There are a lot of factors affecting the direction of our property markets, and consumer sentiment is a major driver.
Not surprisingly a recent ANZ-Property Council Survey shows a deterioration in sentiment across Australia’s property sectors.
Price expectations for residential property have turned around sharply from the positive outlook at the beginning of the year and a net 36% of respondents now expect house prices to decline over the next year.
In commercial property, across all sectors and states sentiment declined sharply.
Confidence in the tourism and retail sectors was the weakest, but sentiment also declined sharply in the office and industrial
After recovering through much of 2019, property sentiment has taken a hit from the coronavirus and the shutdown measures put in place by the federal and state governments to contain it.
Just as the lockdown measures have been broadly-based, the deterioration in sentiment has been equally widespread.
Sentiment across the residential, office, industrial, retail and tourism sectors have all been sharply impacted.
Not surprisingly, the tourism sector has been the hardest hit.
Across all sectors, price expectations have turned around sharply, employment prospects have deteriorated and the construction outlook has turned down.
The construction sector is not subject to a shut-down at present, but the downturn in the outlook is concerning, and suggests that the impact of the virus may be more long lasting on the property sector.
With long lags associated with construction approvals, commencements and completions, a quick rebound once the lockdown is eased seems unlikely.
After improving through 2019, sentiment in the property sector fell sharply in the June quarter ANZ-Property Council survey as the impact of the pandemic and the associated economic shutdown took their toll.
The hit to sentiment was broadly based across states and sectors, and brought the index to below the key 100 level for the first time since the survey’s inception (Figure 1).
Property sentiment collapsed in the June quarter survey
In a special set of questions, we found that expectations of a negative impact from the coronavirus were broadly based and similar across the states.
Nationwide, nearly 100% of respondents expect a negative impact from the coronavirus, with all states recording similar responses; 35% report that the virus and measures to contain it were already having a serious impact; 10% feel that the impact is so serious it is affecting the viability of their business; and 52% expect the impact to be serious or very serious.
Anticipated impact of the pandemic on business in the next quarter
In terms of construction activity: 83% of respondents said that the virus was impacting on “current construction schedules”; 67% said that the virus was having “some impact, but manageable”, suggesting that this related more to supply chain issues; and 15% reported it was having a serious impact.
While construction is a sector that has not been officially shut down, forward work schedules will clearly feel the ramifications of the virus, with few businesses or households willing to make large financial commitments while uncertainty about the economy and incomes is so high.
The deterioration in the economic outlook is clearly weighing on property sentiment, with a net balance of 88% of respondents expecting a deterioration in the economy over the next 12 months.
The slump was across the board, with all states reporting a sharp decline in expectations.
Sentiment in the residential sector fell across the board, with all measures of confidence taking a hit.
Economic growth expectations deteriorated sharply
Twelve-month price expectations are now close to the lows seen in early 2019; the employment outlook is back into negative territory; and construction activity is expected to be flat.
The forward work schedule is positive, but at its lowest point ever (Figure 4).
Residential property sentiment is weak across the board
Most of the hard data are yet to capture the decline in sentiment in the residential sector.
Prices rose solidly in March, although at a slower pace than in February; and building approvals rose strongly in February.
Auction clearance rates, however, have declined sharply over recent weeks and are now at their lowest levels for the period we have data (Figure 5).
House prices are likely to follow suit and weaken over coming months as uncertainty around the economic outlook in general, and household income in particular, constrains household spending decisions.
Auction clearance rates suggest house prices will fall in coming months
House price expectations weakened across all states.
Nationwide, a net 31% of respondents in the residential sector expect prices to fall in the next 12 months (down from 52% expecting a rise in the previous quarter).
Expectations were weakest in Victoria, where a net 42% expect prices to decline.
Sentiment in Queensland and South Australia was almost as weak, with a net 38% expecting price declines; while in Western Australia and New South Wales expectations were marginally less weak, with a net 26% and 16% respectively expecting price declines.
House price expectations have done a sharp U-turn
Expectations for construction activity were varied across states.
