The Australian Business Cycle 2015/2016: Excellent Property Sector Outlook?

In parallel with the signing of the Free Trade Agreement with China the RBA (1) has forecast above trend GDP growth (i.e. around 3%) for Australia in 2016 albeit with lagging employment growth.  This scenario is based on higher than average trend growth for Australia’s trading partners and a return to trend growth in non-mining activity in Australia. Major Trading Partner GrowthNon Mining Activity

According to the RBA this outcome is likely to be driven by ‘very’ low interest rates, an increase in household consumption and associated with increasing incomes in the non-mining capitals of Sydney and Melbourne.  This is evident in the strength of housing market conditions which is supporting strong growth in dwelling investment.  The RBA expects mining investment to fall sharply in 2015 weighing on the performance of Queensland and WA.

Retail Sales and Housing Price Growth


The RBA view paints an excellent economic outlook for the property industry.  By 2016 GDP is likely to be hovering above 3%, the non-mining sector will be growing above trend (i.e. the employment intensive service sector driven by household income) and population growth at the historically high rate of 1.7% or around 400,000 persons per annum.

Interest rates in this scenario could increase by late 2015 or in 2016, depending on the strength of household consumption, employment and business investment.  Based on MacroPlan’s Chinese networks strong demand for residential property is likely to persist for at least two more years.  Retail yields are tightening and there are initial signs of leasing in Sydney, Melbourne and Brisbane office markets despite high vacancy rates.  Contrarian investors are already purchasing B Grade office properties, particularly in Sydney.

Contrary to this robust RBA scenario some economists (e.g. Steen Jakobsen/Saxo Bank) forecast the possibility of a recession in 2015 with the Australian dollar trading at 80 cents, sharply lower commodity prices and the RBA cash rate being cut to 1.5%.  Jakobsen suggests immediate macroprudential controls to prevent the potential of a housing price ‘bubble’. 

Certainly the potential for a weaker stock market driven by commodity prices and the likely requirements for higher capital adequacy provisions for the banking sector look likely to weigh on the stock prices.  The Jakobsen ‘scenario’ would result in a bull market for residential and retail sectors but softness in commercial and industrial sectors.  This potential ‘mini cycle’ could simply elongate the timing of the RBA scenario with above trend economic growth emerging in 2017.

The strength of the AUD will be a key factor. Any reduction to the 75c to 80c range will stimulate further Asian investment. The implications of the removal of US Quantitative Easing are also an important consideration for the Australian Business Cycle.  Academic and market research into the impact of QE in the US, Japan, the UK and Europe (2) indicates widely differing impacts in different countries. For Australia however, it is likely that the QE bond buying which reduced long term bond interest rates and also increased US liquidity with stimulation effects on stock markets around the world, could have some negative impacts in Australia, although the research is inconclusive particularly in relation to economic growth, house prices, and stock prices.  Based on MacroPlan’s current range of projects we have observed no evidence of lower levels of liquidity but we have seen signs of unease in the financing of major new investor targeted apartment projects in Melbourne, Brisbane and Perth.

2015 will be an intriguing year - Expect a solid start as housing markets cool (outside of Sydney) and stock levels move toward long term averages if the RBA scenario prevails. Look for domestic triggers including infrastructure investment and hiring in the public as well as private sector as this will bring forward the next housing cycle in Brisbane.  Expect freight and logistics and the retail sector to be strong sectors as will the market for residential owner occupiers. This trend will continue to drive the upswing in prices and supply of fringe residential land on the Eastern Seaboard.  Economic fundamentals are strong for the property sector whether a 2015 mini-cycle occurs or not.  For Perth, population growth is likely to reduce guiding in the short term (from 3.5% to 1.5%) but recover in 2017/18 as the mining sector operational phase begins.

About MacroPlan: MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Brian Haratsis, Executive Chairman today to discuss your property research requirements.

Brian Haratsis MacroPlan’s Executive Chairman is an economist and future strategist who has more than 30 years’ experience in providing detailed advice to governments and major corporate clients throughout Australia.E: P: 03 9600 0500