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Australian Economic Drivers December 2017

Savills Research Australia

Highlights

Over the year to September 2017, the Australian economy grew by 2.24%;

Australia has experienced population growth at record high levels for nearly 20 years, with total population set to hit 25 million people next year. This is 30 years ahead of official forecasts made in 1998 by the ABS;

Employment growth was recorded at 3.1% over the year to November 2017, exceeding all long-term averages;

Growth in job advertisemets was 3.5% over the year to October 2017 with job advertisements up strongly across all sectors from 2013, except for the Retail sector;

Performances have begun to normalise between states, with encouraging metrics across QLD, SA, ACT and WA.

Date Latest PCP*

GDP Sep-17 2.2% 2.7%

Population Growth Jun-17 1.6% 1.5%

Inflation Sep-17 1.8% 1.3%

Employment Growth Nov-17 3.1% 0.9%

Unemployment Rate Nov-17 5.4% 5.7%

Retail Trade Oct-17 1.8% 3.4%

Job Ad Growth – Total Oct-17 3.5% 5.9%

House Price Growth Sep-17 5.1% 0.9%

Attached Price Growth Sep-17 3.8% -1.3%

Earnings Growth May-17 2.1% 2.0%

*PCP = Previous Corresponding Period

AUS Key Economic Indicators

2

Savills Research | Australian Economic Drivers

SOUTH AUSTRALIA

WESTERN AUSTRALIA

NORTHERN TERRITORY

VICTORIA

QUEENSLAND

NEW SOUTH WALES

WA* GSP: FY18 - 2.50%

FY19 - 2.50%

Emp: FY18 - 0.75%

FY19 - 1.50%

CPI: FY18 - 2.25%

FY19 - 2.50%

State Treasury Economic Forecasts

NSW GSP: FY18 - 2.75%

FY19 - 2.50%

Emp: FY18 - 1.50%

FY19 - 1.25%

CPI: FY18 - 2.25%

FY19 - 2.50%

ACT GSP: FY18 - 2.50%

FY19 - 2.50%

Emp: FY18 - 1.50%

FY19 - 1.50%

CPI: FY18 - 3.50%

FY19 - 3.50%

Qld. GSP: FY18 - 4.00%

FY19 - 3.75%

Emp: FY18 - 1.00%

FY19 - 1.50%

CPI: FY18 - 2.00%

FY19 - 2.25%

Vic. GSP: FY18 - 2.75%

FY19 - 2.75%

Emp: FY18 - 2.00%

FY19 - 1.50%

CPI: FY18 - 2.00%

FY19 - 2.25%

SA GSP: FY18 - 2.25%

FY19 - 2.25%

Emp: FY18 - 1.00%

FY19 - 1.00%

CPI: FY18 - 2.00%

FY19 - 2.25%

Report ContentsState Treasury Economic Forecasts 2Executive Summary 3Key Economic Indicators by State 3GDP & Profits 4Rates & Inflation 8Employment 10Population 14Retail Trade 16Housing Trends 18Household Sector 20Internation Forecasts 22Methodology 24

Key Contacts 24

National Head –Capital Strategy & Research

Chris [email protected]

Senior Analyst – Capital Strategy & Research

Shrabastee [email protected]

For our latest national reports, visit savills.com.au/research

To join Savills Research mailing list, please email [email protected]

*CPI estimates are for Perth only

December 2017

savills.com.au/research 3

Executive Summary The lanes of Australia’s ‘two speed economy’ are beginning to merge, with performance that has been highly fragmented across states and sectors beginning to normalise somewhat. While economic growth remains subdued and highly dependent on population growth (that leads the developed world), a clear improvement has become evident in employment growth over the past 12 months. Such employment gains are understandable when looking at Savills' index of corporate revenue numbers that rose by a substantial 23.7% over the past 12 months, led by the mining sector that has moved into a major export phase following the completion of major projects.

