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Economic and Property update. Paul Braddick ANZ Banking Group Limited. Perth. Summary. Markets ruled by fear but global backdrop supportive Extreme volatility/weak growth from Europe, Japan & US Asset markets priced for Armageddon Asian region to drive growth (structural uplift)

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slide1

Economic and Property update

Paul Braddick

ANZ Banking Group Limited

Perth

summary
Summary

Markets ruled by fear but global backdrop supportive

  • Extreme volatility/weak growth from Europe, Japan & US
  • Asset markets priced for Armageddon
  • Asian region to drive growth (structural uplift)
  • Solid commodity demand

Australia will out-perform

  • Exposure to Asia, mining profits and investment boom
  • Growth at trend or above, low unemployment?
  • Unrivalled policy ammunition (incl. currency)
  • Housing - sentiment shaky, but fundamentals solid
  • Weak sentiment, job security
  • Solid economic backdrop/ltd forced sales, tightening fundamentals
  • Commercial property well placed
  • Low vacancy, restricted supply
  • Rents to rise, yields to firm
  • Office & industrial to outperform
debt overhang a key structural constraint for many key developed economies for years to come
Debt overhang a key structural constraint for many key developed economies for years to come

Fiscal & Debt position

the next i in piigs
The next ‘I’ in PIIGS

Italian debt scenarios

Italy 10-year bond yields

slide5

China growth story is structural and ongoing

From today to 2025…

  • 350 million more people will move to the cities – 103 million have moved since 1990.
  • 221 Chinese cities will have 1 million+ people living in them – the whole of Europe has 35 today.
  • 1 million kilometres of new road and 28,000 kilometres of metro rail will be laid.
  • 170 mass-transit systems will be built - twice the number that all of Europe has today.
  • 40 billion square metres of floor space will be built to construct five million buildings
  • 50,000 skyscraper will be built (+30 stories) – the equivalent of building 2 Chicago's every year.
  • 97 new airports will be built
  • 1 in 7 planes assembled by Boeing and Airbus will be delivered to China.
  • 1,000 MW of coal-fired power capacity will be commissioned every week - equivalent to 4 million tonnes of new coal demand
  • 1 wind farm turbine will be built every hour and a half.
slide6

Don’t forget India (steel production and coal demand set to rise sharply)

India & China Coal/Port Map

Source: ANZ, AME, Wood Mackenzie

mining investment boom has not yet been interrupted by global events
Mining investment boom has not (yet) been interrupted by global events

Private business capital expenditure

New projects advanced since September include the $29bn Wheatstone LNG project and the $27bn Olympic Dam expansion

Source: ABS

slide8

Australia heading towards above trend growth but near-term labour market outlook uncertain

Unemployment rate

GDP growth

Sources: ABS, ANZ Research

slide9

‘Underlying’ inflation back in target range but growth expected to accelerate and capacity tight

Consumer price inflation

Sources: ABS, RBA, ANZ Research

slide10

RBA forced off the fence by deepening European crisis and soft domestic activity

‘Market pricing’ of cash rate changes

RBA cash rate

ANZ

Current market pricing

Sources: Bloomberg, RBA, ANZ Research

two speed economy re emerging driven by surging business investment and wages
Two speed economy re-emerging – driven by surging business investment and wages

Average compensation of employees

Business investment

Sources: ABS, ANZ Research

net overseas migration rebounding
Net overseas migration rebounding…

Net overseas migration

ANZ

forecast

Access Economics forecast

Sources: ABS, ANZ Research

slide13

…but the number of Australians travelling overseas has accelerated sharply

Short term arrivals and departures

Net overseas tourist flow

departures

arrivals

Source: ABS, ANZResearch

housing market shaky but fundamentals supportive
Housing market shaky, but fundamentals supportive
  • Down, down, prices are down
  • Housing finance, auction clearance rates, house priceshave fallen
  • Brisbane, Gold Coast, Perth & Melb. markets have been hardest hit
  • November 2010 rate hikes hurt affordability and sentiment
  • Rising household costs and a softening labour market present substantial risks and weak sentiment could drive further price falls
  • Supply to pressure inner-Melbourne apartments
  • Nonetheless, market fundamentals supportive
  • The market is tight, evidenced by record negative market balance & near record low vacancy rates – will boost rents
  • A rebound in net overseas arrivals will lift demand
  • Building momentum weak - supply well below underlying demand
  • Resource boom and tight labour market conditions will boost incomes and maintain forced selling at low levels
  • Two speed economy will favour/support Qld, WA, SA & NT
  • Interest rates now falling, affordability improving
recent housing data and market sentiment weak
Recent housing data and market sentiment weak

Auction clearance rates (LHS) and auction sales (RHS)

Mortgage delinquencies

House prices (LHS) and Finance approvals (RHS)

Days on market

Sources: ANZ, ABS

are australian house prices overvalued
Are Australian house prices ‘overvalued’?

