By Andrew Nelson
We were doing all right after the GFC. It wasn't comfortable, but comfort could be taken from having a look at Europe and the US. But then the US recovery was pushed out further and further, China faltered and Europe found itself in the midst of a second economic crisis. All the while, Australia kept chugging on.
That is until 2012.
The European debt crisis seemed determined to never end, the US recovery kind of stopped recovering and then we were smacked in the face by new found issues in China, namely the sustainability of the growth that has been underpinning Australia's recent outperformance.
Thus, after a brief rally early in the year, equity markets have softened, risk aversion remains elevated and this has kept a lid on the prices of assets.
It seems like the woes of Europe will never end, with the prospect of enormous economic, social and political challenges to play out for years to come. However, China may prove to be a different story altogether. After the nation's economy stalled quite drastically earlier this year, according the bulk of the talk, Chinese economic activity is expected to recover in 2013 on the back of ongoing policy fiddling and the prospect of accelerated public investment. But all of this is yet to be seen.
In the meantime, house prices continue to decline in most Australian capital cities, while buyer sentiment remains soft and the inventory of unsold homes remains elevated at near record highs. On the other hand, a team of analysts and economists at ANZ Bank point out that supply/demand fundamentals continue to tighten, while low vacancy rates are driving rents higher. At the same time, building activity remains at levels that are far short of being able to dent underlying housing demand.
Thus, there is good news for Australians despite these elevated global risks.The ANZ team believe the domestic economic situation should remain supportive for Australian property. The team sees Australia as still being in the early stages of what should prove to be a multi-year investment boom that that will support solid economic growth over the next few years.
Now here's the fine print, the team believes the benefits of this prospective boom will not be enjoyed equally across the states, with Western Australia, the Northern Territory and Queensland to be the major beneficiaries.
Still, it seems the benefits may already be beginning to manifest themselves. After the declines of recent years, the team notes house prices are starting to show at least tentative signs of reaching a bottom in a few capital cities, spurred on, of course, by the recent string of interest rate cuts. However, ANZ warns that recent state economic reads are suggesting prices in Hobart and Melbourne remain vulnerable.
In the meantime, the team predicts that rising rents, better housing affordability and weak equity markets will help to attract a steady flow of investors and first home buyers back towards buying property. Thus, as long as the economy and labour market remain in decent shape, as they are now, house prices should find a floor in most capital cities in the year ahead.
In terms of commercial property, the team notes that fairly widespread investor uncertainty has seen the post-GFC rebirth of the commercial property market flatten out again in 2012. Rents in Sydney, Melbourne, Adelaide and Canberra have stalled and cap rates are still near post-GFC highs.
However, the team from ANZ also remains upbeat on the underlying market fundamentals of commercial property, which suggests the broader commercial property market is in the early stages of a multi-year cyclical upswing. ANZ notes that currently low vacancy and tight supply will eventually turn into considerable upside for effective rental rates, especially in the office and industrial sectors.
The team also notes that current yields are simply masking what are increasingly positive fundamentals, but the team thinks the yields will firm as investor sentiment rebounds. ANZ is of the belief that in the end, investors just won't be able to turn down high yields, long lease expiries and solid fundamentals, which suggest Australian office property represents an attractive risk-adjusted investment. ANZ predicts that the current global appetite for yield will eventually make its way down the risk curve and Australian office property will be a key beneficiary.
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