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November 2011 Economic and Property update Paul Braddick ANZ Banking Group Limited Perth.

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Presentation on theme: "November 2011 Economic and Property update Paul Braddick ANZ Banking Group Limited Perth."— Presentation transcript:

1 November 2011 Economic and Property update Paul Braddick ANZ Banking Group Limited Perth

2 Page 1 of 34 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

3 Page 2 of 34 Debt overhang a key structural constraint for many key developed economies for years to come Fiscal & Debt position

4 Page 3 of 34 Italy 10-year bond yields Italian debt scenarios The next ‘I’ in PIIGS

5 Page 4 of 34 From today to 2025… 350 million more people will move to the cities – 103 million have moved since 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. China growth story is structural and ongoing

6 Page 5 of 34 Source: ANZ, AME, Wood Mackenzie India & China Coal/Port Map Don’t forget India (steel production and coal demand set to rise sharply)

7 Page 6 of 34 Private business capital expenditure Mining investment boom has not (yet) been interrupted by global events Source: ABS New projects advanced since September include the $29bn Wheatstone LNG project and the $27bn Olympic Dam expansion

8 Page 7 of 34 GDP growth Unemployment rate Australia heading towards above trend growth but near-term labour market outlook uncertain Sources: ABS, ANZ Research

9 Page 8 of 34 Consumer price inflation ‘ Underlying ’ inflation back in target range but growth expected to accelerate and capacity tight Sources: ABS, RBA, ANZ Research

10 Page 9 of 34 RBA forced off the fence by deepening European crisis and soft domestic activity ‘Market pricing’ of cash rate changes Current market pricing RBA cash rate ANZ Sources: Bloomberg, RBA, ANZ Research

11 Page 10 of 34 Two speed economy re-emerging – driven by surging business investment and wages Business investment Sources: ABS, ANZ Research Average compensation of employees

12 Page 11 of 34 Net overseas migration rebounding … Net overseas migration Access Economics forecast ANZ forecast Sources: ABS, ANZ Research

13 Page 12 of 34 Source: ABS, ANZ Research … but the number of Australians travelling overseas has accelerated sharply Short term arrivals and departures arrivals departures Net overseas tourist flow

14 Page 13 of 34 Housing market shaky, but fundamentals supportive Down, down, prices are down -Housing finance, auction clearance rates, house prices have 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

15 Page 14 of 34 Auction clearance rates (LHS) and auction sales (RHS) Mortgage delinquencies House prices (LHS) and Finance approvals (RHS) Days on market Sources: ANZ, ABS Recent housing data and market sentiment weak

16 Page 15 of 34 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 (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

17 Page 16 of 34 Sources: ABS, RBA, ANZ Research Actual house prices Purchasing power - income growth and interest rates* All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates Median house price vs. purchasing power * Represents the average households purchasing power over the median priced home

18 Page 17 of 34 Sources: ABS, RBA, ANZ Research Actual house prices Purchasing power - income growth and interest rates* All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates Perth median house price vs. purchasing power * Represents the average households purchasing power over the median priced home

19 Page 18 of 34 Population growth vs. dwelling completions Annual dwelling completions (rhs) Annual population gain (lhs) ‘000 Sources: ABS, ANZ Research New home building will remain well below underlying demand in the years ahead

20 Page 19 of 34 Housing market balance Shortage Underlying demand Surplus Completions Unprecedented housing shortage – will continue to deteriorate ‘000 Sources: ABS, ANZ Research

21 Page 20 of 34 WA housing market balance Shortage Underlying demand Surplus Completions The housing shortage has already reached unprecedented levels – and will get much worse! ‘000 Sources: ABS, ANZ Economics and Markets Research

22 Page 21 of 34 Source: REIA, ANZ Research Vacancies tight and will tighten further Residential vacancy rate Long-term average Melb. Syd. Adel Perth

23 Page 22 of 34 Sources: RP Data-Rismark, Residex & ABS Movements in real rents reflect a widening structural shortage of rental properties CPI: Rents vs. total

24 Page 23 of 34 Sources: Residex, ABS, ANZ Research Perth rents re-accelerating Rents: average vs. marginal

25 Page 24 of 34 House prices have eased lower in most capital cities Sources: RP Data-Rismark, ANZ Research Median house prices

26 Page 25 of 34 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

27 Page 26 of 34 Non-res. building approvals* Source: ABS New non-res. building activity has slumped - supply additions will be limited Retail Office Hotel etc Industrial * Annualised Trend

28 Page 27 of 34 Retail property has consistently outperformed office and industrial markets but… Total returns year to Sept 11 Source: IPD Capital return index Retail (-10.9%)* Office (-17.2%)* Industrial (-19.8%)* * Peak to trough Hotel (-17.1%)*

29 Page 28 of 34 …questions over strength of future retail demand 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 Retail turnover

30 Page 29 of 34 CBD office vacancy rates Source: Property Council of Australia, ANZ Research forecasts Office vacancies improving (even Bris. & Perth)

31 Page 30 of 34 Incentives remain unusually high relative to vacancy – will correct at some point Source: Jones Lang LaSalle, ANZ Research Sydney CBD office: incentives vs. vacancy

32 Page 31 of 34 Office rents appear to have bottomed (ex Canberra) Source: Jones Lang LaSalle, ANZ Research Prime CBD office rents (net effective)

33 Page 32 of 34 Sources: Property Council/IPD, ANZ Economics and Markets Research, RBA Yields should tighten as sell off was ‘overdone’ relative to fundamentals Office

34 Page 33 of 34 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

35 Page 34 of 34 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 , the holder of an Australian Financial Services Licence. Australia and New Zealand Banking Group Limited (ANZ) ABN


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