ANZ Analysis
AUSTRALIAN ECONOMY
Buoyed by robust market sales, further price growth and a solid pipeline of construction, the property sector continues to lead the broader economy. Despite property sector confidence easing moderately in the March quarter, confidence levels remain only slightly lower than the recent peak in March 2014. The national property confidence index eased moderately to 132 (from 135 in the December quarter). In comparison, broader business confidence has fallen sharply in recent months, reflecting the combined negative impact of headlines surrounding declining commodity prices and a weaker federal government budget position.
Nonetheless, softer property sector confidence bears close watching in the coming quarters given the importance of ‘animal spirits’ in supporting market sales, particularly with respect to property investors. A factor that could force the issue in 2015 is the potential for changes to government housing policy with both the Financial System Inquiry Murray Report and APRA’s review of Australian residential mortgage lending recommending tightener housing investor policy.
A positive outlook for property values and construction is critical to the near-term Australian economic outlook as non-mining business investment and household consumption reflect a sluggish transition to non-mining drivers of economic growth. In particular, the ANZ-Property Council Survey reflects the boost that residential property sales and housing construction are providing to economic growth and employment.
Despite a relatively positive outlook for the property sector, we continue to expect the RBA to remain on hold for an extended period of time with the first hike pencilled in for November 2015. However, we acknowledge the near-term risks are more skewed towards a cut rather than a hike in the first half of 2015, particularly if the unemployment rate increases sharply or the AUD doesn’t sustain its recent depreciation.
RESIDENTIAL PROPERTY
The latest ANZ-Property Council Survey reflects a housing market that has eased from the recent peaks of mid-2014, however maintains a positive outlook for 2015. Despite softer home buyer sentiment, more moderate price gains and a narrowing pipeline of residential property construction, the survey shows that residential property market expectations remained elevated, reflecting the positive impact of low interest rates, tight housing demand/supply fundamentals and a strong investor appetite on the outlook for the housing market.
National housing sales and price growth have eased from the peak of mid-2014, but continue to reflect supportive home buyer sentiment and solid housing market fundamentals. The strongest price gains have been posted in Sydney in the past year (with the median house price in Sydney rapidly approaching AUD900,000), followed by Melbourne. In contrast, house prices in the other capital cities have only edged moderately higher. Nonetheless, the ANZ-Property Council Survey reflects an optimistic outlook across most states and territories, with positive house price expectations across all jurisdictions except the Northern Territory in the March quarter.
Buoyed by low interest rates, increasing home prices and strong population gains, the ANZ-Property Council Survey reveals expectations of increased housing construction activity in the coming year. Combined with strong foreign investment in new housing, these factors are consistent with an elevated level of home building approvals in recent months, particularly for higher-density housing, which are expected to support a prolonged upturn in housing construction activity compared to previous cycles.
COMMERCIAL PROPERTY
Commercial property market sentiment also eased in the March quarter ANZ-Property Council Survey. Despite continued soft market fundamentals as reflected in elevated vacancy rates, weak net absorption and high tenant incentives, the property sector reported expectations for positive capital growth and commercial property construction in the year ahead.
Solid foreign and domestic investor demand for prime grade Australian commercial property is driving downward pressure on cap rates in the major Eastern Sea Board capital cities. While the likelihood of higher capital costs will challenge investor appetite for commercial property going forward, solid global capital flows, a heightened appetite for yield and strong foreign demand for Australian assets are likely to support investor interest in Australian commercial property for some time yet.
Contacts
Warren Hogan, ANZ Chief Economist, 02 8037 0063
David Cannington, ANZ Senior Property Analyst, 03 8655 9036