Nationwide, a net 1% of respondents in the residential sector expect construction activity to fall in the next 12 months (down from 27% expecting a rise in the previous quarter).
The outlook is negative across all states and territories except Western Australia where a net 26% of respondents expect activity to rise.
In Queensland, the optimists matched the pessimists for a net balance of zero (Figure 7).
The turn in sentiment around the construction outlook is yet to be corroborated by the hard data.
While building approvals were yet to turn up convincingly, they did look to be stabilising.
Given the expected sharp rise in unemployment and the large hit to household income, it is likely that approvals will fall sharply over coming months, consistent with the deterioration in construction activity expectations and forward orders in the June quarter survey.
This is likely to leave a very large gap in the construction pipeline in 2020-21.
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The housing construction outlook has deteriorated sharply
Alongside the deterioration in sentiment, firms are saying they expect credit to become harder to access over the next 12 months.
After steadily improving through 2019, in the latest survey a net 18% of all respondents said they expected debt to be more difficult to access, (down from a net 13% expecting it to be easier to access in the previous quarter).
Of the respondents operating in the residential sector, the turnaround was even more marked, with a net 21% expecting it to be harder to access credit from a net 24% expecting it to be easier to access in Q1.
Sentiment around access to debt finance has reversed
While respondents expect credit to be more difficult to get, they continue to expect further cuts in interest rates.
Across the country, a net 67% of firms expect rates to be lowered over the next 12 months (Figure 9).
This survey was conducted over 16–31 March, so primarily after the RBA cut rates to 0.25% on 18 March.
The RBA has flagged this as the low in rates – although it has also signalled that rates will stay low for some time.
At this stage, we do not expect further cuts to the cash rate.
Most respondents expect more rate cuts, despite the cash rate now being at the effective lower bound
Confidence in Australia’s commercial property industry also took a hit in the June quarter survey (Figure 8).
The downturn in the economic outlook, the inability of many tenants to pay their rent and the uncertainty about the timing of recovery have all helped to drive sentiment in commercial property lower.
Confidence in all sectors of commercial property declined sharply in the June quarter survey, although, not surprisingly, sentiment is weakest in the tourism and retail sectors (Figures 10 & 11).
Figure 10. Commercial property confidence declined across all sectors
The tourism sector is expected to be most impacted by COVID-19
In the tourism sector, all indicators fell sharply into negative territory.
Price expectations were the weakest, while forward orders, construction and employment expectations also fell deeply into negative territory.
The hit from the bushfires in the summer holiday period has been compounded by the more serious impact of the pandemic.
With international borders closed, many state borders shut and no end in sight to social distancing, the outlook for the accommodation sector is extremely challenging (Figure 12).
Tourism property confidence declined across all indicators
Sentiment in the retail sector was almost as pessimistic as the tourism industry, with all indicators in negative territory.
Retail sector sentiment was already under pressure, given the ongoing challenges in the industry, but the social distancing measures put in place by the federal and state governments have brought foot traffic close to a standstill in shopping centres and high streets.
Not surprisingly, price expectations are particularly weak (Figure 13).
Retail property indicators were almost as weak as tourism
Confidence in office property also weakened sharply.
As was the case across most sectors, capital value expectations deteriorated the most with a net 50% of respondents in the sector expecting price declines.
The employment, forward work schedule and construction indexes were all in negative territory.
Office property confidence declined across all sectors
Across all of the commercial property sectors, industrial property expectations fared the best.
While most indicators are in negative territory, construction activity expectations remain in the black.
In a shift to online trading, warehousing and logistics are likely benefitting from the current trading dynamics.
With a possible permanent shift to a higher share of online retail sales over time, this sector is likely to outperform other commercial property sectors.
Industrial property sentiment deteriorated
Source: ANZ - Property Council Survey, Author Felicity Emmet, Senior Economist ANZ Bank.
This report was prepared for ANZ Institutional, Market and Private Banking clients and is general in nature and does not constitute personal financial product advice or take into account your objectives, financial situation or needs.
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