Australia | Aug 17 2010
By Chris Shaw
ANZ Banking Group has completed its latest Australian Property outlook, one based on the view the Australian economy overall should continue to enjoy a healthy outlook. Even allowing for the removal of the policy stimulus that drove much of last year's economic growth, the bank expects the current commodity boom is expected to maintain growth momentum in coming years.
The bank's head of property research, Paul Braddick, expects the commodity price cycle will deliver stronger resource investment, production, exports and profits. As well, he sees this as supporting the labour market, which in turn will support economic growth going forward.
In terms of how this impacts on Australian property markets Braddick notes most forecasters expect an upswing in dwelling investment, with this acting as a key driver of growth in coming years. But in Braddick's view sharp declines in new dwelling approvals could, if continued, actually detract from growth.
The key is interest rates, as these have always been a key trigger for shifts in the dwelling cycle. The recent fall in approvals and Braddick's expectation interest rates will continue to rise means dwelling investment could weaken, this despite what is currently a clear shortage of housing.
In the non-residential sector Braddick expects activity levels will decline as government stimulus programs subside. This shouldn't impact on valuations, as while market sentiment remains subdued, credit access is tight and stocks additions are likely to be limited.
With interest rates expected to remain relatively stable the cyclical risks to housing will be more subdued in Braddick's view, though the big issue of affordability remains unresolved. The political, social and economic imperatives to deal with structural issues are growing, but any response remains in the early stages.
If Australia can get it right Braddick suggests the country is on the cusp of one of the strongest secular increases in building industry activity since the 1960s, but if the appropriate steps are not taken, the industry will languish and there will be social and economic repercussions.
Looking short-term Braddick expects housing construction activity will weaken further in 2010/11 as private sector approvals continue to decline. Dwelling completions are forecast to peak at just below 160,000 in 2011 before falling to 150,000 in 2012. This compares to the bank's estimate of underlying demand of about 200,000 dwellings annually.
These figures imply conditions for renters and first home buyers will become increasingly difficult, while for builders margin risk and reduced profitability can be expected.
For the year to June Braddick notes housing prices rose by 10.5% in national average terms, with Melbourne the leader in recording a 16% increase. In recent months momentum has softened and annualised growth in capital city housing prices slowed sharply in the June quarter. A further loss of momentum is expected in the current quarter.
This partly supports a market mismatch in Braddick's view, as he notes of late trading supply has increased while higher interest rates have reduced buyer demand. The current market conditions lead Braddick to suggest annual house price growth in 2011 is likely to be in the low single digits.
At the same time the ongoing housing shortage will see rents and house prices continue to grind higher, making affordability a major issue in the future. Any temporary solutions are likely to just increase volatility in this regard.
With respect to whether or not the Australian housing market is a bubble, Braddick suggests ultimately house purchase affordability relates to debt servicing costs and here interest rates are the main driver. In his view it also means comparing house price to income ratios across economies is a flawed exercise.
For Braddick, the main reason behind the jump in the house price to income ratio in Australia is the structural reduction in interest rates, with mortgage rates declining from around 14% in the 1980s to around 7% in the 2000s. This means housing affordability remains broadly equivalent now to average levels of the 1980s.
In state terms, the Sydney residential market has seen price gains of about 10.4% for the year to June 30, though there are signs now this price growth is easing. Private housing finance approvals are declining and auction clearance rates have come down as affordability has declined.
Braddick estimates New South Wales has a shortage of 86,000 dwellings, a number forecast to rise to 126,000 by the end of June next year. This implies a period of stronger rental growth as vacancies fall to under 1.00% in coming years.
The Melbourne housing market enjoyed 16% price gains over the last year as investors have picked up where first home buyers have tailed off. Fundamentals of the Melbourne market remain tight and Braddick sees no end to the current chronic shortage of housing in the market.
While the Queensland economy was hit hard by the global economic downturn of 2008/09, there are now some causes for optimism as growth in the state has been moderate and unemployment is trending down.
Solid growth should continue and given Braddick estimates there is a shortage in Queensland housing of around 40,000 dwellings at present. This should support prices. Unlike Victoria however, investors have largely remained on the sidelines in the Queensland market, which has limited price growth to 4.5% for the year to June.
In South Australia economic conditions have been strong, helping drive up house prices by 9.1% over the last 12 months. Building approvals and housing starts are increasing, so Braddick estimates South Australia is currently building enough housing for supply to exceed underlying demand by the end of the year. This should moderate both house price and rental growth over the medium-term.
Western Australia has enjoyed stronger growth over 2009/10 but this has only translated into 5.1% house price growth for the period. In Braddick's view this is evidence of the market catching its breath after strong gains earlier in the decade. With fundamentals still tight, house prices are expected to see solid growth in coming years.
The Tasmanian economy remains in the doldrums and this is impacting on property prices, as a decline in first home buyers has outweighed some modest investor interest. Given the economic weakness, Braddick expects negligible house price growth over the coming year, which should in turn cause a moderation in rental market growth in coming years.
For the Northern Territory Braddick suggests the decline in private residential building approvals is a concern as it will only worsen the current chronic undersupply of property. This will further pressure market fundamentals, as evidenced by rental growth of just under 10%.
The economy in Canberra also remains robust and given a largely professional workforce in the city the removal of stimulus measures has had a relatively minor impact on the housing market in the city. With private residential approvals heading higher, Braddick expects the supply side of the market to improve in coming years.
For office property Braddick notes the supply side has been the spoiler for many years thanks to long lags between a development proposal and occupancy. This has also helped create the booms and busts that characterise the office market cycle.
The economic slowdown reduced net absorption but without the traditional additional supply, so vacancies rose only slightly. While capital values came down, the falls were also less than is typical in a downturn.
Sydney CBD vacancy rates have edged up so far this year yet rents have remained steady and Braddick suggests capital values and rents are poised to recover over the next year. It is a similar story in Melbourne. Vacancies in the Brisbane market appear to be topping out, but there is a long road to recovery in Braddick's view.
Too much supply and at too late a time in the cycle has seen the Perth office market swing into surplus and Braddick sees this as implying a volatile medium-term outlook. Longer-term there remains considerable upside in the market in his view.
Fundamentals are softening in the Adelaide office market and in Braddick's view sluggish economic prospects suggest gains will be difficult in 3010-/ despite a tightening in vacancies during the period.
For the retail sector Braddick notes a tough trading environment is expected over 2010/11 but retail turnover continues to hold at solid levels. This has helped support retail property markets, as has comfortable rental affordability levels.
Investment fundamentals in the sector are modestly supportive of further growth in Braddick's view, with prices around 5% below fair value on the bank's numbers. Until there is an upturn in sentiment however any price recovery is expected to be moderate.
In the tourist accommodation market Braddick expects market conditions to tighten, which should create some upward pressure on property values. Limited new supply should assist in this regard. Visitor arrival numbers are improving and this should support better room occupancy rates and the room rates being achieved across the remainder of 2010 in Braddick's view.
With respect to industrial property Braddick notes signs through the first half of this year suggest an improved outlook as inventories have been run down. Further strengthening of the Aussie dollar should drive growth in imports and inventories, so lifting demand for warehousing space over the next 12 months.
Braddick expects industrial yields will compress this year and next, meaning any returns to the 2007/08 levels of rental growth and yields is unlikely to be repeated as developers remain deterred by tight lending conditions.
