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

November 2011

Economic and Property update

Paul BraddickANZ Banking Group Limited

Perth

of 34

SummaryMarkets 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

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SpainGermany

Canada

NZ

Belgium

Denmark

Greece

Ireland

Italy

J apan

Portugal US

FranceUK

Australia

0

20

40

60

80

100

120

140

0 2 4 6 8 10 12

Fiscal Deficit % GDP, 2011f

Net

Debt

% G

DP

, 2011f

Debt overhang a key structural constraint for many key developed economies for years to come

Fiscal & Debt position

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Italy 10-year bond yields Italian debt scenarios

The next ‘I’ in PIIGS

3

3.5

4

4.5

5

5.5

6

6.5

7

7.5

Jan-09 Oct-09 Jul-10 Apr-11

%

100

110

120

130

140

150

00 04 08 12 16 20

Debt

as

% o

f G

DP

7% interest rate

6% interest rate

IMF baseline

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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.

China growth story is structural and ongoing

of 34Source: ANZ, AME, Wood Mackenzie

India & China Coal/Port Map

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

Coal deposits

\Capesize Ports]

High consuming regions

Coal deposits

Capesize Ports

s New Capesize Ports

UMPPs (4GW)

High consuming regions

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Private business capital expenditure

0

10

20

30

40

50

60

70

80

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12(est. 3)

Mining

Manufacturing

Construction

Transport and storage

Property and business services

Wholesale & retail

Finance and Other Services

$bn p

.a.,

nom

inal

Estimates based on 5 year average realisation ratios

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

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GDP growth Unemployment rate

3

4

5

6

7

8

9

10

11

92 95 98 01 04 07 10 13

% Forecasts

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

Sources: ABS, ANZ Research

0

1

2

3

4

5

04 05 06 07 08 09 10 11 12

ann. % change

Gross domestic product

potential economic growth

Forecasts

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1

2

3

4

5

05 06 07 08 09 10 11 12 13

% change from year earlier

'Headline'

'core' inflation

RBA target band

ANZ forecast

Consumer price inflation

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

Sources: ABS, RBA, ANZ Research

1.0

1.5

2.0

2.5

3.0

3.5

4.0

09 10 11

% change from year earlier (6 month annualised)

'Core' inflation

previous

new

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1

2

3

4

5

6

7

8

99 00 01 02 03 04 05 06 07 08 09 10 11 12

%

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

of 34

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

-20

-15

-10

-5

0

5

10

15

20

25

30

35

07 08 09 10 11

ann % chQld

Vic

NSW

WA

SA

Business investment


-2

0

2

4

6

8

10

12

14

07 08 09 10 11

ann % ch

Qld

Vic

NSW

WA

SA

Average compensation of employees

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Net overseas migration rebounding…

Net overseas migration

Access Economics

forecast

ANZ forecast


0

50

100

150

200

250

300

350

400

01 02 03 04 05 06 07 08 09 10 11

Annualis

ed -

00

0's

Net Movements

Net Overseas Migration

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0

1

2

3

4

5

6

7

8

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

millions p.a.

Source: ABS, ANZ Research

…but the number of Australians travelling overseas has accelerated sharply

Short term arrivals and departures

arrivals

departures

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

millions p.a.

Net overseas tourist flow

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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

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

House prices (LHS) and Finance approvals (RHS) Days on market

Sources: ANZ, ABS

80

100

120

140

160

180

200

05 06 07 08 09 10 11

Index,

January

2005 =

100

Sydney (- 2.2%)

Melbourne (- 4.9%)

Brisbane (- 7.1%)

Perth (- 5.4%)

Adelaide (- 3.7%)

* Annual % Change

80

90

100

110

120

130

140

150

160

170

05 06 07 08 09 10 11

Index,

January

2005 =

100

VIC (- 4.2%)

SA (- 10.8%)

WA (- 2.9%)

NSW (- 1.2%)QLD (- 5.9%)

* Annual % Change0

20

40

60

80

100

120

140

06 07 08 09 10 11

Inner SydneyInner MelbourneInner BrisbaneCentral Perth

Days

on m

ark

et

0

10

20

30

40

50

60

70

80

90

Jan Apr J ul Oct

200920102011

Cle

are

an

ce r

ate

%

0

100

200

300

400

500

600

700

800

900

1000

Jan Apr J ul Oct

200920102011

Cu

mula

tive w

eek

ly a

vera

ge

num

bers

of

sale

s at

au

ctio

ns

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Oct-05 J ul-06 Apr-07 J an-08 Oct-08 J ul-09 Apr-10 J an-11 Oct-11

NSW & ACT VICQLD WAAustralia TASSA

Mort

gage D

elin

qu

en

cies

- 9

0+

(%

)

Recent housing data and market sentiment weak

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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