Australia’s population will reach 25 million people in 2018, some 30 years ahead of forecasts made by the ABS in 1998. Over the coming five years, Australia’s population is expected to increase by 8% according to the IMF; a figure circa 3 times the average of developed peers. Clearly for property markets this has been a major driver of demand-led performance, but the economy has become too reliant on this as a driver of economic growth, with growth in GDP per capita a soft 0.6% - half the global average. Should a focus return to productivity growth, Australia’s economic performance could be substantially improved.

Nevertheless, Australian employment grew by a very strong 3.1% over the year to November-17, with the majority of these gains encouragingly led by full-time employment. Most telling in the employment numbers however were the state performances. While all performed well, QLD and WA materially outperformed recent years, with employment growth in QLD an exceptional 4.8% and WA at 2.8%. South Australia also turned the corner with 1.3% employment growth - well above averages witnessed in recent years – which when coupled with an 11.2% rise in job advertisements should put the state firmly back on the investment radar for major investors.

Despite these positive drivers from the business sector, inflation remains benign at just 1.8% for September-17 and pricing competition in the retail sector looks likely to see CPI be of little concern to the RBA that has now held the cash rate steady at 1.50% since August 2016. The concern for the Australian economy is the level of indebtness, now at approximately 140% of GDP. This highlights the sensitivity of the economy to interest rates and may hinder growth contributions from the household sector, but which would ultimately play a part in moderating any required upward movements in the cash rate.

SFD / GDP Growth

Population Gowth Inflation Employment

GrowthUnemp.

RateHouse Price

GrowthApartment

Price GrowthRetail Trade

Growth

Sep-17 Jun-17 Sep-17 Nov-17 Nov-17 Sep-17 Sep-17 Oct-17

NSW 3.1 (2.7) 1.6 (1.4) 1.9 (2.5) 2.9 (1.6) 4.8 (5.3) 1.7 (6.1) 1.0 (5.9) 2.5 (3.9)

VIC 4.2 (3.0) 2.3 (2.1) 2.2 (2.3) 3.0 (2.1) 5.9 (5.6) 11.5 (6.6) 6.2 (4.4) 3.0 (3.9)

QLD 3.0 (2.0) 1.6 (1.8) 1.5 (2.4) 4.8 (1.4) 6.1 (5.6) 4.0 (2.9) 1.1 (1.7) 0.1 (3.2)

WA -4.2 (2.2) 0.8 (2.1) 0.8 (2.1) 2.8 (1.6) 6.0 (4.8) -3.1 (0.5) -6.9 (0.7) -0.5 (3.3)

SA 3.6 (2.0) 0.6 (0.9) 1.8 (2.3) 1.3 (0.7) 6.3 (6.0) 0.7 (2.9) 4.2 (2.8) 2.6 (3.0)

ACT 3.0 (2.6) 1.7 (1.8) 2.1 (2.2) 3.9 (1.6) 4.0 (3.8) 8.1 (3.8) -3.1 (1.5) 1.9 (3.3)

TAS 1.9 (1.4) 0.6 (0.5) 2.0 (2.1) 2.8 (0.6) 5.9 (6.1) 5.4 (3.2) 7.8 (2.3) 2.3 (2.8)

NT 7.1 (4.4) 0.1 (1.4) 0.6 (2.1) -2.1 (2.0) 3.8 (3.9) -4.8 (2.2) -1.3 (1.9) 0.1 (3.6)

AUS 2.2 (2.6) 1.6 (1.7) 1.8 (2.4) 3.1 (1.6) 5.6 (5.4) 5.1 (5.1) 3.8 (4.4) 1.8 (3.6)

Source: ABS/DOE/RBA/Savills Research; 10yr Averages shown in brackets

Key Economic Indicators by State

4


Economic Growth

Source: ABS / Savills Research; On a rolling year basis

Over the year to September 2017, the Australian economy grew by 2.24%, largely in line with the consensus. Growth was driven by private investments, as the mining sector made a comeback. However, this was largely offset by a softer residential housing market and falling consumption, with weak wage growth constraining spending. With business investments largely supporting the economy over the past year, it appears likely that there will be a flow on effect to wages and thus drive consumption. Whilst still below long term averages, the uptick in GDP growth suggests that the domestic economy is now beginning to turn. Although up from historic lows, inflation remains benign, with core inflation at 1.75%, well below the Reserve Bank’s target range.

