Property zombies
Angus Grigg Shanghai
1473 words
16 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Investment Foreigners bought houses in Canada and left them empty as a way to park cash. It may happen here too, warns Angus Grigg.
In Vancouver, Canada, they have become known as "zombie suburbs" – inner city areas dominated by new apartment developments, which despite their wealth and population density have failed to thrive. They are not dead, but like the zombie, only half-living.
Canadian urban planner Andy Yan coined the phrase to try to explain the effect a large inflow of offshore money, mainly from China, was having on parts of Vancouver.
He studied the Coal Harbour area and found that 25 per cent of the apartments were unoccupied for much of the year.
"These places have the density of Manhattan, yet the retail shops and restaurants on the ground floor are struggling," he told AFR Weekend.
Anecdotes such as this and the accompanying surge in property prices were part of the reason Canada scrapped its so-called "millionaire visa scheme" in February.
Just a few weeks later Canberra took the opposite approach and sought to speed up approvals for a similar scheme in Australia known as the Significant Investor Visa.
Figures released by the federal government on Tuesday showed that 343 visas have now been approved under the program and another 602 people are in the queue. If all these are approved, that will generate $4.7 billion in funds flowing into Australia, as each visa holder is required to invest $5 million into an approved investment scheme for four years, in return for permanent residency.
It's an impressive number for capital-starved Australia and is likely to grow substantially, yet the Canadian experience should motivate politicians and urban planners to look behind the headline figures.
Canada, which began its experiment with economic migration in 1986, has a mixed story to tell.
From Yan's point of view, constant evaluation of the program is critical. He said one consideration in stopping the Canadian scheme was that it had never been properly studied. "We never evaluated if economic migration made sense," says Yan, who works for Bing Thorn Architects and sits on Vancouver's City Planning Board.
That left many grasping at anecdotes to try to explain what was happening in Vancouver and if it was a positive or negative for the city.
Yan's research suggests the economic migration program increased the city's rental stock, along with allowing for better urban design and amenities like daycare centres and parks.
But it has also played a part in making Vancouver second only to Hong Kong on the list of the world's least affordable cities to buy a house, according to Demographia, with Sydney fourth and Melbourne sixth.
In attaining this unwanted accolade, house prices in Vancouver have become completely disconnected from wages.Direct link with China
Robin Wiebe, a senior economist at the highly respected Conference Board of Canada, laid out the numbers and found a direct link with China.
"Despite a decent local economy and favourable demographics, Vancouver's housing market was relatively sluggish during the 1990s," he wrote in a research paper.
He said real estate prices grew at an annual rate of just 3 per cent over the decade to 2000. In the following decade, according to Weibe, prices doubled, including an annual rise of 20 per cent in 2006 alone.
"Casual observations and statistical tests both hint that China's influence rivals that of three key domestic factors: Vancouver's population growth, changes in employment and Canadian mortgage interest rates."
In his research Weibe finds a link between China's GDP growth and price rises in Vancouver, but others like Yan also see other factors at work.
Yan talks about the rise of Vancouver and more recently Sydney and Melbourne as "hedge cities". That is, cities where wealthy Chinese and other nationalities buy property as an insurance policy against things going wrong at home.
Yan speculates this is one reason why "house prices in Vancouver have completely decoupled from wages".
And there are now signs of this in Australia, where much of the Chinese buying has been concentrated around inner city suburbs close to universities.
Data released by the Australian Bureau of Statistics on Wednesday showed wage growth at a record low of 2.6 per cent for the year to June 30.
Yet on the same day the ABS said house prices had risen 10 per cent across Australia, led by a 15.6 per cent rise in Sydney and 9.3 per cent in Melbourne.
No one is suggesting this decoupling of house price and wages in Australia is entirely driven by Chinese buying and certainly not due to the Significant Investor Visa Scheme, which is still in its early stages.
But even Reserve Bank governor Glenn Stevens, a man not known for sensational statements, has said the effect can't be entirely discounted.
He said cashed up Asian buyers, mainly students, were "quite prominent" in inner city areas and had an effect on "asset prices and the exchange rate".
Stevens said he had reached this conclusion partly by noticing ads for Australia property while passing through Singapore.
