Australia and New Zealand Banking : Property sector confidence eases, but remains buoyant

ANZ RESEARCH

PCA-ANZ PROPERTY SURVEY

AUSTRALIAN ECONOMIC UPDATE

10 JULY 2014

CONTRIBUTORS

Warren Hogan

Chief Economist

+61 2 8037 0063

+61 4 1449 8675

Warren.Hogan@anz.com

David Cannington

Senior Property Analyst

+61 3 8655 9036

David.Cannington@anz.com

• The Australian Property Confidence Index fell 1 point to 131 in the September Quarter.

While this is down from the high of 140 in Q1 of this year, it remains higher than a year ago (121) and well above the levels recorded for much of the past three years (see Figure 1). Confidence across the residential and non-residential property sectors remains strong, is more positive than broader business confidence, and is in stark contrast to the recent weakness in consumer confidence.

• NSW remains the stand out State for property industry confidence. It rose 3 points to 143 and is just shy of the high of 147 recorded in Q1. Confidence in Queensland and Tasmania also rose in the quarter and both States have index readings above the national average (see Figure 1). The ACT is the only region experiencing soft confidence with an index reading of 101. Most indicators of confidence and activity in the ACT weakened in the quarter, consistent with the reception to the Commonwealth Budget delivered in May.

• The survey shows some moderation in housing market sales in recent months.

Nonetheless, the housing market outlook remains positive, reflecting elevated auction clearance rates and home sales, solid house price gains and strong dwelling approvals. In addition, the latest Property Council-ANZ Survey also reveals solid foreign investor housing sales, particularly in New South Wales and Victoria.

• The detail within the report remains strong. All questions relating to firms' own activity,

such as hiring intentions and forward work schedule, are all at high levels. This is consistent with expected strong construction activity in the major metropolitan centres over the next year. This should support employment growth and eventually a broadening of the non-mining recovery.

COMMENT

"Confidence across the property industry hardly moved at all through the winter months and remains at a high level. With hiring intentions and work yet to be done still strong, the survey highlights the critical role the construction industry is playing in leading the recovery in the non-mining economy. We expect construction activity to take up some of the slack being generated by the downturn in mining and energy investment. This might be referred to as the first phase of the non-mining recovery. Phase two would be a broadening of non-mining business investment and job creation beyond construction. The residential sector is still the strongest part of the industry with construction activity and price expectations buoyant even though price expectations have softened this quarter in line with lower auction clearances. House prices now appear to be settling down to more sustainable growth rates. House prices are expected to rise over the next 12 months in every State except the ACT.

The industry uniformly expects the next move in interest rates to be up. The majority expect the RBA to raise interest rates within 12 months, in line with ANZ expectations. This is at odds with market pricing, which has a rate cut priced as the most likely next move. This expectation of rising interest rates across the property industry is unchanged over the last nine months."

TABLE 1. PROPERTY COUNCIL-ANZ PROPERTY CONFIDENCE SURVEY: SUMMARY INDICES

Prices Construction Work Schedule

Sep 13 121 14.3 28.8 3.6 38.1

Dec 13 132 41.8 53.2 12.6 29.9

Mar 14 140 46.4 63.8 18.2 25.7

Jun 14 132 42.0 64.3 21.6 29.9

Source: Property Council-ANZ

Australian Economic Update / 10 July 2014 / 2 of 11

ANALYSIS

However, the property sector maintains a broadly optimistic outlook for the coming year, driven largely by strong underlying housing market demand, a solid pipeline of building activity and expectations of further cyclical improvement in economic conditions.

prime office property, in particular, is expected to drive capital growth and yield compression in these markets.

FIGURE 1. PROPERTY INDUSTRY CONFIDENCE EASES, BUT REMAINS POSITIVE

160

150

140

130

120

110

100

90

80

70

Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14

NSW VIC QLD SA WA TAS NT ACT Australia

Source: Property Council-ANZ

Australian Economic Update / 10 July 2014 / 3 of 11

FIGURE 2. PROPERTY CONFIDENCE REMAINS WELL ABOVE BUSINESS SENTIMENT

50

40

30

20

10

0

-10

-20

-30

07 08 09 10 11 12 13 14

Property Council-ANZ property industry confidence

ACCI: composite index

NAB business confidence

NAB business conditions: finance, business & property

AIG PMI

Source: ACCI, AIG, NAB, Property Council-ANZ

FIGURE 3. RESIDENTIAL PROPERTY CONFIDENCE: COMPOSITE STATE INDICES

80

70

60

50

40

30

20

10

0

-10

-20

-30

Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14

NSW VIC QLD SA WA TAS NT ACT AUS

Source: ABS, Property Council-ANZ

FIGURE 4. HOUSING CONSTRUCTION OUTLOOK SOFTENS

70

60

50

40

30

20

10

0

07 08 09 10 11 12 13 14

Property Council-ANZ housing construction outlook ABS dwelling approvals (1 quarter ahead, RHS) ABS housing starts (RHS)