GDP Growth vs. Inflation

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5% GDP Growth Inflation

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

NSW VIC QLD WA SA ACT AUS

1yr 5yr 10yr 15yr

$5bn

$7bn

$9bn

$11bn

$13bn

$15bn

$17bn

$19bn

$21bn

$23bn

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000 Development Approvals Real Mining Capex (RHS)

NSW 3.13%

Vic. 4.25%

WA -4.23%

Qld. 2.25%

SA 2.97%

December 2017


Source: ABS / Savills Research Source: ABS / Savills Research

The Victorian economy has been a standout, with growth in State Final Demand surpassing all other states and long-term averages. However, whilst there has been much discourse about the strength of the Victorian economy (particularly over the New South Wales economy), latest data from the ABS points to GDP per capita growth falling in Melbourne over FY17 by 0.1%, with a rise of 1.0% in Sydney over the same period. Rising commodity prices and increased production has spurred new engineering starts, with Queensland the main beneficiary, although significant improvements over recent years have also been recorded in SA and ACT.

Over the past decade, Australia has been largely characterised as a “two speed economy” with the chart below one of the best depictions of this trend. As the resources downturn began in 2012, the residential construction boom started to take off, helping to drive economic growth nationally. Promisingly, latest data indicates that the “two speed economy” is normalising, with other industries accounting for a greater proportion of overall economic growth. Since 2016, we are seeing the domestic economy being increasingly supported by growth in the services’ industries, particularly the Professional & Technical Services’ and IT & Telecommunications sectors. Growth in these two industries has also helped drive full-time employment growth up.

State Final Demand (as at Sep-17)

Real Mining CAPEX vs. Residential DAs

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


1yr 5yr 10yr 15yr

$5bn

$7bn

$9bn

$11bn

$13bn

$15bn

$17bn

$19bn

$21bn

$23bn

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


1yr 5yr 10yr 15yr

$5bn

$7bn

$9bn

$11bn

$13bn

$15bn

$17bn

$19bn

$21bn

$23bn

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000


GDP Composition by State

NSW - 32.8% VIC - 25.3% QLD - 19.5% WA - 11.9% SA - 6.5% ACT - 2.7% TAS - 1.8% NT - 1.8%

6


Economic Growth (continued)

Source: ABS / Savills Research

Growth in GDP per capita has emerged as a prime concern for the Australian economy. Whilst Australia boasts 26 consecutive years without a technical recession, this record has been underpinned by rapid population growth at a level experienced by few other developed economies. This suggests productivity growth per person is lagging relative to its international peers. A growing part-time labour force leading to rising underemployment and sluggish wage growth are also contributors to downward trending real GDP per capita growth. Promisingly, as illustrated in the adjoining chart, there has been a small uptick in growth in GDP per capita over the last quarter, with forward looking indicators pointing to continued improvements over 2018.

GDP Growth Per Capita (as at Sep-17)

Mining

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5% GDP per Capita Growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5% 2017 2018 2019 2020 2021

70.9%66.1%

23.7%21.3%

16.8%11.3%

8.2%5.3%5.2%4.5%4.5%4.1%

3.1%2.4%

(7.3%)(16.0%)

Prof. & Tech ServicesMining

TotalUtilities

Admin & SupportManufacturing

Retail TradeIT & Telecommunications

ConstructionBanks

Wholesale TradeOther

Rental, Hire & R/ELogistics

Arts & RecreationHospitality

Sep-17

Sep-16

$108.8 bn

$65.5 bn

Prof. & Technical ServicesSep-17

$25.0 bn

$14.6 bnSep-16

“Corporate revenues are up an impressive 24% over the year to September 2017”

December 2017


Source: IMF / Savills Research Source: ABS / Savills Research

A recovery in global trade and China’s import demand is likely to keep Australia’s forecast economic growth over the next 5 years well above its developed peers (as illustrated in the adjoining chart). The key concern for Australia remains productivity, which ranks the poorest out of all advanced economies in terms of the output gap, with weak demand resulting in the economy performing under its full potential. This has clearly translated to a widening gap between growth in GDP per capita and GDP growth since the Global Financial Crisis, with projections (from the IMF) of further widening if productivity concerns are not addressed.