This suggests even the country's most sober economist is relying somewhat on anecdotes rather than analysis, which is exactly what the Canadians have warned against.
One of the first points made in a report released earlier this month by stockbroking firm CSLA was the lack of "hard data" on Chinese investment in the Australian housing market.
Everyone is still coming up with their best guess.
One of the more credible is Credit Suisse, which estimates Chinese buyers are currently purchasing 12 per cent of all new homes in Australia, after overtaking the United States as the number one investors in local real estate.
This lack of hard data is a constant in the Canadian experience, but one person who has studied the field more than anyone is David Ley, a professor at the University of British Colombia, who holds the country's research chair in geography.
His blunt message for Australia is: Don't expect much beyond the upfront payment from the Significant Investor Visa.
"The wider economic benefits for Canada have been much smaller than expected," he said. "There has not been a serious effort to develop economic projects."
This is backed by a startling number that shows those who have entered Canada via its investor visa program pay less tax than any other immigrant group, including refugees.
The issue is that this new wave of economic migrants is vastly different from those who came before them.Seeking a passport and its protection
They are seeking a passport and the protection this provides, rather than a new place to live.
The experience in Canada is that those on the investor visa keep their economic interests in China and use cities like Vancouver and Toronto as a second home.
"It [the investor visa] was good for luxury car dealers, the real estate industry and those selling household items," says Ley who authored the book Millionaire Migrants.
"But the broader benefits were much smaller than expected."
Australia is likely to face many of these issues, as the Significant Investors Visa requires immigrants to only spend 40 days each year in the country.
"That sounds like a summer holiday to me," Ley says.
It should be noted, however, that the upfront payment in Australia is far larger than what Canada demanded.
Under its program applicants were asked to provide the Canadian government with an interest free loan of $C800,000 ($787,000) over five years and have minimum assets of $C1.6 million.
In scrapping the scheme the government said; "We believe those who want to come to Canada should live here, pay taxes here and invest their money directly in the Canadian economy".
"It has significantly undervalued Canadian permanent residency," a government spokesperson said.
Such a conclusion will not be available to Australia for some years.
According to CLSA the economic benefits from surging Chinese interest in Australia is likely to be relatively narrow.
It identifies property groups such as Mirvac, Lend Lease and Goodman as the biggest winners, along with construction materials company Fletcher Building.
This comes back to the motivation behind the decision to seek Australian permanent residency.
According to CSLA more than 65 per cent of migrants cited their children's education as the main factor, followed by Australia's clean environment.
Just over 10 per cent of respondents cited "business investment" as a factor.
Put simply, we can expect to mirror the Canadian experience with a construction boom that, according to CSLA, will run for the next six years.
But the bigger question is whether will also see the rise of "zombie suburbs" and runaway house prices without benefits for the broader economy.
Fairfax Media Management Pty Limited
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Thanks for the article. I don't follow canada but looks like they get it. Better late than too late
Household formation, not population, is the driver of demand
THE AUSTRALIAN AUGUST 14, 2014 12:00AM
Bernard Salt
Social Editor
Bernard Salt: Household formation
http://cdn.newsapi.com.au/image/v1/exter...z9c5xuj3mc
WHAT is the demand for housing in Australia? It is tempting to answer this question by citing the current rate of population growth: more people translates into demand for more housing.
But is this the case?
What if population growth is largely the result of a high birth rate? This might mean that families simply transfer out of a two-bedroom apartment and into a four-bedroom house. In this case, there is no net gain in housing demand because it involves transferring from smaller to larger accommodation.
In some respects a better indicator of the demand for housing, and for all the accoutrement that hangs off housing, such as household furnishings and home finance, is the level of household formation. Over calendar 2013 the Australian population increased by 392,000 or 1.7 per cent to reach 23.3 million. Right now, in August 2014, the Australian population sits at the 23.6-million mark; we will pass the 24-million mark at some time in late 2015 or early 2016.
The greatest number of people ever added to the Australian continent occurred in calendar 2008: in that year population growth was 460,000 or 2.2 per cent. You might recall that it was towards the end of 2008 that prime minister Kevin Rudd made his famous “I believe in a big Australia” comment. This statement seemed to trigger a shutdown in the rate of overseas migration such that population growth dropped to 310,000 during 2010.
