So is Western Australia in a recession or not?
Recent newspaper headlines claimed that Western Australia has entered a sharp recession, but this has been followed by other articles claiming this is not the case. So what is happening?
See our full report below
The latest report by RPData shows as prices falling by 1.2% in May, following a fall of 0.5% in April. In the first quarter of this year, prices were reported as increasing by 2.8%.
In contrast to RP Data-Rismark figures on value changes, our valuers are seeing values continuing to rise in most of our major cities.
Overall we consider that prices have continued to increase at a moderate pace in most markets. The difference may be due to the RP Data-Rismark methodology whereby the index measure the change in imputed house and unit values based on the flow of sales data and the attributes of those homes.
See our full report below
271 Australia Residential Markets National Overview June 2013
The latest report by RPData shows as prices falling by 1.2% in May, following a fall of 0.5% in April. In the first quarter of this year, prices were reported by RPData as increasing by 2.8%.
However, this does not match the experience of Propell’s property valuers who operate in the markets, where most markets are seen as stronger than the RPData figures suggest. Overall we consider that prices have continued to increase at a moderate pace in most markets. The difference may be due to RPData methodology that reports on median prices, which are not the same as typical prices. A change in sales composition, e.g. a fall in the number of higher value sales, or an increase in the number of lower value sales, can change the median price, so that it is possible for the median price to fall, when values are actually increasing.
Click on the link below for the full report.
271 Australia Residential Markets National Overview June 2013
So is the world economy improving or not? A slew of optimistic news in past months is getting replaced by a series of negative news, confusion reigns and this has shown up in volatile markets around the world.
The UN issued a revised global economic forecast which was reduced to 2.3% from a previous 2.4%, the actual numbers matter less than the fact that the forecast has been lowered.
So in the USA jobs are being created and unemployment claims are coming in, on the low side. US home prices are rising, but according to an article in todays AFR:
“Financial data firm Markit said that in the United States, falling overseas demand and domestic belt-tightening pushed the US Manufacturing Purchasing Managers Index to a seven-month low of 51.9 in May from 52.1 the previous month. A reading above 50 indicates expansion.”
However the expansion is enough for Bernanke to start talk of a reduction and eventual reversal of QE in the future. Couched as it was in careful language, that was enough to send stock and bond markets into a panic.
The Japanese market had a one day fall of 7.3% as concerns about the new economic policy or “Abenomics” took hold, and Chinese manufacturing fell, with traders suddenly remembering that chinese debt had expanded from $9 Trillion to $23 Trillion and the government can’t keep pump priming the economy on debt forever.
If QE is wound back, and US interest rates start increasing, the worry is that the massive outflows of US capital in recent years to the BRICS countries, and Australia, will hit the brakes and come to a stop. It is exactly these circumstances that killed the developing economies before, such as the Asian Crisis of 1997.
It is hard to see an upside in global conditions for Australia. Potentially we face a mixture of declining exchange rate, increasing inflation, lower demand for mineral exports. It will probably be next year at the earliest before all this kicks in. Meanwhile our government keeps developing budget policy on the assumption that todays extraordinarily good economic climate will continue.
The domestic outlook for employment has taken some hits, with Ford announcing closure of manufacturing here, Swan cleaners dismissing all staff and while low interest rates might otherwise kick off a boom in house prices, Australians still have reason to be cautious. Our forward estimate for national house prices, as recently as a month ago, was for a 5.2% increase in the nezt year, but with the election, and a declining economy, we may see interest in the housing market fade after the September election and average price rises come back to about 4% for the next year.
At a time when our governments, State and Federal, would like to think of more ways to tax the mining sector, we are starting to see reports of a downturn in activity. It was always understood that, as mine’s move from the development phase to the operational phase, the number of workers would decline.
However, reports coming through in the past month starting to paint a picture of cost-cutting and deferment of plans or projects, as miners continue to blame the high cost of doing business in Australia. The high dollar is also quoted as a problem, though the recent 5% decline in the dollar exchange rate should help somewhat.
In Western Australia in the past weeks, we have started to see reports of a sudden decline in job advertisements, in miners deferring employment recruitment plans, and in downstream roles related to exploration being cut.
This is anecdotal, but my neighbour Ian, a marine geologist, tells me this week that he is unemployed, with their company having gone from a phase in which they were frantically busy doing exploration in the sea off Australia and PNG, to finding that the miners have suddenly cancelled all survey instructions. The company blames offshore marine contractors who, according to my neighbour, pay wages at one quarter of the Australian rate. If that is correct, a mere 5% decline in the exchange rate will not correct that, but it is an indication of the problems we face.
Now the company Transfield Services reports in the Financial Review today that cuts in maintenance work on resource projects hit a crescendo over the last 6 weeks. According to chief executive Graeme Hunt, “in mining anything that is discretionary has been turned off or closed down”. Transfield joins other contractors in issuing profit warnings as resource companies postpone projects. Maintenance work is normally regarded as immune to cycles, since equipment needs to be maintained, so the deferment of such work is being seen as an indicator of the stresses that miners are currently facing.
What does all of this mean for Australia and our property sector?
Western Australia is already feeling the impact of these cuts, as employment prospects are certainly weaker, and this may hit the high wages of mining workers. It is early days yet, but property in the north-west has been enjoying extremely high prices, and is vulnerable to a collapse in prices if a severe downturn in the mining sector occurs. The same applies, to a lesser extent, to Perth, where house prices are still expected to increase, but the expected rate of increase may decline to be not much above the inflation rate in the short term. The penny has not dropped in the Perth housing market yet, and we expect it to remain strong into the Spring, but after that we will want to see the state of the mining sector.
Darwin has enough projects under way to maintain its strength for the time being.