Corporate revenues rose by an exceptional 23.7% over the year to September 2017. Company profits for the mining sector are indicative of the completion of major projects and a move to the export phase, as mining companies reported a fivefold increase in profits on the back of rising commodity prices and increased production. Promisingly, record high growth in profits for the Professional & Technical Services sector are indicative of future growth in the sector via an uptick in related technical services' work.

Forecast GDP Growth – International

Company Profits (as at Sep-17)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5% 2017 2018 2019 2020 2021

70.9%66.1%

23.7%21.3%

16.8%11.3%

8.2%5.3%5.2%4.5%4.5%4.1%

3.1%2.4%

(7.3%)(16.0%)


TotalUtilities



ConstructionBanks




-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5% 2017 2018 2019 2020 2021

70.9%66.1%

23.7%21.3%

16.8%11.3%

8.2%5.3%5.2%4.5%4.5%4.1%

3.1%2.4%

(7.3%)(16.0%)


TotalUtilities



ConstructionBanks




8


Rates & Inflation

The spread between short term and long term bond rates are indicative of a normal, albeit somewhat flat, yield curve. 10yr rates currently trading approximately 75bps above 2yr rates bond markets do not appear to be mispricing the risk-component of time; as was evident between 2006-7. An inverted yield curve (below zero on this chart) has long been seen a a reliable predicator of an economic downturn which does not appear to be at play in today’s market and shows bond traders are not expecting material increases in rates through the period.

Core inflation remains below target levels as a result of muted wages growth and pricing competition in the retail sector. Higher liquor, tobacco and electricity prices helped to drive the overall inflation rate, although CPI was below long term averages across all other broad categories (except for liquor). In particular, increased competition amongst supermarket retailers over the last 2 years saw the cost of food fall by 0.7% over the year to September 2017, well below the 20yr CAGR of 2.7%. Amazon’s entrance into Australia is likely to continue to constrain inflation over the short to medium term as Australian retailers focus on remaining competitive; leading to a downgrading of inflation forecasts by the RBA.

CPI by Sector (Sep-17)

Yield Spreads - 2yr to 10yr Bond (bps)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0% Annual Growth 20yr CAGR

-100

-50

-

50

100

150

200

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%Housing Small businessLarge business Govt. Bond Yield - 2yrGovt. Bond Yield - 3yr Govt. Bond Yield - 5yrGovt. Bond Yield - 10yr Cash Rate

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%


-100

-50

-

50

100

150

200

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%


Source: ABS / Savills Research Source: RBA / Savills Research

Global 10yr Bond Rates (as at Nov-17)

2.51% 1.26% 0.06% 3.91% 2.08% 2.34% 2.76%

2.50% 0.32% 0.62% -0.16% 1.71% 1.90% 1.41%

December 2017


Exchange Rates – USD

Interest Rates

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%


-100

-50

-

50

100

150

200

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%


Source: RBA / Savills Research

“A housing boom that appears to be moderating, record high levels of household debt, historically low wages growth and inflation below target levels have prompted the RBA to maintain their ‘lower for longer’ outlook for the interest rates”

After a temporary surge to USD 0.79 in August, the Australian dollar continues to fall amid an eroding gap between global and domestic interest rates. However, the outlook for the Australian dollar remains mixed. On the one hand, the interest rate differential is set to fall further in 2018, losing attractiveness for foreign capital, as other advanced economies focus on raising interest rates (with no such aims on the horizon for the RBA). At the same time, resilient demand from the Chinese economy and the AUD’s safe-haven status amid growing political and financial instability in other advanced economies like the UK and the US are likely to push the dollar higher. Whilst the Australian economy would benefit more from a depreciating currency, whether this eventuates remains to be seen.