Thereafter the growth rate recovered and has hovered around the 400,000-mark for a few years. This is an important indicator for the property industry and for Australian business more generally. Ten years earlier in calendar 2003 Australian population growth was 222,000 or 1.1 per cent. Over a decade the rate of population growth in this nation has ratcheted up by 77 per cent.
There is a prima facie case to say that the house construction and home finance industries should have performed well over the last decade. But this is only part of the story because it is households and not population that actually drives demand for housing and for home finance. What is Australia’s current rate of household formation and how has that changed over time?
It may not surprise you to learn that household formation is quite a technical term. It is best measured through estimates of private occupied dwellings, which excludes a relatively small proportion of the population living in hospitals, nursing homes, prisons, convents and staffing quarters such as mining camps. About 92 per cent of the population live in private occupied dwellings.
I think that at December last year there were 8.425 million private occupied dwellings in Australia, up 149,000 or 1.8 per cent over the previous 12 months. At a national level, household formation is tracking an annual growth rate (of 1.8 per cent) that is marginally faster than the rate of population growth (1.7 per cent). This is good news for the property industry. The demand for housing is just outstripping population growth.
But this is actually not new news. Household formation, or more correctly growth in private occupied dwellings, has by my calculations outstripped population growth more or less every year for the last decade.
Separations and divorce; the rise of widowhood; 20-something Generation-Ys leaving home to live in an apartment are all social drivers of demand for household formation. These demographic and social shifts have steadily lifted the demand for housing over the past decade and probably for much longer.
During 2003 household formation in Australia was 85,000 or 1.2 per cent. On these numbers the demand for housing has lifted by 75 per cent over the decade to 2013.
Whichever way you look at the numbers — either by straight population growth or by the increase in household formation — the past decade has seen an underlying expansion in demand for housing that equates to growth rate of around 7 per cent a year.
In order to have kept pace with market growth and to have retained market share, a national home builder or home finance provider, for example, should have recorded sales in real terms in 2013 that were 75 per cent greater than the levels in 2003. Anything less represents a loss of market share. But this is a broad national analysis. What national players in the housing space really require is a city-by-city municipality-by-municipality market-by-market estimate of annual growth in household formation. I have looked at household formation in two slow-growth markets: Broken Hill and Hobart.
Some technical adjustments have been necessary to ensure consistent city geographies over time, but the results are illuminating.
Between 2006 and 2011 the population of Broken Hill fell 0.6 per cent a year. The number of households in Broken Hill dropped by 0.7 per cent a year. In towns that are losing population, household contraction exceeds population decline, leading to an oversupply of houses on the market and to a softening of prices.
Hobart is a different market since it is growing, albeit at a slow rate. Hobart as now defined contains about 210,000 residents growing at an average rate of 1 per cent a year.
Household formation is tracking 1.4 per cent a year.
There are some towns where household formation runs well ahead of population growth, such as Hobart.
Perhaps there is a higher than average level of separations and divorce in Hobart than in other Australian cities.
Or perhaps it’s that Gen-Y is leaving the parental nest earlier because housing is cheaper. Whatever the reason, the outcome is that housing demand can actually be quite strong in slow-growth markets.
It prompts the question of what is the population and household growth equation in different cities and markets? What would be really helpful is if the Australian Bureau of Statistics measured household formation as well as population growth on a city-by-city basis. This information would inform, or it should inform, the strategic thinking and action of Australia’s housing industry.
Bernard Salt is a KPMG partner and an adjunct professor at Curtin University Business School;
www.bernardsalt.com.au; bsalt@kpmg.com.au
Building outlook all about funding in government and private sectors
FRANK GELBER THE AUSTRALIAN AUGUST 14, 2014 12:00AM
Non-dwelling building value of commencements Source: TheAustralian
FIVE years from now, non-dwelling building will still be around current levels, but much changed in make up.
Having been boosted over the past five years by government stimulus packages, these influences have begun to reverse. We have already seen a correction in social and institutional building, with more to come. And that has been offset by a partial recovery in commercial and industrial building as the return of investors to property has underwritten development finance.
By and large, it’s all about funding, both in the government and private sectors. Governments around Australia have been reducing building-related investment to bring budgets back under control after extraordinary stimulus packages lifted expenditure. The “Building the Education Revolution” spending on schools and universities has largely returned to pre-GFC levels.
