Australia | Mar 16 2009
By Chris Shaw
With 2009 expected to be a tougher year for the Australian economy than was the case in 2008 economists see the unemployment rate in Australia trending higher, with estimates suggesting a rate of around 6.5% (or higher) by the end of the year is likely.
The good news according to ANZ Banking Group is, even allowing for higher unemployment, Australian house prices should remain well supported thanks to the shortage of available housing that has already pushed rents and prices significantly higher in recent years.
Paul Braddick, the bank’s head of property and financial system research, points out Australian housing market conditions are far different from overseas markets thanks in large part to more conservative lending practices by domestic banks and financial institutions.
As well, the fact there has been such a shortage of available properties in the Australian market stands in stark contrast to the oversupply of properties that have driven prices sharply lower in the US in particular. This trend should continue in Braddick’s view as sharp falls in building approvals in recent months suggest a further fall in Australian housing supply in coming months.
Braddick estimates underlying demand currently stands at around 180,000 properties per year while the latest data indicate completions in 2009/10 could fall to less than 120,000 properties. Even if immigration is cut back to deal with rising unemployment, Braddick estimates demand would still be around 150,000 properties and on his numbers by the middle of next year there could be an underlying shortage of as much as 250,000 properties across Australia.
At the same time affordability has improved substantially on the back of falling interest rates and the extention and expansion of the first home buyers grant scheme. This has combined to generate a bounce in housing finance commitments in recent months and while this doesn’t signal a rebound in house prices in coming months, it does suggest to Braddick prices will bottom in the second half of this year unless there is a further significant deterioration in the Australian economy overall.
This means while residential property prices have fallen by 3.8% on average since peaking early in 2008, the scope for additional downside is limited, with Braddick expecting a peak to trough decline of around 6%. This compares more than favourably to the more than 50% fall in equity values since the onset of the global financial crisis.
The outlook for commercial property is less positive in the bank’s view as additional capacity and softening tenant demand are generating an increase in sub-lease vacancies and forcing property owners to increase the incentives on offer.
The risk in the bank’s view is the market’s fundamentals deteriorate further, with scope for a further rise in capitalisation rates and a fall in rental expectations. This is particularly the case in the Brisbane and Perth markets, where rents soared in recent years on the back of the commodities boom, but where market and economic conditions are now significantly less supportive.
Brisbane in particular looks set to undergo a significant adjustment in the bank’s view as there is record supply coming onto the market this year. At present there are only commitments for two-thirds of this amount and this should push CBD vacancies to around record levels, pushing up incentives and pushing down rents.
In contrast the Sydney and Melbourne markets have not seen anything like the same level of stimulus given the lesser direct exposure of these states to the commodities boom. Hence why both markets are fundamentally in better shape. This suggests while capital values should continue to fall slightly the lack of any significant rental increases in recent years will limit the downside in both markets.
Poor consumer sentiment has weighed on the retail property market since early 2008 and this has led to a softening in retail yields. With rents only rising slightly over the same period, the bank suggests this indicates significant declines in capital values. Given the current economic climate the bank expects both rental growth and yields will soften further through 2009.
In the tourist sector the bank sees growth prospects as poor. Demand is weakening at the same time as growth in room and bed numbers was above its five-year average growth rate. With leisure travel being hit by lower consumer spending and business travel to be impacted by the economic downturn there appear few reasons for an improvement in conditions in coming months.
The industrial property market will be hit hard by the economic downturn as the bank notes demand is under significant pressure, particularly as the weaker economy is causing a run-down in inventories, so reducing the need for warehousing space.
While the last couple of years saw significant increases in total available space, the bank points out a number of projects have now been put on hold given the state of the economy, with the greatest impact being on speculative developments.
Supply is already ample given the strong development work undertaken in recent years and this is pushing down market rents and capital values. Risk remains to the downside in the bank’s view as the weak economy may result in some forced sales, so pushing capital values down further.