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.2010yr Avg - USD USD


1 AUD to: Current PCP 10yr Avg

TWI 63.60 65.30 68.63

USD 0.76 0.75 0.87

GBP 0.56 0.60 0.56

EUR 0.64 0.70 0.68

JPY 84.97 84.23 85.55

CNY 5.01 5.15 5.71

SGD 1.02 1.07 1.17

INR 48.90 51.26 39.54

THB 21.44 26.62 22.29

NZD 1.11 1.05 1.18

MYR 3.10 3.34 3.01

IDR 10,254 10,138 9,422

HKD 5.92 5.80 6.78

CAD 0.98 1.00 0.97


10


Employment


Labour market conditions continued to strengthen across Australia with a signifi cant recovery in full-time employment evident for the fi rst time since the Global Financial Crisis. Employment growth was recorded at 3.1% over the year to November 2017, exceeding all long-term averages. Growth in part-time employment over the last 3 years has been a prime contributor to weak wage growth in the domestic economy, translating to weaker consumer and business sentiment over the last 2 years. Promisingly, an upturn in full-time employment is likely to translate to higher wages. Full-time employment growth accounted for for 83% of total employment growth (as at November 2017), compared to 23% in November 2016.

Full Time vs. Part Time Employment Growth

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000 F/T Employed P/T Employed

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


1yr 5yr 10yr 15yr

6.255.85 5.82 5.81 5.68

5.41

4.65 4.62

3.76

WA TAS SA QLD VIC AUS NT NSW ACT

“Employment growth was recorded at 3.10% nationally, the strongest result since the Global Financial Crisis, led by IT & Telecommunications”

NSW

2.91%Vic.

3.00%Qld.

4.81%WA

2.83%SA

1.32%ACT

3.87%

December 2017



A rebound in employment growth was evident across all states. The positive from the latest data has been growing full-time employment and an increase in the total hours worked that is likely to support household incomes over the medium term. Employment gains in Queensland were largely as a result of increasing requirement for workers in the Hospitality & Tourism industries. In addition, new starts to infrastructure and mining projects have also boosted employment growth in the state. In particular, Rio Tinto’s $2.6 billion investment in a power plant in far north Queensland helped to boost employment in the Mining, Resources and Energy sector. Growth in public sector employment was largely responsible for consistent overall employment growth in Victoria as the government workforce grew faster the private sector..

The national unemployment rate fell to 5.4% (in trend terms), its lowest level since April 2013. However, this was due in part to a falling participation rate in addition to strong employment gains evident over the year to November 2017. The unemployment rate fell across all states except for WA, where it rose to 6.25%. The unemployment rate in NSW was recorded at 4.6%, highlighting the underlying strength of the NSW labour market. However, we feel that the rate of underemployment continues to be a better refl ection of the health of the economy, which remains elevated at 8.5%.

Employment Growth by State (Nov-17)

Unemployment Rate by State (Nov-17)

(200,000)

(100,000)

-

100,000

200,000

300,000


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


1yr 5yr 10yr 15yr

6.255.85 5.82 5.81 5.68

5.41

4.65 4.62

3.76


(200,000)

(100,000)

-

100,000

200,000

300,000


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


1yr 5yr 10yr 15yr

6.255.85 5.82 5.81 5.68

5.41

4.65 4.62

3.76


Employment Composition by State

NSW - 32% VIC - 26% QLD - 20% WA - 11% SA - 7% ACT - 2% TAS - 2% NT - 1%

12


Employment by Industry (May-17)

Employment (continued)

9.4%

6.4%5.2%

5.1%

3.3%3.0% 2.1%

1.7%1.1%

0.9%

(0.6%)

(1.1%)

(1.6%)(1.6%)

(8.8%)(10.4%)

-15%

-10%

-5%

0%

5%

10%

(7.7%)

(2.3%)