65

50

35

20

5

-10

-25

-40

Source: ABS, Property Council-ANZ

Australian Economic Update / 10 July 2014 / 4 of 11

FIGURE 5. COMMERCIAL PROPERTY CONFIDENCE: COMPOSITE INDICES

120

115

110

105

100

95

90

Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14

Composite commercial property Office property Retail property Industrial porperty Tourism property

Source: Property Council-ANZ

FIGURE 6. COMMERCIAL PROPERTY PRICE EXPECTATIONS VARY ACROSS SECTORS

40

30

20

10

0

-10

-20

-30

-40

NSW VIC QLD SA WA TAS NT ACT AUS Office Retail Industrial Tourism

Source: Property Council-ANZ

FIGURE 7. FOREIGN INVESTOR SALES STRONG IN NSW & VICTORIA

25

20

15

10

5

0

NSW VIC QLD SA WA TAS NT ACT AUS

Residential property Commercial property

Source: ABS, Property Council-ANZ

Australian Economic Update / 10 July 2014 / 5 of 11

TABLE 2. PCA-ANZ PROPERTY INDUSTRY CONFIDENCE INDEX - AUSTRALIA

index economic expectations expectations

Dec-11 104 -13.9 -10.4

Mar-12 107 -7.5 -41.7

Jun-12 113 -4.9 -13.4

Sep-12 106 -8.5 -47.7

Dec-12 102 -13.3 -34.4

Mar-13 107 -10.7 -47.6

Jun-13 124 5.9 -7.0

Sep-13 121 6.0 -28.2

Dec-13 132 28.6 -4.8

Mar-14 140 23.6 4.9

Jun-14 132 14.3 7.5

Sep-14 131 7.6 7.0

* Property Industry Confidence indexed to base of 100.

TABLE 3. PROPERTY INDUSTRY EXPECTATIONS - AUSTRALIA Year Ahead Expectations

TABLE 4. CAPITAL VALUE EXPECTATIONS - AUSTRALIA

TABLE 5. CONSTRUCTION ACTIVITY EXPECTATIONS - AUSTRALIA Year Ahead Construction Expectations

Australian Economic Update / 10 July 2014 / 6 of 11

TABLE 6. PCA-ANZ PROPERTY INDUSTRY CONFIDENCE INDEX - STATES AND TERRITORIES Property Industry Confidence Index

* Property Industry Confidence indexed to base of 100.

TABLE 7A. PROPERTY INDUSTRY EXPECTATIONS - STATES AND TERRITORIES

Year Ahead Expectations

Staffing Level Forward Work Schedule Debt Finance Availability

New South Wales

Mar-13 3.1 31.6 2.0

Jun-13 10.5 45.0 11.4

Sep-13 8.4 45.3 8.7

Dec-13 19.4 39.9 14.3

Mar-14 23.7 35.9 15.3

Jun-14 29.6 39.4 12.8

Sep-14 22.7 39.0 12.4

Victoria

Mar-13 1.6 15.2 -0.6

Jun-13 7.3 31.7 8.4

Sep-13 4.4 31.8 4.4

Dec-13 11.9 25.9 10.3

Mar-14 16.8 24.0 8.8

Jun-14 24.7 26.2 10.6

Sep-14 23.1 30.7 6.7

Queensland

Mar-13 -1.8 19.0 0.1

Jun-13 1.1 33.0 9.2

Sep-13 -3.7 32.7 5.6

Dec-13 14.3 31.4 21.1

Mar-14 23.7 22.9 29.3

Jun-14 17.4 29.4 21.0

Sep-14 14.6 26.5 15.7

South Australia

Mar-13 1.8 19.5 -4.3

Jun-13 1.8 25.1 6.1

Sep-13 -2.7 25.7 1.6

Dec-13 1.4 15.9 4.3

Mar-14 10.9 10.1 9.7

Jun-14 4.8 11.5 4.0

Sep-14 5.8 9.9 3.8

Australian Economic Update / 10 July 2014 / 7 of 11

TABLE 7A (CONT). PROPERTY SECTOR EXPECTATIONS - STATES AND TERRITORIES Year Ahead Expectations

Australian Economic Update / 10 July 2014 / 8 of 11

TABLE 8. CAPITAL VALUE EXPECTATIONS - STATES AND TERRITORIES Year Ahead Capital Value Expectations

Australian Economic Update / 10 July 2014 / 9 of 11

TABLE 9. CONSTRUCTION ACTIVITY EXPECTATIONS - STATES AND TERRITORIES

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