A ‘once in a century’ mining boom and an unprecedented pipeline of major resource and infrastructure projects will drive growth in the Australian economy back above trend in the years ahead. The latest PCA-ANZ Property Industry Confidence Survey results reflect the early stages of this cycle, with the property industry confidence index increasing to 113 in June quarter 2012 (compared to 107 in the March quarter). However, a hawkish RBA, a strong A$ and tightening fiscal policy will exacerbate the ‘two speed’ nature of the recovery. As the latest PCA-ANZ survey results indicate, regions directly exposed to the investment boom will perform strongly, while other areas will be highly dependent on the associated demand for professional services. Queensland, Western Australian and the NT will be the clear out-performers while prospects for most other states remain relatively subdued.
While the mining and engineering-construction sectors boom, retail spending, non-mining related manufacturing, public services and tourism will remain under pressure. In line with the net balance of PCA-ANZ survey respondents expecting interest rates to decrease in the next year, we see the near-term risks to official interest rates skewed to the downside and will be determined largely by inflation expectations and the labour market.
After softening considerably in the second half of 2011, the housing sales market has shown tentative signs of life in recent weeks. While we expect prices to find a floor in 2012, we are not convinced that the nadir has been reached. Heightened job security concerns are weighing on sentiment and with house prices falling, buyers perceive little urgency to enter the market. These trends have been reflected in PCA-ANZ survey results with the majority of survey respondents expecting residential capital values to remain unchanged, while the net balance of respondents expect prices to fall in the next year.
Nonetheless, population growth has rebounded while new building activity continues to weaken. New dwelling approvals are currently running at an annualised completions rate of just 120,000, well below the long-run average of 150,000 and underlying housing demand of 185,000. Consequently, market fundamentals are tightening rapidly and rental growth has accelerated. Combined with a marked improvement in housing affordability we believe housing will become increasingly attractive to both first home-buyers and investors in the years ahead.
The Australian commercial property market is very well placed and remains at the early stages of a multi-year cyclical upturn in valuations as the PCA-ANZ survey shows, with improved capital growth expectations across all commercial property sectors except retail property in the June quarter. Limited new supply, solid demand and tight vacancy combined with a rebound in economic growth suggest significant upside to rents. Moreover, global investor uncertainty and subdued domestic investor demand has maintained yields at unusually high levels given the strength of the fundamental backdrop.
We expect significant yield compression in the years ahead as impressive total returns and high yields attract capital from international investors, domestic REITS and superannuation funds.
Prospects for hotel, office and industrial property remain strong. However, retail property faces both cyclical and structural constraints. As the deterioration in investment potential and weaker capital growth expectations from the PCA-ANZ survey indicates, household caution and rising non-discretionary costs are weighing on retail spending and expectations for retail property. Despite a solid outlook for household income, ongoing increases in non-discretionary costs (including rents, utility prices, education and insurance) will continue to restrict discretionary retail spending. With retail rents already a relatively high share of turnover, restricted growth in turnover may limit near-term growth in rents.
At 113 (compared to 105 in the March quarter), the PCA-ANZ confidence index reveals an increasingly positive view of the NSW property market in the June quarter 2012. Positive perceptions of NSW property continue to be driven by tightening fundamentals in both residential and commercial markets, driving rents higher. Combined with improved housing purchase affordability, tight market conditions and increasing rents should encourage both first home buyers and investors into the purchasing market. As a result, prices and capital values should edge higher through the second half of 2012. However, weak household sentiment and a subdued economic outlook will continue to weigh on house prices, commercial property capital values and confidence through the remainder of 2012.
A soft economic climate in Victoria was reflected in a further deterioration in Victorian respondents’ property market outlook, with the PCA-ANZ confidence index falling to 96 in June quarter 2012 (compared to 97 in the March quarter and 100 in December quarter 2011). Victoria’s residential and commercial property markets continue to battle the combined headwinds of weak market confidence, a softening labour market, financial market volatility and a hangover from the recent building boom. While the outlook for Victoria’s economy remains relatively soft compared to the mining states, underlying tightness in Victoria’s housing market and a diversified economy should limit the negative impact of the current headwinds.
The PCA-ANZ survey continues to show an increasingly positive view of Queensland property, with the PCA-ANZ confidence index increasing to 127 (from 113 and 103 in the March quarter 2012 and December quarter 2011 respectively). This result in part reflects an increasingly positive outlook for the Queensland economy in 2012. While Queensland continues to experience divergent performance across regional property markets, the outlook for the Queensland economy should continue to shape property industry confidence through the remainder of 2012. With the exception of retail property which remains weighed down by weak retail spending, the PCA-ANZ survey Queensland results show solid increases in property industry confidence and improved commercial property capital growth expectations. Looking forward, commercial property conditions should continue to improve, driven by rapid absorption and decreasing vacancies, particularly for the commercial office and industrial property markets.
South Australian respondents had a positive view of the property market with the PCA-ANZ confidence index increasing to 112 in the June quarter (compared to 105 in the March quarter and 99 in the December quarter). While expectations for the residential property market remain weighed down by weak sentiment, soft employment growth and a balanced housing market the positive survey result was driven by confidence in the commercial property outlook. We expect property market confidence to remain positive through 2012, reflecting the economic benefits from a number of large non-residential building redevelopments in Adelaide (Royal Adelaide Hospital, Adelaide Convention Centre and Adelaide Oval) and a positive outlook for regions benefitting from major mining and energy projects (including the proposed Clinton and Arckaringa Basin coal-to-liquid gas project and Olympic Dam).
The WA economy continues to benefit from the post-GFC commodity boom, driving increased property market confidence and capital growth expectations. PCA-ANZ confidence index in WA increased to 144 in the June quarter (compared to 127 in the March quarter), recording the second highest confidence level across states and territories (second only to a very confident NT, reporting a confidence index of 159). While house prices are currently 8.2% below their March 2008 peak, the outlook for house prices is positive with 85% of survey respondents expecting house prices to remain unchanged or increase in the next year. The economic benefits of significant WA mining infrastructure spending and tight market fundamentals should also drive solid growth in construction activity through 2012, particularly in the commercial office and industrial sectors. PCA-ANZ survey results show a large majority of respondents expect commercial office (71%) and industrial property (66%) construction activity to increase over the next year.
Tasmanian respondents, on balance, continued to report the most pessimistic view of property markets across states and territories with an index reading of just 73 in the June quarter (compared to 85 in the March quarter). This reflects relatively weak economy activity in Tasmania through 2011, with state final demand of -0.7% in the year to December 2011. A subdued outlook for the Tasmanian economy for 2012 and weak construction activity expectations presents some further downside risk to Tasmania’s property industry through 2012.
Respondents in the Northern Territory remained very positive with the highest confidence index (159) across all states and territories. This result reflects a positive economic outlook, with a number of large resource projects including the $33 billion Itchys gas project expected to provide a significant boost to the territory’s economy, demand for labour and household income. These projects should underpin solid growth in economic activity, employment and property construction through 2012.
Respondents in the ACT had a moderately balanced view of the property sector, with a confidence index of 101, reflecting an uncertain outlook for ACT employment with the existing budget pressures and a sharp unwinding of the boom in dwelling construction through 2011. On balance, respondents expect construction activity in the commercial office sector to weaken over the next 12 months. In addition, a softening in underlying housing demand through slowing population growth presents further downside risks to the ACT residential property market and economic growth.
Warren Hogan, ANZ Chief Economist, 02 9227 1562 or 0414 498 675
Paul Braddick, ANZ Head of Property Research, 03 9273 5987