0.3%

3.5%

3.9%

4.2%

5.6%

6.5%

11.2%

NT

TAS

NSW

AUS

ACT

WA

VIC

QLD

SA

70

75

80

85

90

95

100 Job Ads - Total Job Ads - OfficeJob Ads - Industrial Job Ads - Retail


Australia’s services’ sectors continue to drive employment gains, as illustrated in the adjoining chart. Marginal gains were made in the Manufacturing and Mining industries, as a result of rising commodity prices and a lower AUD. Moderating residential development approvals, particularly for apartments, led to slower growth in construction jobs with further falls expected over the remainder of 2017. As expected, weak retail trade growth translated to falling employment in Retail Trade. Recent evidence suggests that a rising ageing population is likely to boost employment in Health Care and Social Services sectors. These industries are set to be given a further boost as Australia’s population continues to grow; aiding sub sectors like Child Care.

Industrial

10.5%

Office

4.7%

Retail

-4.7%

“Job Advertisements grew across all sectors, except for Retail”

December 2017


Job Ad Growth by Sector (Jul-17)

Job Ad Growth by State (Jul-17)

9.4%

6.4%5.2%

5.1%

3.3%3.0% 2.1%

1.7%1.1%

0.9%

(0.6%)

(1.1%)

(1.6%)(1.6%)

(8.8%)(10.4%)

-15%

-10%

-5%

0%

5%

10%

(7.7%)

(2.3%)

0.3%

3.5%

3.9%

4.2%

5.6%

6.5%

11.2%

NT

TAS

NSW

AUS

ACT

WA

VIC

QLD

SA

70

75

80

85

90

95


9.4%

6.4%5.2%

5.1%

3.3%3.0% 2.1%

1.7%1.1%

0.9%

(0.6%)

(1.1%)

(1.6%)(1.6%)

(8.8%)(10.4%)

-15%

-10%

-5%

0%

5%

10%

(7.7%)

(2.3%)

0.3%

3.5%

3.9%

4.2%

5.6%

6.5%

11.2%

NT

TAS

NSW

AUS

ACT

WA

VIC

QLD

SA

70

75

80

85

90

95


Source: DOE / Savills ResearchSource: DOE / Savills Research

Growth in job advertisemets surpassed long term averages, increasing 3.5% over the year to October 2017. Although off a lower base, South Australia recorded the largest increase of all states with growth in job advertisements rising by 11.2%, as renewed requirements in the manufacturing sector helped boost overall growth. WA posted its first gain since April 2015 after falling mining investments continued to challenge the resources’ reliant state. Labour market conditions in Victoria are likely to remain strong as the number of job advertisements continued to rise for over 3 years, driven by gains in Education and Services. Gains in Queensland were largely as a result of growth in state government infrastructure spending, boosting demand for engineering jobs, which rose 40% over the year.

After a modest start to the year, growth in job advertisements rebounded. Job advertisements across directly attributable to specific property sectors (as allocated by Savills) were up strongly from 2013, except for the Retail sector. Advertised roles for workers in the Retail sector were down 4.7% over the 12 month period to October 2017, with continued such expectations as retail trade growth projections remain challenged. There was a recovery in professional job advertisements over the last 3 months on the back of strong performance in Victoria, SA and Queensland.

14


Population

15

17

19

21

23

25

- 50

100 150 200 250 300 350 400 450 500

Overseas Migration ('000s) Natural Increase ('000s)Population (m)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


1yr 5yr 10yr 15yr

5,038

3,572

269

-15 -716

-1,273

-2,767

-4,108

QLD VIC TAS ACT NT SA WA NSW


Over the last 20 years, Australia’s population has increased by one-third from 18.4m in 1998. Australia has experienced population growth at record high levels for nearly 20 years, with total population set to hit 25 million people next year. This is 30 years ahead of official forecasts made in 1998 by the ABS. Whilst this has been aided by rising fertility rates and increasing longevity, overseas migration has largely been the reason for the strength in population growth numbers. Overseas migration is currently at record high levels, with 245,410 people migrating to Australia over the 12 months to June 2017, with nearly 90% settling in the Eastern cities of Sydney, Melbourne and Brisbane.