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0

100

200

300

400

500

600

86 88 90 92 94 96 98 00 02 04 06 08 10

$'000


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

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0

100

200

300

400

500

600

86 88 90 92 94 96 98 00 02 04 06 08 10

$'000


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

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100

150

200

250

300

350

400

450

500

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

100

125

150

175

200

225

Population growth vs. dwelling completions

Annual dwelling completions (rhs)

Annual population gain (lhs)

‘000 ‘000


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

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-80

-40

0

40

80

120

160

200

240

280

320

360

400

440

480

8687 8889 9091 92 9394 9596 9798 9900 0102 0304 0506 07 0809 1011 1213 1415

Housing market balance

Shortage

Underlying demand

Surplus

Completions

Unprecedented housing shortage – will continue to deteriorate

‘000


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-20

-10

0

10

20

30

40

50

60

70

8687 88 8990 91 9293 94 9596 9798 99 0001 02 0304 0506 07 0809 10 1112 13 1415

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

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0

1

2

3

4

5

6

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

%

Source: REIA, ANZ Research

Vacancies tight and will tighten further

Residential vacancy rate

Long-term average

Melb.

Syd.

Adel

Perth

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0

100

200

300

400

500

600

700

800

900

1000

83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

-200

-100

0

100

200

300

400

500Index 1972=100

Rents(lhs)

CPI(lhs)

Housing market balance

(rhs)

000s

Sources: RP Data-Rismark, Residex & ABS

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

CPI: Rents vs. total

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-5

0

5

10

15

20

25

30

35

01 03 05 07 09 11

ann. % ch.

Advertised rents(lhs)

Rents CPI

(lhs)

Sources: Residex, ABS, ANZ Research

Perth rents re-accelerating

Rents: average vs. marginal

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House prices have eased lower in most capital cities

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

05 06 07 08 09 10

index Dec 2004=100

Syd.(-2.5%)*

Melb.(-5.5%)*

Bris.(-8.6%)*

* peak to Sep 2011

Sources: RP Data-Rismark, ANZ Research

Median house prices

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

05 06 07 08 09 10

index Dec 2004=100Darwin

(-3.7%)*

Adel.(-4.8%)*

Perth(-7.2%)*

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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

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0

1

2

3

4

5

6

7

02 03 04 05 06 07 08 09 10 11

2008-09 $bn

Non-res. building approvals*

Source: ABS

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

Retail Office

Hotel etcIndustrial

* Annualised Trend

0

2

4

6

8

10

12

02 03 04 05 06 07 08 09 10 11

2008-09 $bn

0

1

2

3

4

5

6

02 03 04 05 06 07 08 09 10 11

2008-09 $bn

0.0

0.5

1.0

1.5

2.0

2.5

02 03 04 05 06 07 08 09 10 11

2008-09 $bn

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Retail property has consistently outperformed office and industrial markets but…

0

2

4

6

8

10

12

14

16

hotel office retail indust

% p.a.

capital

income

Total returns year to Sept 11

Source: IPD

90

100

110

120

130

140

05 06 07 08 09 10 11

Index, March 2005 = 100

Capital return index

Retail (-10.9%)*

Office (-17.2%)*

Industrial (-19.8%)** Peak to trough

Hotel (-17.1%)*

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…questions over strength of future retail demand

-5

0

5

10

15

20

60 65 70 75 80 85 90 95 00 05 10

ratio

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

0

2

4

6

8

10

02 03 04 05 06 07 08 09 10 11

ann. % ch

Retail turnover

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0

5

10

15

20

25

30

90 94 98 02 06 10

%

Adelaide

Perth

Hobart

0

5

10

15

20

25

30

90 94 98 02 06 10

%

Sydney

Brisbane

Melbourne

CBD office vacancy rates

Source: Property Council of Australia, ANZ Research forecasts

Office vacancies improving (even Bris. & Perth)

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

Source: Jones Lang LaSalle, ANZ Research

Sydney CBD office: incentives vs. vacancy

0

10

20

30

40

50

60

70

80

90

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

5

10

15

20

25% face rent

I ncentives (lhs) Vacancy (rhs)

%

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Office rents appear to have bottomed (ex Canberra)

Source: Jones Lang LaSalle, ANZ Research

0

100

200

300

400

500

600

700

800

900

02 03 04 05 06 07 08 09 10 11

net average $ per sqm

Sydney

Brisbane

Melbourne

0

100

200

300

400

500

600

700

800

900

02 03 04 05 06 07 08 09 10 11

net average $ per sqm

Canberra

Perth

Adelaide

Prime CBD office rents (net effective)

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0123456789

10

87 89 91 93 95 97 99 01 03 05 07 09 11

%

Risk-free benchmark(indexed bond rate)

prime office yield

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

0

1

2

3

4

5

87 89 91 93 95 97 99 01 03 05 07 09 11

% Office property risk premium

long-run average

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

Office

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SummaryGlobal 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

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DisclaimerThis 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.

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

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