ANZ Housing Snapshot October 27 Housing shortage will rise to record level Market pressures are building Overview... 1... 2 New South Wales... 3 Victoria... Queensland... South Australia... 6 Western Australia... 7 Tasmania... 8 Australian Capital Territory... 9 Northern Territory...1. Annual % change Rental Growth... 3. Authors: Mr Ange Montalti Senior Economist, Financial System Analysis +61 3 9273 6288 Ange.Montalti@anz.com Stephanie Wayne Research Analyst +61 3 9273 7 Stephanie.Wayne@anz.com Paul Braddick Head of Financial System Analysis +61 3 9273 987 Paul.Braddick@anz.com 2. 97 98 99 1 2 3 6 7 The Australian economy is expected to continue to perform very strongly over the next year. An important driver of growth in recent years has been the very rapid growth in the price of and demand for commodities. This has filtered through to strong business investment and to consumers. Households remain confident and are voting with their wallets as incomes are supported by solid wages growth employment strength and personal income tax cuts. Recent global market volatility has prompted a re-pricing of risk and generated some liquidity issues in some markets, raising the average cost of finance. While there will be some stresses and possibly casualties in the sectors directly affected, this unsettling experience is unlikely to alter the generally favourable outlook for Australia s economic performance. With financial markets settling, the Reserve Bank is likely to focus once again on the inflationary outlook. There are still upside risks on this score. The economy is displaying considerable growth momentum, with non-farm GDP increasing by.2% over the year to June 27. The labour market continues to tighten and retail spending is up nearly 8% over the year to August 27. With core inflation already running in the top half of the Reserve Bank s target band, the risk of an upward surprise on the inflation front is real and hence the prospect of another interest rate rise within the next six months. Our Vision: For Economics@ANZ to be the most respected, sought-after and commercially valued source of economics research and information on Australia, New Zealand, the Pacific and Asia. While the housing market screams for more stock, interest rates and builder margin compression continue to delay recovery. Housing market pressures are building that will ultimately generate the much needed supply response and in the meantime will continue to drive rents and house prices higher.
ANZ Housing Snapshot - October 27 Housing update: Pent-up demand for housing has been building since 21. An extended period of monetary policy tightening, prohibitive development costs and caution among builders have capped construction activity, with number of residential building approvals remaining relatively static through 27 so far. Plotting future dwelling requirements against likely supply, points unquestionably to further rapid tightening in market conditions with another interest rate rise this cycle delaying building recovery. Strong household sector finances, rising employment and monthly housing finance approvals rocketing towards $2bn have been supporting house prices growth over the past year which has picked up nationally. Given strong economic and housing market fundamentals, the prices outlook remains solid which in conjunction with a further monetary tightening, will stretch affordability for new entrants. These difficult conditions are unlikely to fade until a significant supply-side response has worked through to restore balance. This is not likely until at least the turn of the decade. 2 1 1 ' 1 8 ' Private Building Approvals Houses 6 - -1 88 9 92 9 96 98 2 6 8 2 Other residential buildings 1 2 3 6 7... 3. 2... % Rental Vacancy Rate -quarter moving average 98 99 1 2 3 6 7 8 2 19 17 1 13 11 1 2 3 6 7 Total 2 2 1 1-97 98 99 1 2 3 6 7 1.3 1.1.9.8.7 ANZ 'Housing Purchase' Affordability 97 98 99 1 2 3 6 7 Page 2
