months of double-digit growth following a modest two-month dip in May and June.

Though we’d like to see greater evidence that other sectors are also stepping up to take over leadership of Australia’s economy, a real estate boom can flow through to many areas of a country’s economy.  

Portfolio Update

GrainCorp Ltd’s (ASX: GNC, OTC: GRCLF) weary shareholders finally got some much-needed support from the company’s erstwhile suitor. Yesterday, The Wall Street Journal reported that Archer-Daniels Midland Co (NYSE: ADM), whose previous AUD3.2 billion bid to acquire the grain-handling company was spurned by the Australian government, intends to boost its investment in GrainCorp.

Illinois-based ADM already owns 19.9 percent of GrainCorp’s shares outstanding, a stake which makes it the company’s single largest shareholder. When we last wrote about GrainCorp in late January, we noted that ADM’s substantial investment in the firm means that it’s still very much incentivized to do what it can to ensure GrainCorp’s continued regional dominance, since it would presumably like to earn a nice return on its investment.

Beyond that, the wording of the government’s ruling also suggested that it would be open to approving a deal in the future once the industry further matures–it only just deregulated in 2008–and should ADM make inroads into assuaging concerns that underpinned political opposition to the deal among rural constituents.

More recently, about a week ago, the Australian Financial Review reported that Trade and Investment Minister Andrew Robb indicated the government may be open to reconsidering ADM’s bid. Speaking before the Credit Suisse Asian Investment Conference in Hong Kong, Mr. Robb said, “The timing was wrong, but there may be another opportunity at some stage.”

“At the time,” he continued, “it was seen primarily from a competitive point of view that it would cut across some very constructive positions… that had been in place in the sector… that for many years had been under statutory authority.”

In the interim, ADM has the option to increase its holdings to 25 percent of GrainCorp’s shares outstanding, a move that the government has encouraged, despite rejecting the company’s offer, and one that ADM is now apparently willing to take. On Tuesday, Juan Luciano, president and chief operating officer of ADM, said the company would hold its stake and try to increase it over time.

Echoing Treasurer Joe Hockey’s earlier suggestion that ADM do more to demonstrate its commitment to the Australian grains industry, Mr. Luciano said, “We are committed to Australia.”

Furthermore, he observed, “I think we got slammed a little bit by a wave of fear and nostalgia. We are committed to working with the government and farmers to placate those fears.” These sentiments suggest that ADM remains interested in pursuing a full acquisition.

The affirmation from GrainCorp’s largest shareholder couldn’t have come at a better time. Without the deal, GrainCorp’s management has acknowledged it would have to mover more slowly in making necessary investments in upgrading  the firm’s infrastructure, while staving off challenges from upstart competitors. Meanwhile, Executive Chairman and Acting CEO Don Taylor is leading the search for former CEO Alison Watkins’ replacement.

In late February, Mr. Taylor also said that drought conditions in Queensland and northern New South Wales would cause GrainCorp’s 2014 net profits before significant items to fall to a range between AUD80 million and AUD100 million from AUD175 million the prior year.

In the several weeks since then, the mix of analyst sentiment has slightly deteriorated, though at two “buys,” eight “holds,” and four “sells,” it still remains essentially neutral. In late March, BBY Limited lowered its rating to “underperform,” equivalent to a “sell,” from “buy.” And JPMorgan cut its rating to “underweight,” or “sell,” from “neutral,” or “hold.”

Since hitting a two-year low of AUD7.52 in early February, GrainCorp’s shares have climbed 13 percent, to AUD8.50. GrainCorp is a buy below USD10 in the Aggressive Portfolio.