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ANZ Analysis for June Quarter 2015

  • April 21, 2015

ANZ Analysis for June Quarter 2015

AUSTRALIAN ECONOMY

The property sector continues to be the bright spot on the broader Australian economic outlook. Supported by the weight of capital, sales demand and capital growth, the property market has remained solid, particularly in the areas that are attracting foreign investor capital such as Sydney, Melbourne and Brisbane.

Nonetheless, outside of the property sector, non-mining activity continues to disappoint and economic growth remains soft. We expect below-trend growth in 2015 will keep the unemployment rate elevated, which will maintain downward pressure on interest rates. While the market is pricing in another two rate cuts by early 2016, we expect the RBA will deliver only one more rate cut in the current cycle, and that rates will stay at historic lows through 2015 and 2016.

The Australian economy continues to face the significant headwind of lower terms of trade and a sharp downturn in mining sector. In addition, a loss of momentum in the economy has been accompanied by deteriorating business confidence and ongoing lacklustre consumer confidence. Consequently, easing property sector confidence, particularly outside of NSW, bears close watching in the coming quarters.

An optimistic outlook for the property sector is critical to supporting capital growth, employment and property construction in the near-term. In particular, while the ANZ/Property Council Survey reflects a relatively stable and positive outlook for NSW and Victoria, property confidence in a number of other states (including Queensland, South Australia and Western Australia) has fallen sharply in recent quarters.

 

RESIDENTIAL PROPERTY

The housing sector continues to be the bright spot for the economy. The latest ANZ/Property Council Survey reflects improved housing market sentiment in the most recent quarter on the back of a positive outlook for residential property prices and solid expectations for housing construction. While this outlook has been supported by the recent RBA rate cut to a new historical low, it also reflects the positive impact of a strong investor appetite, both domestic and foreign, on the outlook for the housing market.

The ANZ/Property Council Survey shows a moderately optimistic housing market outlook across most states and territories, with positive house price expectations across all jurisdictions except Western Australia in the June quarter. Housing sales and price growth have increasingly demonstrated a two-speed market in recent months with Sydney clearly outperforming the other major capital cities, boosted in particular by strong investor demand. Outside of Sydney house prices in most other capital cities have continued to edge higher in 2015, supported by low interest rates.

Low interest rates, increasing home prices and solid population gains, look to be buoying expectations of increased housing construction activity in the coming year, according to the ANZ Property Council Survey. In addition to the positive impact of these housing market conditions, solid foreign investment in new housing has also continued to drive a strong upturn in housing construction. Looking ahead, a solid pipeline of planned high-rise apartment construction in Sydney, Melbourne and Brisbane is expected to support a prolonged upturn in housing construction activity compared to previous cycles.

 

COMMERCIAL PROPERTY

Commercial property market sentiment also increased in the June quarter ANZ/Property Council Survey, largely reflecting positive capital growth expectations for high-grade properties in the major capital cities. Despite ongoing soft market fundamentals evident 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.

Buoyed by ongoing solid investor demand, combined with a continued weight of global investor capital, the property sector is likely to see further capital growth and yield compression for prime grade Australian commercial property in the major Eastern Sea Board capital cities. However, solid global liquidity combined with a heightened search for yield is likely to also eventually drive investor demand and capital growth to other segments of the Australian commercial property market.

 

Contacts

Warren Hogan, ANZ Chief Economist, 02 8037 0063
David Cannington, ANZ Senior Economist, 03 8655 9036