Docstoc

Economic and Financial Outlook for

Document Sample
Economic and Financial Outlook for Powered By Docstoc
					Economic and Property
              update
                   Paul Braddick
       ANZ Banking Group Limited
                           Perth
                    November 2011
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

                                Page 1 of 34
Debt overhang a key structural constraint for
many key developed economies for years to come
                                                    Fiscal & Debt position
                         140
                                                                                              Japan
                                                                                 Greece

                         120

                                             Italy
                         100
 Net Debt % GDP, 2011f




                                          Belgium
                         80
                                                                        Portugal                      US
                                                                                                            Ireland
                                                            France
                                                                                                UK
                         60

                                       Germany
                                                                               Spain
                         40
                                                               Canada


                         20
                                       Australia

                                                     Denmark                                   NZ
                          0
                               0   2                 4                  6                 8            10             12

                                                         Fiscal Deficit % GDP, 2011f



                                                                Page 2 of 34
      The next ‘I’ in PIIGS

          Italy 10-year bond yields                                         Italian debt scenarios
                                                                 150
    7.5


     7

                                                                 140
    6.5                                                                                  7% interest rate




                                              Debt as % of GDP
     6
                                                                 130
%




    5.5                                                                                         6% interest rate


     5
                                                                 120

    4.5
                                                                                        IMF baseline
     4
                                                                 110

    3.5


      3                                                          100
     Jan-09   Oct-09   Jul-10   Apr-11                                 00     04   08      12        16      20



                                         Page 3 of 34
 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.
                                       Page 4 of 34
       Don’t forget India (steel production and coal demand
       set to rise sharply)
                                       India & China Coal/Port Map




                                   Coal deposits                           Coal deposits
                                   Capesize Ports                          Capesize Ports
                                                                           \

                                                                           ]




                                   New Capesize Ports
                                   s                                       High consuming regions
                                   UMPPs (4GW)
                                   High consuming regions




Source: ANZ, AME, Wood Mackenzie                            Page 5 of 34
       Mining investment boom has not (yet) been
       interrupted by global events
                                             Private business capital expenditure
                             80
                                       Mining
                                                                             New projects advanced since
                             70        Manufacturing                         September include the $29bn
                                                                            Wheatstone LNG project and the
                                       Construction                         $27bn Olympic Dam expansion
                             60
                                       Transport and storage
         $bn p.a., nominal




                             50        Property and business services

                                       Wholesale & retail
                             40
                                       Finance and Other Services

                             30


                             20


                             10


                             0
                             00-01   01-02   02-03    03-04   04-05   05-06     06-07   07-08   08-09   09-10   10-11    11-12
           Estimates based on 5 year average realisation ratios                                                         (est. 3)



Source: ABS                                                           Page 6 of 34
        Australia heading towards above trend growth but
        near-term labour market outlook uncertain
                             GDP growth                                           Unemployment rate
                                                                        11   %                              Forecasts
    5     ann. % change                             Forecasts

                                        potential                       10
                                        economic
    4                                    growth
                                                                        9

                                                                        8
    3
                                                                        7

    2                          Gross
                             domestic                                   6
                              product
                                                                        5
    1
                                                                        4

    0                                                                   3
          04     05     06    07   08    09   10    11   12                  92    95   98   01   04   07    10    13


Sources: ABS, ANZ Research                               Page 7 of 34
        ‘Underlying’ inflation back in target range but growth
        expected to accelerate and capacity tight
                                             Consumer price inflation
  4.0     % change from year earlier                          5      % change from year earlier
            (6 month annualised)
                              'Core' inflation
  3.5
                                                                                           'core' inflation
                                  previous
                                                              4
                                                                                                              ANZ
  3.0                                                                                                       forecast


  2.5                                                         3
                                                new


  2.0

                                                              2

  1.5                                                                                         'Headline'

                                                                      RBA target band
  1.0                                                         1
                 09                10            11                  05   06   07   08   09       10   11   12   13


Sources: ABS, RBA, ANZ Research                       Page 8 of 34
       RBA forced off the fence by deepening European
       crisis and soft domestic activity
                                        ‘Market pricing’ of cash rate changes
     8 %

                                                     RBA cash rate
     7


     6


     5
                                                                                                       ANZ
     4

                                                                                                      Current
     3                                                                                                market
                                                                                                      pricing

     2


     1
         99      00       01       02     03   04   05      06          07   08   09   10   11   12


Sources: Bloomberg, RBA, ANZ Research
                                                         Page 9 of 34
          Two speed economy re-emerging – driven by
          surging business investment and wages
                 Business investment                              Average compensation of
     35     ann % ch                                        14
                                                                        employees
                                                                  ann % ch
                                                                                            WA
                                            Qld
     30
                                                            12
     25

                                                            10
     20
                                              WA
     15                                                       8                              Qld