Population – Migration & Nat. Increase

“Population growth forecasts from the International Monetary Fund's project Australia's population to grow by 8% over the next 5 years; double the average of the world's top 30 economies”

December 2017


15

17

19

21

23

25

- 50

100 150 200 250 300 350 400 450 500


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


1yr 5yr 10yr 15yr

5,038

3,572

269

-15 -716

-1,273

-2,767

-4,108


15

17

19

21

23

25

- 50

100 150 200 250 300 350 400 450 500


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


1yr 5yr 10yr 15yr

5,038

3,572

269

-15 -716

-1,273

-2,767

-4,108



Overseas migration has also been a key reason for ballooning populations on the East Coast, accounting for 77% of the total increase in population in NSW and 60% in Victoria. Melbourne’s status as the most liveable city in Australia, relative affordability over Sydney and an increase in job creation (particularly in the public sector) has seen population growth in Victoria outperform all other states. Whilst this has aided the Victorian economy overall, such a dependency on population growth has led Melbourne to be one of only 3 regions in Australia to record falls in GDP per capita over FY17, although recent employment data indicate an uplift may be imminent. Population growth in WA remains muted and well below historic levels given the decline in resource construction.

A wave of interstate migration from NSW to Victoria and Queensland has been evident over the last 6 months as a result of the residential housing boom in Sydney. With Sydney house prices nearly double those in other capital cities, we are now seeing increased interstate migration to the more affordable cities of Brisbane and Melbourne. In addition, a surge of job creation in South East Queensland is providing further incentive for people to move north. Just as we saw with the last residential property boom in Sydney in 2000, a wave of interstate migration to the north eventuated. Whilst population growth in NSW has been largely attributed to overseas migration, Victoria and Queensland’s populations are growing as a result of increased interstate migration.

Population by State (as at Mar-17)

Interstate Migration by State (as at Jun-17)

10yr Avg 2013 2014 2015 2016 2017

NSW 1.4 7.46m (1.4) 7.57m (1.5) 7.68m (1.4) 7.80m (1.5) 7.84m (1.6)

Vic. 2.1 5.84m (2.2) 5.97m (2.2) 6.10m (2.2) 6.24m (2.4) 6.29m (2.4)

Qld. 1.9 4.69m (1.7) 4.75m (1.4) 4.81m (1.3) 4.88m (1.5) 4.91m (1.6)

WA 2.1 2.51m (1.8) 2.53m (1.0) 2.55m (0.7) 2.57m (0.7) 2.58m (0.7)

SA 0.9 1.68m (0.9) 1.69m (0.9) 1.71m (0.7) 1.72m (0.6) 1.72m (0.6)

ACT 1.9 0.39m (1.8) 0.39m (1.5) 0.40m (1.8) 0.41m (1.7) 0.41m (1.8)

Australia 1.7 23.32m (1.7) 23.67m (1.5) 24.01m (1.4) 24.39m (1.6) 24.51m (1.6)

Source: ABS / Savills Research; 12 month growth shown in brackets

Total Population by State

16


Retail Trade Growth

Retail Trade Growth by State (Oct-17)

Retail Trade by Sector (Oct-17)

Retail Trade

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-1%

0%

1%

2%

3%

4%

5%

6%


1yr 5yr 10yr 15yr

2.7% 2.7% 2.7%1.9%

1.0% 0.8%

(0.4%)

(3.3%)-4%

-3%

-2%-1%

0%

1%2%

3%

4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-1%

0%

1%

2%

3%

4%

5%

6%


1yr 5yr 10yr 15yr

2.7% 2.7% 2.7%1.9%

1.0% 0.8%

(0.4%)

(3.3%)-4%

-3%

-2%-1%

0%

1%2%

3%

4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-1%

0%

1%

2%

3%

4%

5%

6%


1yr 5yr 10yr 15yr

2.7% 2.7% 2.7%1.9%

1.0% 0.8%

(0.4%)