Starts for hospitals have remained high as we worked our way through a major round of projects, but will now decline sharply, with work done falling as these are completed. We’re still working on sports facilities such as the new AFL stadium in Perth and work related to the Gold Coast Commonwealth Games in 2018. And the Sydney Convention and Entertainment Centre will boost activity, but commencements will then fall.
We expect social and institutional building commenced to fall by about 15 per cent in real terms over the next four years, before picking up by the end of the decade as the next round of government-funded projects comes through. Social and infrastructure building, with associated government expenditure levels, will form a much higher base in real terms than before the GFC.
While social and infrastructure building will be about 24 per cent lower than average over the next five years than in the last five-year period, we expect the next round of increases in funding to underwrite a substantial rise in building in the following decade. Government asset sales are likely to provide the finance for the next round of projects.
Commercial and industrial building has trodden the opposite path, collapsing after the credit crisis as funding evaporated. The normalisation of property markets and funding has more recently underwritten a partial recovery in building activity.
In Brisbane and Perth, the office cycle has peaked, with starts set to fall until the oversupply of office space is absorbed. That won’t be until next the decade.
Sydney (allowing for Barangaroo) and Melbourne are building below long-term demand levels, and activity will pick up during the decade, albeit slowly at first.
The building of factories remains weak because of problems of competitiveness associated with the high dollar. But warehousing activity has increased and will grow strongly over the next few years as the popularity of industrial property investment underwrites a substantial inflow of funds into prime warehousing property investment. Hotels building has begun what will become an unsustainable boom, with the sheer quantum of supply flowing into the market leading to a subsequent collapse in building activity.
Retail building has recovered strongly and will be sustained into the medium term. Not only are we seeing a surge of bulky goods and neighbourhood centre building, but shopping centres are locked into competitive refurbishments to maintain their position in catchments and hence centre incomes. The pressures on retailing, including internet shopping, make it even more important for centres to evolve into attractive destinations, boosting the expenditure required. The upshot will be a solid, but unspectacular, net rise in commercial and industrial building over the next five years, with further solid rises in the following decade.
We are looking at an average level of building starts in the next five years 16 per cent higher than the past five.
As a result of these differing influences, total non-dwelling building will fluctuate in a narrow band around present levels of activity. That should allay the fears of those concerned about our ability to get through the work without substantial cost rises. Costs are always cyclic. But these levels of activity won’t put substantial pressure on capacity. The current residential upswing won’t make much difference, particularly given the likelihood of an oversupply of high-rise apartments in Melbourne.
China: Amid Graft Crackdown, Wealthy Chinese Invest in Australian Property
988 words
18 Aug 2014
Thai News Service
THAINS
English
© 2014 Thai News Service
Section: General News - More wealthy Chinese are moving their money out of China to invest in Australia's property market as a corruption crackdown in the world's second biggest economy gathers momentum, property consultants and lawyers said.
They said their clients had told them they had legitimate funds to invest, but were concerned about being caught up in an investigation, which in China often delves into the affairs of dozens of associates of the main target, and losing that wealth.
What we see at the moment is that there are more Chinese who would likely send more money out of the country so they don't get caught up in this crackdown, according to David Green-Morgan, global capital markets research director at real estate services firm Jones Lang LaSalle.
It's one of the most visible signs of the fear being caused in China by President Xi Jinping's 18-month-old drive against the pervasive graft that he says threatens the Communist Party's survival, a fear that is even causing some officials to take their own lives.
Beijing's campaign has particularly targeted so-called naked officials, the term for state employees whose spouses or children live overseas. Those officials are generally suspected by the party of using such connections to illegally move assets.
Ordinary Chinese citizens can legally transfer only $50,000 overseas each year, but vast sums leak out of China using a variety of loopholes, such as funneling money through the Chinese territory of Hong Kong.
The restrictions in China are becoming more onerous, said Green-Morgan. That's triggered an increase in the amount of money that's looking to move out of China or probably is already outside of China and is looking to be spent.
Safe haven
Australian property has long been a popular choice for Chinese money -- both legitimate and illegitimate - but the flow of investment appears to have accelerated of late.