     10
                                                  SA
                                                              6
      5
                                             NSW
                                                                                            NSW
      0                                                       4
                                                                                              Vic
     -5                                      Vic              2
    -10                                                                                     SA
                                                              0
    -15

    -20                                                      -2
               07            08   09   10         11                07       08   09   10         11



Sources: ABS, ANZ Research                        Page 10 of 34
                         Net overseas migration rebounding…
                                              Net overseas migration
                         400
                                                                             Net Movements
                         350


                         300
                                                                                                             ANZ
    Annualised - 000's




                         250                                                                               forecast


                         200


                         150
                                                                                  Net Overseas Migration
                                                                                                        Access
                                                                                                      Economics
                         100                                                                           forecast

                         50


                          0
                               01   02   03   04   05      06           07   08     09       10      11



Sources: ABS, ANZ Research                              Page 11 of 34
        …but the number of Australians travelling overseas
        has accelerated sharply
                Short term arrivals and                                    Net overseas tourist flow
   8    millions p.a.
                      departures                                2.0     millions p.a.


   7
                                     departures                 1.5


                                                                1.0
   6

                                                 arrivals       0.5
   5

                                                                0.0
   4
                                                              -0.5
   3
                                                              -1.0

   2
                                                              -1.5

   1                                                          -2.0


   0                                                          -2.5
       95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11              95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11



Source: ABS, ANZ Research                              Page 12 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 13 of 34
                                                   Recent housing data and market sentiment weak
                                                   Auction clearance rates (LHS) and auction sales (RHS)                                                                                                                                                                                                       Mortgage delinquencies
                                                   90                                                                                                            1000
                                                                                                                                                                                                                                                                           1.00




                                                                                                        Cumulative weekly average numbers of sales at auctions
                                                   80                                                                                                            900                                                                                                       0.90

                                                                                                                                                                 800                                                                                                       0.80
                                                   70




                                                                                                                                                                                                                                      Mortgage Delinquencies - 90+ (%)
                                                                                                                                                                 700                                                                                                       0.70
                               Cleareance rate %




                                                   60

                                                                                                                                                                 600                                                                                                       0.60
                                                   50
                                                                                                                                                                 500                                                                                                       0.50
                                                   40
                                                                                                                                                                 400                                                                                                       0.40

                                                   30
                                                                                                                                                                 300                                                                                                       0.30

                                                   20                                           2009                                                                                                                2009
                                                                                                                                                                                                                                                                           0.20
                                                                                                2010                                                             200                                                2010                                                                                                                           NSW & ACT           VIC
                                                                                                2011                                                                                                                2011                                                                                                                           QLD                 WA
                                                   10                                                                                                                                                                                                                      0.10                                                                    Australia           TAS
                                                                                                                                                                 100                                                                                                                                                                               SA
                                                                                                                                                                                                                                                                           0.00
                                                   0                                                                                                                0
                                                    Jan           Apr        Jul          Oct                                                                        Jan              Apr         Jul        Oct                                                                          Oct-05     Jul-06   Apr-07   Jan-08    Oct-08   Jul-09     Apr-10        Jan-11    Oct-11

                                                         House prices (LHS) and Finance approvals (RHS)                                                                                                                                                                                                                 Days on market
                             200                                                                                                                                 170                                                                                                                      140
                                                                                                                                                                                WA (-2.9%)
                                                                                                                                                                 160
                                                                                    Perth (-5.4%)                                                                                                                       VIC (-4.2%)
                                                                                                                                                                                                                                                                                          120
                             180
                                                                                                                                                                 150

                                                                                                                                                                                                                                                                                          100
 Index, January 2005 = 100




                                                                                                       Index, January 2005 = 100




                             160                                                                                                                                 140
                                                                      Melbourne (-4.9%)                                                                                                                                                                                  Days on market
                                                                                                                                                                 130                                                                                                                       80
                                                                 Adelaide (-3.7%)
                             140
                                                                                                                                                                 120
                                                                                                                                                                                                                                                                                           60
                                                                                    Brisbane (-7.1%)
                             120                                                                                                                                 110
                                                                                                                                                                                                                                                                                           40
                                                                                                                                                                 100
                             100                                                                                                                                                                                                                                                                               Inner Sydney
                                                                                      Sydney (-2.2%)                                                                         SA (-10.8%)                                                                                                   20
                                                                                                                                                                  90
                                                                                                                                                                                                                                                                                                               Inner Melbourne
                                                                                                                                                                                                                    QLD (-5.9%)                                                                                Inner Brisbane
                                                                                                                                                                                                   NSW (-1.2%)
                                                        * Annual % C hange                                                                                                   * Annual % C hange                                                                                                                Central Perth
                             80                                                                                                                                   80                                                                                                                        0
                                         05               06     07     08     09      10       11                                                                      05       06         07    08    09         10      11                                                                   06            07            08             09                 10               11




