ANZ Property Council Survey September Quarter 2015

ANZ/Property Council Survey September Quarter 2015ContactsWarren Hogan, ANZ Chief Economist, 02 8037 0063 David Cannington, ANZ Senior Economist, 03 8655 9036AUSTRALIAN ECONOMYAustralia’s economic growth rate remains below-trend, with the residential property sector one of the few patches of strength. The falling terms of trade have not only applied the brakes to mining investment, but have also seen national income growth slow sharply. In this environment, we think corporate profit growth will be low, government spending soft, and wages growth anaemic as the impact of past commodity price declines are still being felt. Ultimately this is providing a strong headwind to household spending growth.The September quarter ANZ/Property Council Survey reflects an optimistic outlook for property sector capital gains and construction, particularly in the major Eastern seaboard states. However in the broader economy, consumer spending and business investment remains weighed down by the threat of global economic instability, stirred in recent weeks by both the Greek crisis and China’s equity market sell-off.The outlook for increased property sector employment in the ANZ/Property Council Survey also contrasts with soft employment growth in a number of other sectors, most notably in the mining sector. This highlights that, outside of the property sector, the rebalancing towards non-mining sources of growth is happening too slowly. For this reason, we continue to expect the unemployment rate to drift higher.While the strength in the residential property sector suggests monetary policy is stimulatory for the economy, the ability of lower rates to generate stronger consumer spending and non-mining business investment has been subdued. On balance, a soft growth outlook suggests the Reserve Bank’s ‘policy of least regret’ may well be a lower cash rate. While a scenario of soft consumer spending and non-mining investment present a compelling case for further policy easing, the Reserve Bank must also weigh up the risk of fuelling exuberant housing market activity.RESIDENTIAL PROPERTYSupported by a solid investor appetite for housing and supportive financial market conditions, the housing sector continues to be the bright spot for the economy. Despite concerns by some analysts about the pace of growth in residential property prices and investor lending, the latest ANZ/Property Council Survey provides an optimistic, yet measured outlook for the Australian housing market in the most recent quarter.Supported by solid underlying housing market fundamentals and expectations of continued low interest rates, the property sector has maintained a positive outlook for residential property prices and housing construction. However, the positive outlook has been tempered somewhat in the September quarter by the property sector’s expectations that debt finance availability will be tightened as a result of APRA’s macro prudential policy. In addition to positive domestic conditions, the ANZ/Property Council Survey also reports continued strong foreign investor sales, supported by a solid appetite for Australian property and a lower AUD.The ANZ/Property Council Survey reveals property sector expectations of positive house price growth across all states and territories except Western Australia in the September quarter. Housing sales continue to reflect a two-speed (or three-speed) market in recent months with Sydney outperforming Melbourne while the other major capital cities are more sluggish. Nonetheless, it appears solid house price growth in Sydney and Melbourne has not boosted confidence as much as pre-GFC. Combined with a sharp increase in foreign investment in recent years, low interest rates, increasing home prices and solid population gains have driven an unprecedented pipeline of planned housing construction. This isparticularly the case for higher-density housing in Sydney, Melbourne and Brisbane. However, the current cyclical upturn is only providing limited transmission (or economic multiplier) to the broader economy outside of the real estate services and housing construction sectors. Nonetheless, in comparison to population growth and household formation rates, current construction trends are providing a rich source of more affordable housing and only recently have increased to levels that are sufficient to meet annual new housing requirements.COMMERCIAL PROPERTYSentiment remained divergent across commercial property sectors and states/territories in the September quarter ANZ/Property Council Survey. Commercial property expectations reflected the positive impact of solid investor demand for high-grade properties in the major capital cities on capital growth expectations. Other commercial property classes remained weighed down by broadly soft occupier fundamentals. In particular, elevated vacancy rates, weak net absorption and high tenant incentives are providing a drag on planned construction and capital growth expectations in the Brisbane and Perth commercial office markets in the year ahead. In contrast ongoing solid investor demand, combined with a continued weight of global investor capital, is driving expectations of further capital growth and yield compression for prime grade Australian commercial property in the major Eastern Sea Board capital cities. However, despite Australian commercial property offering relatively strong and stable returns, the spike in financial market volatility as a result of global events in recent weeks provides a timely reminder of the risks to global liquidity.