According to Australia's foreign investment review board, China was the No.1 source of foreign capital investment into Australia's real estate in 2013. It received approvals to invest nearly $6 billion ($5.58 billion) into the sector, up 41 percent from a year ago.
They are worried so they are looking for a safe place, said a Sydney-based immigration lawyer, who is advising on setting up a new fund exclusively for Chinese investors and regularly travels to Beijing and Shanghai. They don't want returns, not necessarily. They want a safe place, he added.
China is expected to see an annual growth of 20 percent in outbound real estate investment in the next decade, up from $11.5 billion last year, property agent Savills has forecast.
That will help push Chinese demand in Australian property by 15 percent over the next 12 months, said Andrew Taylor, co-CEO of Juwai.com, the largest real estate portal that targets Chinese buyers looking abroad.
Such strong interest is likely to boost Australia's apartment construction, which is set to hit record levels by 2017 and remain elevated through to 2020, Brokerage CLSA said in a report this month titled The Magic Dragon.
Favored destination
Wealthy Chinese have been pouring money for years into real estate in major cities in North America, Europe and Asia, including New York, London and Sydney.
Some of their favorite markets are becoming less attractive, though, for Chinese investors: A 15-percent stamp duty introduced for foreign buyers in Hong Kong and Singapore, where cash-rich mainland Chinese had been blamed for driving up prices, has cooled interest, while Canada recently canceled its Immigrant Investor Program, popular with wealthy Chinese.
Australia, in contrast, may ease rules on a visa scheme aimed at luring investment from wealthy Chinese after complaints that disclosure requirements are too strict, lawyers and migration agents have said.
Australia is now the second-most favored destination for Chinese property buyers, behind the United States but ahead of Canada and Britain, according to Juwai.
Property investment into Australia provides an emigration option to Chinese buyers and can also establish a base for their children's education in an English-speaking country.
It also offers the kind of robust, independent legal system sought by those looking to shield their assets from the Chinese authorities.
A somewhat more disturbing motivation for emigration and shifting capital out of China is that many are seeking protection of their wealth for both economic and political reasons, said CLSA's Andrew Johnston, without elaborating.
Tip of the iceberg
An Australian government inquiry into foreign residential real estate investment policy is due to report on October 11, but consultants and researchers Reuters spoke to did not expect any rule changes that could hurt the construction sector.
Existing regulations restrict non-residents to buying only new-build property.
Chinese property developers have been aggressively investing abroad to cater to domestic demand and to diversify their assets in response to a cooling property market at home.
Hong Kong-listed Wanda Commercial Properties has set up a $1.6-billion fund to invest in Australian real estate, while China's Greenland Holding sold every apartment in a Sydney project last year within the first three hours for a total of 2 billion yuan [$325 million].
Century21 and Fairfax Media's Domain.com, Australian real estate portals, have launched Chinese language websites, and REA Group recently announced that SouFun, a major real estate online marketplace in China, would carry Australian listings.
Australian developers are also flying to China to promote their properties.
I think this investment is a tip of the iceberg, said Warren Duncan, director at real estate agent LJ Hooker. It is such a small portion of developers and purchasers from China that have bought in Australia compared to the population of China. So, the trend will continue for a long time to come. - VOA
Thai News Service Co. Ltd.
Document THAINS0020140815ea8i0008h
Stockland puts money on converting big-city office towers to apartments
THE AUSTRALIAN AUGUST 19, 2014 12:00AM
Sarah Danckert
Property Reporter
Melbourne
AUSTRALIA’S largest residential developer, Stockland, has flagged that it may look to convert some of its office towers into residential developments and build apartments atop its shopping centres as the residential market goes gang busters. The news came as Stockland forecast 6-7.5 per cent earnings per share growth in 2015, with the company starting the new financial year with a record 3185 contracts to buy homes across its estates on hand.
For 2014, Stockland posted a net profit of $527 million — up on the $105m of 2013 — thanks in large part to a 57.2 per cent improvement in residential profit to $95m. Its residential business was boosted by strong sales in Sydney, with prices up 5 per cent, but Perth was waning. Retail property profits rose 7.5 per cent to $347m, while business parks profits rose 5.5 per cent to $100m.