Sources: ANZ, ABS                                                                                                                                                                                                   Page 14 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 15 of 34
       All of the growth in house prices since mid-1980s
       explained by rising incomes & lower interest rates
                                  Median house price vs. purchasing power
                   $'000
      600
                                                                                      Actual house
                                                                                         prices
      500


      400
                                            Purchasing power -
                                            income growth and
      300                                   interest rates*


      200


      100


          0
              86       88         90   92   94    96        98         00   02   04   06    08       10

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


Sources: ABS, RBA, ANZ Research                        Page 16 of 34
       All of the growth in house prices since mid-1980s
       explained by rising incomes & lower interest rates
                           Perth median house price vs. purchasing power
                   $'000
      600
                                                                                      Actual house
                                                                                         prices
      500


      400
                                            Purchasing power -
                                            income growth and
      300                                   interest rates*


      200


      100


          0
              86       88         90   92   94    96        98         00   02   04   06    08       10

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


Sources: ABS, RBA, ANZ Research                        Page 17 of 34
        New home building will remain well below
        underlying demand in the years ahead
                             Population growth vs. dwelling completions
    500      ‘000                                                                 ‘000 225
                                                             Annual population
    450                                                          gain (lhs)
                                                                                        200
    400

    350
                                                                                        175

    300

                                                                                        150
    250

    200                                                              Annual dwelling
                                                                    completions (rhs)   125
    150

    100                                                                                 100
          76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14



Sources: ABS, ANZ Research                   Page 18 of 34
       Unprecedented housing shortage – will continue to
       deteriorate
                                       Housing market balance

     480 ‘000
     440
     400
     360
     320
     280
     240
     200                                                         Underlying demand
     160
                                                                       Completions
     120
       80                                                          Shortage
       40
         0
      -40
      -80                    Surplus
              86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15


Sources: ABS, ANZ Research
                                                 Page 19 of 34
       The housing shortage has already reached
       unprecedented levels – and will get much worse!
                                                   WA housing market balance

       70 ‘000

       60

       50

       40
                                                                           Underlying demand
       30

       20
                                                                             Completions
       10                               Shortage

         0

      -10
                                        Surplus
      -20
              86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15


Sources: ABS, ANZ Economics and Markets Research
                                                           Page 20 of 34
         Vacancies tight and will tighten further

                             Residential vacancy rate
     6      %



     5

                                                        Long-term      Perth
     4                                                   average


     3


     2                                                              Melb.

                                                                            Syd.
     1
                                                                      Adel

     0
         91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10


Source: REIA, ANZ Research
                                    Page 21 of 34
        Movements in real rents reflect a widening
        structural shortage of rental properties
                                                    CPI: Rents vs. total
                  Index 1972=100                                                                      000s
      1000                                                                                                         500
                                                                                              Rents
        900                                                                                   (lhs)
                                                                                                                   400
        800                                                                                            CPI
                                                                                                      (lhs)        300
        700

        600
                                                                                                                   200
        500
                                                                                                                   100
        400

        300                                                                                                        0
                                                                               Housing
        200                                                                    market
                                                                               balance                             -100
        100
                                                                                (rhs)
            0                                                                                                      -200
                83      85       87       89   91   93   95    97         99   01   03   05   07      09      11


Sources: RP Data-Rismark, Residex & ABS                   Page 22 of 34
        Perth rents re-accelerating

                                           Rents: average vs. marginal
              ann. % ch.
      35

      30                                                               Advertised rents
                                                                            (lhs)
      25

      20

      15
                                                                                    Rents
                                                                                     CPI
      10                                                                            (lhs)

        5

        0

      -5
            01                        03         05                   07           09       11


Sources: Residex, ABS, ANZ Research                   Page 23 of 34
        House prices have eased lower in most capital cities
                                                    Median house prices
 230 index Dec 2004=100                                               230 index Dec 2004=100
 220                                                                                           Darwin
                                                                      220                     (-3.7%)*
 210          * peak to Sep 2011                                      210
 200                                                                  200
 190                                                                  190                                 Perth
 180                                             Melb.                                                  (-7.2%)*
                                                                      180
 170                                           (-5.5%)*
                                                                      170
 160                                                                  160
 150                         Bris.
                                                                      150
                           (-8.6%)*
 140                                                                  140                                 Adel.
 130                                                                  130
                                                                                                        (-4.8%)*
 120                                        Syd.                      120
 110                                     (-2.5%)*                     110
 100                                                                  100
   90                                                                     90
             05       06        07        08   09    10                        05   06   07   08   09    10


