november 2011 economic and property update paul braddick anz banking group limited perth
TRANSCRIPT
November 2011
Economic and Property update
Paul BraddickANZ Banking Group Limited
Perth
Page 2 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
Page 3 of 34
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
Page 4 of 34
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
Page 5 of 34
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
Page 6 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
Page 7 of 34
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
Page 8 of 34
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
Page 9 of 34
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
Page 10 of 34
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
Page 11 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
Sources: ABS, ANZ Research
-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
Page 12 of 34
Net overseas migration rebounding…
Net overseas migration
Access Economics
forecast
ANZ forecast
Sources: ABS, ANZ Research
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
Page 13 of 34
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
Page 14 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
Page 15 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
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
Page 16 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 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
Page 17 of 34
0
100
200
300
400
500
600
86 88 90 92 94 96 98 00 02 04 06 08 10
$'000
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
Page 18 of 34
0
100
200
300
400
500
600
86 88 90 92 94 96 98 00 02 04 06 08 10
$'000
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
Page 19 of 34
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
Sources: ABS, ANZ Research
New home building will remain well below underlying demand in the years ahead
Page 20 of 34
-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
Sources: ABS, ANZ Research
Page 21 of 34
-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
Page 22 of 34
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
Page 23 of 34
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
Page 24 of 34
-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
Page 25 of 34
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%)*
Page 26 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
Page 27 of 34
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
Page 28 of 34
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%)*
Page 29 of 34
…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
Page 30 of 34
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)
Page 31 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
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)
%
Page 32 of 34
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)
Page 33 of 34
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
Page 34 of 34
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
Page 35 of 34
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