Across the business underlying profit rose 12.2 per cent to $555m, earnings per share grew by 7.1 per cent to 22.8c. The company paid a 24c distribution for the year. The shares climbed 3c to $4.17.
Phoenix Portfolios managing director Stuart Cartledge said it was a good solid result in line with expectations.
Several fund managers also brushed off suggestions that Stockland should have issued a special dividend after netting an $80m profit from the sale of its stake in Australand.
Chief executive Mark Steinert said Stockland had identified properties that might be suitable for alternative use as residential developments, including office towers in St Leonards and North Sydney and its Merrylands shopping centre, also in Sydney. He said some office properties could be sold to residential developers.
Stockland also confirmed it had considered selling its retirement business, which took another $73m writedown despite posting a 13.8 per cent lift in profit to $40m. Mr Steinert said the company would instead look to sell off some of its existing villages.
Steinert: expect a Qld boost
Robert Harley
417 words
19 Aug 2014
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Stockland chief executive Mark Steinert is confident that the housing surge which underpinned a better than expected profit rise for Australia's largest housing developer in 2014 will continue into 2015.
Sure, the rate of house price growth will moderate. Depending on the location, house prices will grow by 1 to 2 per cent in real terms, he said.
But the sales volume will grow and the operating profit margin improve.
Sydney is the standout. Mr Steinert expects more sales and higher prices.
At Willowdale, a short drive from the new Leppington Station in the city's south-west, and at Elara in the north-west, a succession of land releases has sold out within the day.
Mr Steinert also expects more sales and higher prices in Queensland backed by a "strong lift" on the hard-hit Sunshine Coast. "The difference between Sydney and Brisbane house prices is as high as ever," Mr Steinert said.
The one negative is the downturn in resources but even so, the key driver for Queensland housing, interstate migration, is beginning to rise.
In Victoria, competition might limit growth in price and volume.
In Perth, price and volume growth are slowing with mining investment.
"It is more about moderating," Mr Steinert said. "The level of migration and population growth in Perth is quite high, and it is still an under-supplied market."
For the next year, the traditional hurdles for housing appear benign.
"We see a gradual improvement in the economy, back to trend levels of growth," he said.
"The transition from mining infrastructure investment has gone well; but there is some concern about geopolitical tension, about Europe and about China."
In the medium term, interest rates will rise, or "normalise", but gradually, in line with jobs growth and by not much more than 100 basis points.
"We don't see interest rates as a significant headwind," Mr Steinert said. "But we recognise that affordability is a challenge, which is why we have a focus on affordable projects."
The 2014 jump in housing profit was based on a 12.5 per cent rise in settled sales, to 5219, and an improved profit margin of 9.1 per cent.
In 2015, settlements will be closer to 6000 with almost half already locked in and another 500 deposits in July.
At the same time, Stockland is broadening the mix, introducing completed homes, and aiming for an 11 to 13 per cent operating profit margin by 2016.
Fairfax Media Management Pty Limited
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UN warns on Aust housing bubble
AAP AUGUST 19, 2014 7:00PM
Australia's economy faces "sluggish" growth amid warnings of an asset bubble in the property sector that needs to be "closely monitored", the United Nations says in its latest economic report for Asia and the Pacific.
The UN report forecasts economic growth for Australia of 2.8 per cent in 2014, "due to falling mining investments, fiscal restraint and fragile private consumption", ahead of the 2.3 per cent set for 2013.
The slide in commodity prices, a driving force of growth in recent years, is adding to the economic slowdown in Australia against the backdrop of a "weak global economy".
The UN's annual economic survey for the Asia Pacific noted that weak labour conditions "would help keep a lid on inflation", but commodity exports would continue to play a key role in the outlook despite China's policy shift to domestic-led growth resulting in a softening of demand.
A key concern was a possible asset bubble in the domestic housing market. "The housing market is likely to strengthen, but the possibility of an asset bubble should be monitored closely," the UN warned.
The UN said despite an "orderly depreciation" of the Australian dollar, monetary authorities should hold back from raising interest rates, as the decline "was needed to improve the competitiveness of non-resource sectors".
The report was more optimistic over the outlook for the New Zealand economy, where growth was tipped at 3.3 per cent for 2014, up from the 2.7 per cent achieved in 2013.