Sources: RP Data-Rismark, ANZ Research                    Page 24 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 25 of 34
       New non-res. building activity has slumped -
       supply additions will be limited
                                      Non-res. building approvals*
                             Retail                                                         Office
 7    2008-09 $bn                                                12    2008-09 $bn
 6                                                               10
 5
                                                                  8
 4
                                                                  6
 3
                                                                  4
 2
 1                                                                2
 0                                                                0
       02     03   04   05    06      07   08   09   10    11          02    03   04   05    06   07   08   09   10   11

                         Industrial                                                    Hotel etc
 6    2008-09 $bn                                                2.5   2008-09 $bn
 5
                                                                 2.0
 4
                                                                 1.5
 3
                                                                 1.0
 2
 1                                                               0.5

 0                                                               0.0
       02     03   04   05    06      07   08   09   10    11           02   03   04   05    06   07   08   09   10   11

  * Annualised Trend
Source: ABS                                           Page 26 of 34
         Retail property has consistently outperformed
         office and industrial markets but…
                Capital return index                                  Total returns year to Sept 11
          Index, March 2005 = 100                                     % p.a.
   140
                                                              16                    capital
                                        Office
                                      (-17.2%)*
                                                              14
   130
                                                                                    income
                                                              12

                                              Retail
   120                                      (-10.9%)*         10


                                                                8

   110                                          Hotel
                                             (-17.1%)*          6


                                                                4
   100

                                              Industrial        2
              * Peak to trough               (-19.8%)*
    90                                                          0
         05       06     07      08    09     10     11
                                                                        hotel   office        retail   indust



Source: IPD                                           Page 27 of 34
      …questions over strength of future retail demand
                      Retail turnover                                       Internet sales leakage
10    ann. % ch
                                                                            - long-run implications for high
 8                                                                            margin/generic retail
 6
                                                                            Increased tourist $ offshore &
 4
                                                                              slow inbound tourist $
 2
                                                                            - strong A$ (may get stronger!)
 0
          02    03    04    05    06    07    08    09    10    11          Slowdown in net o/s migration
                                                                            - temporary (tight labour market,
                Household savings rate                                        skilled labour shortages)
20    ratio


15
                                                                            Increased household caution
                                                                            - GFC related fear/wealth declines
10                                                                          - return to more ‘normal’ savings
                                                                            - deposit war/special rates
5
                                                                            Sales should grow with income
0
                                                                            - Solid income growth…
-5                                                                          - …but sentiment soft and RBA…
     60    65    70    75    80    85    90    95    00    05    10

                                                                 Page 28 of 34
       Office vacancies improving (even Bris. & Perth)
                                                     CBD office vacancy rates
30      %                                                                    30      %


25                                                                           25               Perth
                      Melbourne


20                                                                           20
                                                                                                      Adelaide

15                                                                           15
                                                Sydney
10                                                                           10


  5                                                                                      Hobart
                                                                               5

                                      Brisbane
  0                                                                            0
      90         94          98           02           06       10                 90    94     98      02       06   10


Source: Property Council of Australia, ANZ Research forecasts        Page 29 of 34
         Incentives remain unusually high relative to vacancy
         – will correct at some point
                                Sydney CBD office: incentives vs. vacancy
   90 % face rent                                                               %   25

   80
                                                                                    20
   70

   60
                                                                                    15
   50                                                                 Vacancy
                                           Incentives (lhs)
                                                                       (rhs)
   40
                                                                                    10
   30

   20
                                                                                    5
   10

     0                                                                              0
         89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10



Source: Jones Lang LaSalle, ANZ Research              Page 30 of 34
           Office rents appear to have bottomed (ex Canberra)

                                      Prime CBD office rents (net effective)
   900      net average $ per sqm                                         900        net average $ per sqm

   800                                     Brisbane                       800

   700                                                                    700

   600                                                                    600
                                                                                                                             Perth
   500                          Sydney                                    500

   400                                                                    400
                                                                                                                   Canberra
   300                                                                    300
                                                  Melbourne
   200                                                                    200
                                                                                                                   Adelaide
   100                                                                    100

       0                                                                         0
            02     03     04    05     06    07   08   09   10     11                02   03   04   05   06   07   08   09   10   11




Source: Jones Lang LaSalle, ANZ Research                         Page 31 of 34
        Yields should tighten as sell off was ‘overdone’
        relative to fundamentals
  10      %                                                            Office
   9
                                                                    prime office yield
   8
   7
   6
   5
   4
   3                                 Risk-free benchmark
   2                                   (indexed bond rate)
   1
   0
        87        89          91          93          95          97          99       01   03   05   07   09   11
    5        %                                         Office property risk premium
    4
                                                         long-run average
    3

    2

    1

    0
        87         89          91          93          95         97          99       01   03   05   07   09   11


Sources: Property Council/IPD, ANZ Economics and Markets Research, RBA Page 32 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



                                Page 33 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 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.




                                      Page 34 of 34

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:7/4/2012
language:English
pages:35