Queensland is an interesting one. The decline in coal prices is adding to resource sector woes, and Queensland always seems to be waiting for a boom that has never quiet started yet. These changes may threaten proposed projects and curtail the size of others, giving the State further headaches on top of the existing budget woes.
For some time, both Treasury and the Reserve Bank have been highlighting the need to kickstart the nonmining sector, as a source of growth when the mining boom fades into more normal growth. Quite how we kick start the nonmining sector is still open to discussion, but it seems that this need will appear much more quickly than might have been expected a couple of months ago.
Transfield share price, courtesy of Sydney Morning Herald
According to Master Builders Australia, the value of residential building work done in real terms is expected to grow from $46 billion this year to $61 billion in 2015, according to an article in today’s Financial Review.
The value of residential building work has been in a slump for the past 3 years, seemingly getting worse with every month, but this trend has started reversing in half of the States. The chief economist of the MBA, Peter Jones, said that the forecast assumed that low interest rates will help release significant pent-up demand after a long period of under building.
However, the recovery is only forecast for 4 States: NSW, QLD, WA, NT. The State’s losing out are South Australia and Tasmania, the ACT and Victoria. In the case of Victoria, weaker employment prospects, and a ready oversupply of land, tend to weigh on the market, though as pricing gets corrected the outlook for Victoria may improve.
However, the outlook for non-residential building work remains negative, with the MBA forecasting further declines in real terms followed by what they describe as modest growth. Such growth may be driven by new activity in the commercial and industrial building sectors, though weakness is expected in social and institutional sectors and education related building. Activity in the engineering construction sector is expected to stay strong, despite the investment phase in resources starting to peak.
Picture courtesy of AFR.
Following the Federal Budget we have updated our economic overview and the May edition is available from the link below.
The Federal Budget, delivered in May, forecasts a continuing deficit of about $18 Billion or 1.1% of GDP, but it is likely to understate the actual picture for the next year. A key assumption is that real household expenditure will grow by 3%, while imposing further costs on households, which makes that questionable. As the mining contribution peaks, the question of whether the non mining sector can produce enough growth to produce the longer term 3% GDP growth target becomes important. With an election looming, and the prospect that many of the key budget measures may not get passed through Parliament before this session ends, it is an interim budget that will likely be changed after the election.
270 Australia Economic Overview May 2013
The Australian dollar has moved lower following the last cut in interest rates, and is now trading at around parity with the US. This is effectively a devaluation of about 5% on recent exchange rates. There are mixed opinions about where the dollar will go over the next year. While there are some forecasts of it dropping to US $0.95 or lower, others expect it to retain its attraction for capital investors and to continue trading around parity, or even to strengthen, the latter tied to the expected change in government.
A lower exchange rate is a mixed blessing, bringing with it higher inflation, and petrol prices at the pump will be the first obvious indicator of the change. However, it should reduce the negative pressure on local nonmining industry which may be more positive for employment in the longer term.
As far as property prices go, it is not so much the exchange rate that matters as what is driving the low interest rates, namely the weaker economy. Yesterday’s fall in the dollar was attributed to a negative survey of business conditions by National Australia Bank which pointed to weaker activity across the economy, although this was partially offset by Chinese stats showing that industrial output in April had risen 9.3% which indicated a strengthening trend.
In the short term, there is little doubt that the lower interest rates will feed into an already strengthening housing market in Australia and encourage demand and an increase in house prices. The Propell house view is for median prices to increase by an average 5.2% in the next year, but of course a lot could happen to the economy, either positive or negative, to change that.
Today we wait on the new Federal budget. Since the general expectation is for the Liberals to win government in September, this budget is of limited interest, except to the extent that it locks in a new government to increased spending plans. It is evident that the income from the mining boom has not been used to cut public spending or increase public saving, while the recipients of new welfare are worthy causes, this is hardly the time to be committing to vastly increased expenditure, when public revenue is falling, with expected Company Tax down $17 billion this year alone. So the new government is going to have to tackle the gap between revenue and spending, and so it is the first budget of the new government that will give us a more serious indication of where the nation is likely to go in coming years.
See more at
http://www.smh.com.au/business/a-tipped-to-stay-under-pressure-20130513-2jibf.html
Picture courtesy of www.australiandollarforecast.com
According to Stockland, in a briefing by Mark Steinert, today, the residential property market has a recovery underway but the market for new house and land packages is lagging by around 6 months. As reported by Property Observer, the auction clearance rate for Sydney remained at a high level this weekend at 70.7%.
He said that Queensland leading indicators show that confidence is returning, but this varies between submarkets. He also said that the group would no longer build stand-alone high rise apartments, which he describes as high risk.
In this column, we have over several months reiterated our view that economic growth in the next year will be more like 2.5% than the higher figure promoted by Treasury.
Earlier this week Treasury issued a report forecasting growth of 2.75% for the next year. Today the Reserve Bank issued its own forecast, suggesting that real growth in 2013 will remain at about 2.5%, possibly strengthening next year but remaining under 3%.
They quoted factors affecting growth as being the approaching peak in resource investment, the high exchange rate and ongoing fiscal consolidation, and the reduction in interest rates has been made to help support demand.
At the same time, they warn of the risks that low interest rates could lead to an unexpectedly strong rise in house prices. They don’t define what is meant by “strong”, but the current house view of Propell National Valuers is that prices could rise by an average 5.2% in the next year. The Bank will probably be comfortable with that level if it is just for one year, but anything much stronger runs the risk of interest rates increasing again.
Our current forward estimates for house prices is shown in the table below. However, we caution that the future is uncertain, and unexpected events have a way of changing the outlook, so that this simply represents our view at the present 
time.
