Property market strong but supply demand imbalance continues: ANZ's Daniel Gradwell

EXPERT OBSERVER

I think there were 2 pronounced developments during Q4 2019i, the first being there was a broad acceptance that an improvement in the market is here to stay in terms of price growth.

In terms of economic indicators, we’ve seen an improvement in the labour market over the past month or 2 which is a real positive compared to mid2019 when unemployment was trending higher.

The challenge is will there be enough job creation over the next few months given the headwinds around the bushfires and Coronavirus.

ANZ Research is anticipating the economy will not create enough additional jobs to drive unemployment lower and wages higher, which is expected to result in 2 more interest rate cuts towards the middle of the year.

The RBA has emphasised its belief that rate cuts are having the desired impact, but that it does take time.

The implications for the economy and property markets will continue to be felt through 2020.

In terms of property indicators, we’ve seen some tentatively positive numbers coming through in building approvals. This is important given they were at very low levels throughout 2019 for both apartments and detached houses.

Of course apartments were hit harder which reflected concerns over build quality and cladding issues which were more prominent in Sydney but still had an impact in Melbourne.

That said, it’s worth highlighting the large lead and lag times before getting product onto the market. Even if building approvals start to pick up today, there will still be a housing shortage in the short term.

What are your predictions for 2020?

Broadly it will be a good year from a housing standpoint. Anticipated rate cuts will further entrench growth in prices for existing and new dwellings across both detached housing and apartments. Prices are already above the previous peak for units and apartments in Melbourne.

We’ll continue to see a pretty solid presence of first home buyers in the market. But it gets complicated because price growth doesn’t help affordability which is already challenging. While the new home loan deposit scheme will help 10,000 first home buyers a year, it won’t affect a material change.

The demand and supply dynamic will put upward pressure on prices initially, but building approvals and construction should start to accelerate in the second half of the year. That’s the key challenge; supply can take 12-18 months to come through, and the delay could put further pressure on both housing prices and rents.

Vacancy rates are already low and if we’re not building enough for the remainder of the year it’s likely the vacancy rate will continue to fall and result in continued rent increases.

Auction results have been strong and there are greater levels of stock on the market and rising transactions.

It’s not just a short term sugar hit which people might have been expecting, and the realisation that a stronger market is here to stay is why we’re seeing more people in the market keen to purchase.

Secondly, the supply-demand imbalance continues. Over the final quarter last year we finally started to see some positive signs regarding the construction pipeline, which has been a long time coming. We’re not talking about a sharp rebound, rather some green shoots emerging by way of building approvals starting to stabilise rather than continuing to fall.

Building approvals fell more than 25% from the peak, and have now recovered just 3%. Housing finance also picked up for construction of new dwellings for both owner occupiers and investors, which is usually a good indicator of where building approvals will go. So we have reason to be more optimistic about the construction cycle than we were 3 months ago.

What are the key economic and property indicators telling us?

It’s a little mixed.

On the economic front, the recent bushfires and Coronavirus present some challenges. For people directly by the bushfires it’s catastrophic, but the impact on the broader economy is likely to be temporary.

There will be some rebuilding stimulus which the federal government has already announced that will go directly to these communities. Coronavirus will have a larger impact.

A recent ANZ Research note forecast the bushfires to take 0.2% off GDP, while Coronavirus will shave off 0.5% due to the impact on tourism and foreign students. And, unlike the bushfires, there won’t be any stimulus measures.

If you compare it to the SARS outbreak in 2002-2003 when Chinese tourist arrivals fell by more than 80%, the share of Chinese tourism is now 5-times larger.

But it’s not just about the number of visitors; they also spend the most per person, which significantly magnifies the impact.

DANIEL GRADWELL is the Associate Director of Property at ANZ