ANZ Housing Snapshot - October 27 Housing update: New South Wales A lacklustre housing performance has mirrored a weak economy. Recently, signs of economic life have coincided with positive stirrings in the housing market. Sales, clearance rates and prices are all hinting at a turnaround in sentiment. However, with the economy likely to improve only gradually, a significant rebound in building may still be some way off despite unparalleled housing market tightness (approvals are running at half the level of the underlying requirement with a shortage of 3, dwellings at June 27). Market pressures are likely to build rapidly from here. House prices are beginning to respond and are now up around % over the year to June 27, rental vacancies are low and set to fall further and rental growth is edging upwards. With an acceleration in prices expected and another interest rate rise on the cards, affordability will deteriorate further. However, gradual economic recovery (GSP growth to double to 3% by 29) combined with house price improvement will become necessary conditions to restore confidence among builders who face a higher cost base to pass on to buyers and the risk of further interest rate rises. This will present a renewed barrier to entry for first-time buyers who will increasingly have to contemplate a relatively (yet diminishingly) cheaper rental option. 6 3 2 1-1 -2-3 ' 88 9 92 9 96 98 2 6 8 2. ' Houses Other residential buildings 1 2 3 6 7. % 2 7.. 3. 2.. Sydney * -quarter moving average 98 99 1 2 3 6 7 8 S REIA E i @ANZ 1 NSW 2 3 6 7 6. 6..... 28 2 2 8 - Sydney.8 ANZ 'Housing Purchase' Affordability Sydney -8 97 98 99 1 2 3 6 7.6 97 98 99 1 2 3 6 7 Page 3
ANZ Housing Snapshot - October 27 Housing update: Victoria Victorian economic performance has been solid in recent years and despite a recent softening, the outlook remains favourable. A marked improvement in population growth in recent years, particularly from overseas is underpinning this strength and will remain a critical support to housing demand over the medium-term. While there is some pent-up demand in Victoria, market balance is unlikely to be presenting a compelling force for higher levels of construction as it is in NSW. That said, generally positive sentiment, backed by a robust labour market outlook will ensure that the building sector responds to market signals. Melbourne s rental market is tight and set to tighten further. House prices have reaccelerated lifting annual growth to double-digits and total returns to housing investors in the past year have amounted to.%. While a further interest rate rise will dampen this performance and delay building recovery, there is every prospect that with solid economic momentum persisting, higher constructions levels over 28 will be forthcoming. ' ' 3 1 3. 2. Houses Other residential buildings -1 88 9 92 9 96 98 2 6 8.. 1 2 3 6 7.. 3. 2. % Melbourne 2 Victoria. 3. * -quarter moving average. 98 99 1 2 3 6 7 8 1 2 3 6 7 2. 3 1.8 ANZ 'Housing Purchase' Affordability 2 2 1 Melbourne Melbourne 1-97 98 99 1 2 3 6 7.8 97 98 99 1 2 3 6 7 Page
ANZ Housing Snapshot - October 27 Housing update: Queensland The Queensland economy is booming, buoyed primarily by a strong resources sector. GSP lifted nearly 8% in real terms over the year to June 27. While population growth has eased in the past couple of years, it remains the fastest growing state and will continue to provide a strong motor for ongoing residential building activity which has been running at solid levels. Forward indicators suggest further improvement over 28, albeit moderate and concentrated in the detached sector. With the Queensland economy expected to sustain very solid momentum and pent-up demand already at high levels, residential construction has a very favourable mediumterm outlook. House price growth has reaccelerated to almost % over the year with a total investor return (income and capital) of 19.2% over the same period. As in other capitals, rental markets are tightening and rental growth is accelerating. Despite solid growth in household incomes, both rental and housing affordability look set to deteriorate further. ' 3. ' 3 2 1 2. Houses -1-2 88 9 92 9 96 98 2 6 8.. Other residential buildings 1 2 3 6 7... 3. % Brisbane 2... 2.. * -quarter moving average 98 99 1 2 3 6 7 8 1 QLD 2 3 6 7, Economics@ANZ 3. 2. 3 3 2 2 1 1 - Brisbane 97 98 99 1 2 3 6 7 ANZ 'Housing Purchase' Affordability 1.7 Brisbane 1.3 1.1.9.8 97 98 99 1 2 3 6 7 Page