Most ‘analysis’ based on simple metrics

  • i.e. House price to income ratio, rental yields
  • Rising incomes & reduced interest rates fully account for ALL price growth since 1985
  • (rising purchasing power has matched price gains)
  • Prices also underpinned by structural changes including:
    • Financial deregulation & product innovation
    • Capital gains tax relief
    • FHOG
    • Increased size/quality of dwellings
    • Structural dwelling shortage
  • Real question is: will house prices fall significantly?
  • Economic backdrop supportive (wage gains, low unemployment)
  • Housing shortage entrenched – vacancies will tighten, rents to rise

Sentiment may win battle, but fundamentals will win the war

slide17

All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates

Median house price vs. purchasing power

Actual house prices

Purchasing power - income growth and interest rates*

* Represents the average households purchasing power over the median priced home

Sources: ABS, RBA, ANZ Research

slide18

All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates

Perth median house price vs. purchasing power

Actual house prices

Purchasing power - income growth and interest rates*

* Represents the average households purchasing power over the median priced home

Sources: ABS, RBA, ANZ Research

slide19

New home building will remain well below underlying demand in the years ahead

Population growth vs. dwelling completions

‘000

‘000

Annual population

gain (lhs)

Annual dwelling completions (rhs)

Sources: ABS, ANZ Research

slide20

Unprecedented housing shortage – will continue to deteriorate

Housing market balance

‘000

Underlying demand

Completions

Shortage

Surplus

Sources: ABS, ANZ Research

slide21

The housing shortage has already reached unprecedented levels – and will get much worse!

WA housing market balance

‘000

Underlying demand

Completions

Shortage

Surplus

Sources: ABS, ANZ Economics and Markets Research

slide22

Vacancies tight and will tighten further

Residential vacancy rate

Long-term average

Perth

Melb.

Syd.

Adel

Source: REIA, ANZResearch

slide23

Movements in real rents reflect a widening structural shortage of rental properties

CPI: Rents vs. total

Sources: RP Data-Rismark, Residex & ABS

slide24

Perth rents re-accelerating

Rents: average vs. marginal

Sources: Residex, ABS, ANZ Research

slide25

House prices have eased lower in most capital cities

Median house prices

Sources: RP Data-Rismark, ANZ Research

commercial property outlook valuations attractive
Commercial property outlook: valuations attractive

Office market - very well placed

  • Fundamentals solid – strong demand, weak supply, tight vacancy
  • Early stages of multi-year cyclical upswing – rents will rise
  • Uncertainty weighing on valuations but cap rates should firm

Retail – solid fundamentals, but demand uncertain

  • Tight vacancies, weak supply
  • Healthy labour market, rising household incomes
  • But household caution, rising savings rate
  • HH costs rising – utilities, fuel, insurance and debt service
  • Spending should rebound, but will RBA allow?
  • Industrial – well placed
  • Vacancy tight, weak supply
  • Above trend GDP growth, investment boom
  • Import penetration rising – strong A$ - warehouse/logistics

Hotels – business demand booming, tourism slow

slide27

New non-res. building activity has slumped - supply additions will be limited

Non-res. building approvals*

Retail

Office

Industrial

Hotel etc

* Annualised Trend

Source: ABS

retail property has consistently outperformed office and industrial markets but
Retail property has consistently outperformed office and industrial markets but…

Capital return index

Total returns year to Sept 11

Office

(-17.2%)*

Retail

(-10.9%)*

Hotel

(-17.1%)*

Industrial

(-19.8%)*

* Peak to trough

Source: IPD

questions over strength of future retail demand
…questions over strength of future retail demand

Retail turnover

Internet sales leakage

  • long-run implications for high margin/generic retail

Increased tourist $ offshore & slow inbound tourist $

  • strong A$ (may get stronger!)
  • Slowdown in net o/s migration
  • temporary (tight labour market, skilled labour shortages)
  • Increased household caution
  • GFC related fear/wealth declines
  • return to more ‘normal’ savings
  • deposit war/special rates

Sales should grow with income

  • Solid income growth…
  • …but sentiment soft and RBA…

Household savings rate

slide30

Office vacancies improving (even Bris. & Perth)

CBD office vacancy rates

Source: Property Council of Australia, ANZ Research forecasts

slide31

Incentives remain unusually high relative to vacancy – will correct at some point

Sydney CBD office: incentives vs. vacancy

Source: Jones Lang LaSalle, ANZ Research

slide32

Office rents appear to have bottomed (ex Canberra)

Prime CBD office rents (net effective)

Source: Jones Lang LaSalle, ANZ Research

slide33

Yields should tighten as sell off was ‘overdone’ relative to fundamentals

Office

Sources: Property Council/IPD, ANZ Economics and Markets Research, RBA

summary34
Summary

Global risks high and markets priced for Armageddon

  • Asset market opportunities?
  • Incentives high to avoid meltdown

Australia will out-perform

  • Resource/infrastructure investment boom
  • Growth at trend or above, low unemployment?
  • Two speed

Housing sentiment soft but fundamentals strong

  • Sentiment toxic but affordability has improved
  • Housing shortage will become critical – rents will rise
  • Investors & first homebuyers will return to market
  • Commercial property very well placed
  • Tight vacancy, solid demand, restricted supply
  • Rents to rise, yields compress
  • Retail will under-perform
slide35

Disclaimer

This material provides general information current at the time of publication. This material does not take into account your personal needs, financial circumstances or objectives. Terms and Conditions, fees and charges apply to products and services listed. ANZ Private Bankers and ANZ Private Advisors are representatives of Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522, the holder of an Australian Financial Services Licence. Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522.