"Higher net immigration, better prospects for the dairy industry, and the reconstruction activities" from the Christchurch and Canterbury earthquakes of 2010 and 2011 would continue to support the economy.
The Insurance Council of New Zealand recently reported that New Zealand residents are to receive payouts of $NZ12 billion ($A11.17 billion) to cover the costs from the earthquakes.
But the outlook remained dependent on the "strength of private consumption and investment" given a tightening of budgets and monetary policy.
A chief concern lay in the short term for New Zealand exports. The "possible headwinds" lay in a stronger New Zealand dollar hurting export growth.
The report added that surging house prices and monetary policy tightening in the United States "may push up interest rates, placing strains on investments and consumer spending".
It’s just another cycle: weak markets will lift
FRANK GELBER THE AUSTRALIAN AUGUST 21, 2014 12:00AM
RESIDENTIAL markets move in cycles, and now they’re out of synch. They have been for some time. That’s not unusual, it just means that we have to understand them individually.
Our methodology for forecasting markets has been to count demand and supply and project this forward. We calculate an underlying demand based on population by age group to estimate household formation. That tells us how much we have to build over time. We compare that with supply to determine if we’re building too much or too little. And we cumulate this into a deficiency or surplus of stock. That gives us the direction and magnitude of the next cyclic swing.
Three factors drive the cycles — the stock deficiency or surplus, affordability and interest rates, the latter operating as a trigger in either direction.
The bottom line in our recent Residential Property report is that, Australia-wide, strong latent demand has led to strong growth, primarily in units, taking residential commencements above demand thereby underwriting an imminent fall in the deficiency of stock.
But that’s from a high level. States and regions are different. The focus of the shortfall is NSW, Queensland and Western Australia, hence the strength of the upswing in these states. Equally, we should be concerned about oversupply in the other states and the ACT. We are concerned about the extraordinary amount of inner-city apartments coming on in Melbourne in the next few years.
The other factor coming into play is the impact on the demand for housing as regions servicing the mining investment boom cope with falling mining investment. We are looking at falls in the rate of population increase pretty much across the board, leading to a reduction in the underlying demand for dwellings over the next five years. Housing won’t be the only sector affected. In the upswing, we had to feed, clothe, house, entertain and transport incoming workers. That growth will now at least partially reverse.
Meanwhile, affordability remains reasonable given the weakness of residential prices over much of the last decade, the low level of interest rates and hence mortgage repayments. The real affordability problem is in the rental market — more on that another time.
And the interest rate environment is benign. Given the softness of the economy, low wage inflation and hence the benign inflationary pressure, we think short rates will stay low for at least another year before rising moderately. We will be cushioned from US rate rises when they come.
To us, that means that there are still a few years left in the housing upswing in Sydney and Brisbane. The Perth market may run out of steam as the mining boom runs its course. Darwin has a few years left to complete the Ichthys LNG project, but then demand will fall. Canberra, Adelaide and Hobart are oversupplied and will remain weak. Melbourne is balanced, but heading for oversupply, particularly in units.
There is no need to raise the spectre of a “bubble” to describe any of this. The term is unhelpful except when you need to describe an accident waiting to happen. A bubble is when expectations of capital gain become self-fulfilling as weight of money drives up prices and a boom in building takes the market into oversupply.
That can happen. But it’s not happening now. Overall, the market is undersupplied not oversupplied. Housing prices, while high, are lower relative to household incomes than they were a decade ago. And low interest rates have reduced debt-servicing ratios substantially.
The most expensive market — Sydney — is the most undersupplied and has been the weakest over the last decade. The low levels of residential building were part of the explanation for the weakness of the NSW economy. Hence the “basket case” title. But NSW is a basket case no more as latent demand drives strong rises in residential building and flowing through the rest of the economy.
We’re more concerned about the potential oversupply of Melbourne inner-city apartments. Many are held by Chinese investors. If they lock them up and leave them empty, they won’t add to the housing stock. But our understanding is that many of these units will end up either owner-occupied or on the rental market. And they’re still starting new projects.
The cycles are out of synch — some strong, some weak. But that has happened many times before in Australian residential markets. Usually the current batch of weak markets are those that will be strong the next time round. This is just another cycle.
Frank Gelber is chief economist for BIS Shrapnel. fgelber@bis.com.au
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