ANZ Housing Snapshot - October 27 Housing update: South Australia The South Australian housing market is in broad balance. Despite a sluggish economic performance in recent years, the housing has performed solidly with finance approvals lifting sharply, house prices growth pipping the national average in the year to June 27 and the rental market tightening. A key driver of this strength has been the remarkable surge in population growth, particularly net overseas migration which has lifted to 13, in the year to March 27 (its highest level on record by a long shot). This strength in migration is likely to place ongoing pressure on rental markets with vacancies projected to plummet to historically low levels by the end of 28. Furthermore, with a solid improvement in the South Australian economy expected and housing fundamentals in broad equilibrium, house prices growth should hold in double-digit territory for much of 27/8. 1 1 '.8.7.6...3 ' Houses Other residential buildings - -1 88 9 92 9 96 98 2 6 8.2.1. 1 2 3 6 7. 3. % 2 South Australia 1.3 1.1 2. Adelaide.9.8. * -quarter moving average. 98 99 1 2 3 6 7 8 1 2 3 6 7, Economics@ANZ.7.6. 28 2 2 Adelaide 1.9 1.7 1.3 ANZ 'Housing Purchase' Affordability Adelaide 8 1.1.9-97 98 99 1 2 3 6 7.7 97 98 99 1 2 3 6 7 Page 6
ANZ Housing Snapshot - October 27 Housing update: Western Australia Despite a softening in commodities growth, the direct and downstream effects of high price levels is still playing out with the WA economy booming, recording a remarkable 9.9% growth in GSP over the year to June 27. However, after massive house price growth over 2 and 26, prices are consolidating in 27. Housing affordability has deteriorated to well below the national average but with an expected flattening in prices and still above-average income growth, affordability should improve marginally over the course of 27/8, despite a further interest rate rise early next year. Housing market fundamentals are sound with the market expected to move into moderate pent-up demand over the next couple of years, more of a reflection of the construction sector s inability to keep up with strong demand levels than any significant reluctance to enter the market. Economic conditions are projected to remain very favourable, providing a solid underpinning to housing market outcomes over the medium-term. 3 2 ' 2. 1.8 ' 2 1 1 - -1-1 88 9 92 9 96 98 2 6 8.8.6..2. Houses Other residential buildings 1 2 3 6 7. %. Perth 3. 2... * -quarter moving average -. 98 99 1 2 3 6 7 8 2 1 WA 2 3 6 7, Economics@ANZ 2.8 2. 2..8 8 2. ANZ 'Housing Purchase' Affordability 32 Perth 1.8 Perth 2 8-8 97 98 99 1 2 3 6 7.8.6 97 98 99 1 2 3 6 7 Page 7
ANZ Housing Snapshot - October 27 Housing update: Tasmania Despite very solid housing market fundamentals and hints of an improvement in economic performance, the medium-term outlook for the housing market remains vulnerable to the recent substantial weakening in population growth (which halved over the past 3 years to around.6% per annum). Population growth and housing demand will be highly dependent on the outlook for the broader economy and employment in particular. In this light, the go-ahead for the $2b Gunns Pulp mill will provide a significant boost to business investment and employment in Tasmania. Recent renewed strength in house prices is likely to be sustained, largely protected by still favourable price relativities to mainland capital city prices and above average affordability. That said, interest rates will avert any reacceleration in prices despite the economy showing signs of life. ' 2.2 3 Tasmania.22.2 2 1-1 -2 88 9 92 9 96 98 2 6 8 1 2 3 6 7, Economics@ANZ.....1.8 8 % 7 Hobart 6 3 2 1 * -quarter moving average 98 99 1 2 3 6 7 8 6 Hobart 3 2 1.26.2.22.2.....1.8 1.9 1.7 1.3 1.1.9 ' Total 1 2 3 6 7 ANZ 'Housing Purchase' Affordability Hobart -1 97 98 99 1 2 3 6 7.7 97 98 99 1 2 3 6 7 Page 8
ANZ Housing Snapshot - October 27 Housing update: Australian Capital Territory The ACT housing market is performing strongly with building approvals on a solid upward trend and house prices reaccelerating after a short breather. Population growth has picked up, particularly net interstate migration. Housing fundamentals are strong with pent-up demand expected to build further over the medium-term despite the supply side boost already in prospect. The rental market has tightened and has at this stage only translated into moderately higher rentals growth. A further intensifying of rental market tightness is likely to see additional strength in rentals growth over 27/8. This will also underpin house prices, although the interest rate environment is likely to temper growth over the next year. 6 3 2 1-1 -2-3 ' 88 9 92 9 96 98 2 6 8.3.3.2.2.1.1. ' Total 1 2 3 6 7... 3. 2.. % Canberra * -quarter moving average 98 99 1 2 3 6 7 8 2.2 2. 1.8.8 ANZ 'Housing Purchase' Affordability Canberra 97 98 99 1 2 3 6 7 3 2 $m 31 3 2 Canberra 29 27 2 1 1-97 98 99 1 2 3 6 7 1 ACT 2 3 6 7, Economics@ANZ 2 23 21 19 17 1 Page 9
ANZ Housing Snapshot - October 27 Housing update: Northern Territory Northern Territory is experiencing solid population growth and has been enjoying resourcerelated momentum, although this seems to have been easing more recently. Despite generally favourable supports, the housing market is showing signs of weakness. Contrary to the national trend, finance approvals are trending down, according with reduced momentum in prices growth following a very strong phase in recent years. The price performance is likely to play out very much like the WA market which is undergoing a period of consolidation. Rentals growth has accelerated, rising 8% over the year to June 27. Provided demand for resources stays healthy (and this is our expectation), the NT economy and the housing market should achieve a soft landing. '.1 Private Building Approvals - NT* ' 3 2.13 1-1.11.9.7 Total -2 88 9 92 9 96 98 2 6 8. 1 2 3 6 2 2. ANZ 'Housing Purchase' Affordability 1.8 Darwin 8 Darwin -8 97 98 99 1 2 3 6 7.8 97 98 99 1 2 3 6 7 2 1 $m NT 2 3 6 7, Economics@ANZ 1 13 11 9 7 3.. -. - - -2. - -3. - -. Net interstate migration* ' * -qtr rolling sum 1 2 3 6 7 Source : ABS Page 1
ANZ Housing Snapshot - October 27 ANZ Research Economics@ANZ Saul Eslake Fiona Allen Chief Economist Business Manager +61 3 9273 621 +61 3 9273 622 Saul.Eslake@anz.com Fiona.Allen@anz.com Tony Pearson Mark Rodrigues Wain Yuen Riki Polygenis Amber Rabinov Head of Australian Senior Economist, Economist, Senior Economist (Acting), Economist, Economics Industry Industry Australia Australia +61 3 9273 83 +61 3 9273 6286 +61 3 9273 629 +61 3 9273 6 +61 3 9273 83 Tony.Pearson@anz.com Mark.Rodrigues@anz.com Wain.Yuen@anz.com Riki.Polygenis@anz.com Amber.Rabinov@anz.com Amy Auster Katie Dean Jasmine Robinson Dr. Alex Joiner Head of International Economics Senior Economist, International Senior Economist, International Economist, International +61 3 9273 17 +61 3 9273 1381 +61 3 9273 6289 +61 3 9273 63 Amy.Auster@anz.com Katie.Dean@anz.com Jasmine.Robinson@anz.com Alex.Joiner@anz.com Paul Braddick Ange Montalti Stephanie Wayne Head of Financial System Analysis Senior Economist, Financial System Analysis Research Analyst, Financial Systems Analysis +61 3 9273 987 +61 3 9273 6288 +61 3 9273 7 Paul.Braddick@anz.com Ange.Montalti@anz.com Stephanie.Wayne@anz.com Warren Hogan Cherelle Murphy Head of Markets Research Senior Economist, Markets +61 2 9227 162 +61 3 9273 199 Warren.Hogan@anz.com Cherelle.Murphy@anz.com ANZ Investment Bank Warren Hogan Sally Auld Tony Morriss Cherelle Murphy Mark Pervan Head of Markets Research Senior Interest Rate Strategist Senior Currency Strategist Senior Economist, Markets Commodity Strategist +61 2 9227 162 +61 2 9227 9 +61 2 9226 677 +61 3 9273 199 +61 3 9273 37 Warren.Hogan@anz.com Sally.Auld@anz.com Anthony.Morriss@anz.com Cherelle.Murphy@anz.com Mark.Pervan@anz.com David Croy Patricia Gacis Strategist Market Strategist + 2 7378 27 +61 2 9227 72 croyd@anz.com Patricia.Gacis@anz.com Sarah Percy-Dove Head of Credit Research +61 2 9227 12 Sarah.Percy- Dove@anz.com Research & Information Services Mary Yaxley Marilla Rough Manesha Jayasuriya Head of Research & Senior Information Officer Information Officer Information Services +61 3 9273 626 +61 3 9273 6263 +61 3 9273 1 Mary.Yaxley@anz.com Marilla.Rough@anz.com Manesha.Jayasuriya@anz.co m ANZ New Zealand Cameron Bagrie Khoon Goh Philip Borkin Chief Economist Senior Economist Economist +6 82 22 +6 82 237 +6 82 2199 bagriec@anz.com gohk@anz.com borkinp@anz.com Sean Comber Steve Edwards Kevin Wilson Economist Economist Rural Economist +6 82 2286 +6 82 2217 +6 82 2361 combers@anz.com edwards1@anz.com Kevin.Wilson@nbnz.co.nz Page 11
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