(3.3%)-4%

-3%

-2%-1%

0%

1%2%

3%

4%




Retail Trade grew by 1.8% over the year to October 2017, a figure below all long term averages. Weak wage growth, materially higher household indebtedness (now 140% of disposable income) and a moderating residential housing sector continue to have a slowing effect on retail trade. With housing capital gains now moderating, the concern is that consumers, which have also been met with stagnant wage growth, will focus on servicing this debt in coming years and that may prove a further drag on the retail sector. For retailers and investors this question is further compounded by the uncertainty over the arrival of Amazon as the industry remains highly competitive.

Challenges in the retail sector remain evident with all states performing below their respective long term averages. However, broad based gains were evident in the month of October, following falls in July and August and a largely flat September. Australian retail sales rose 0.5% in October, beating market expectations. Whilst sales increased across all states and territories in the month of October, the gains were not enough to buoy WA, which posted negative annual retail turnover for the first time since 2001 while Queensland remained largely flat after a year of solid returns. Retail turnover growth in Australia, (like economic growth) is clearly a beneficiary of strong population growth, with retail sales per capita largely flat over the current 12 month period.

Broad based gains were evident across all key retail sectors, except for Household Goods and Hardware & Garden retailing. Whilst strength in labour market conditions over the last 3 months would normally translate to a recovery in retail sales, competition from new entrant Amazon is likely to see pricing competition amongst domestic retailers continue. A slowdown in residential housing was evident in retailing for Household Goods and the Hardware & Garden sector, with the latter posting the largest fall across all key sectors. Positively, the last 3 months of the year are traditionally the strongest with the upcoming Christmas shopping period likely to boost retailers’ profit margins amid increased spending.

December 2017


Retail Trade (10yr Indexed)

Household Savings Rate

Retail Trade Growth by Sector & State

80

90

100

110

120

130

140

150

160 TotalSupermarketsHousehold GoodsDepartment StoresHardware & Garden

-2%

0%

2%

4%

6%

8%

80

90

100

110

120

130

140

150

160 TotalSupermarketsHousehold GoodsDepartment StoresHardware & Garden

-2%

0%

2%

4%

6%

8%



The differing performance across Australia’s retail sectors is shown with non-discretionary retailing clearly outperforming retailing in discretionary goods over the last 10 years. Whilst Supermarket retailing has grown over 50% over this period, Department Stores’ retailing has remained largely unchanged over the same period. Indeed better than expected retail turnover figures from October were driven by a surge in Food, Supermarket and Café & Restaurant sales. Increased competition and a continued slowdown in new home building has led to falls in sales for the Household Goods and Hardware & Garden sectors.

Australia’s household savings rate continues to fall after peaking at 8.8% in September 2009 (after the Global Financial Crisis), to 5.0% in June 2017. Whilst there are concerns that this has been as a result of a wealth effect, the adjoining chart indicates that falls to the savings rate coincide with the beginning of the resources downturn in 2012 and subsequent falls in returns on fixed interest.

Supermarket Food Clothing & Footwear

Department Stores

Household Goods

Hardware & Garden

Café & Restaurants

Other Total

NSW 4.9 (4.3) 4.6 (3.6) 2.7 (4.6) 0.2 (0.4) -0.6 (3.7) -5.0 (5.2) 3.0 (6.0) 1.1 (4.6) 2.5 (3.9)

VIC 1.8 (4.5) 2.3 (4.4) 1.6 (3.4) 3.1 (1.0) 1.5 (3.2) -2.2 (5.6) 0.9 (5.2) 9.5 (4.3) 3.0 (3.9)

QLD 1.5 (4.6) 1.8 (4.6) -1.9 (1.8) 1.1 (0.6) 0.2 (1.3) -4.6 (3.3) -3.4 (3.4) -0.6 (3.5) 0.1 (3.2)

WA 1.8 (4.1) 0.8 (3.8) -5.1 (-1.3) 0.2 (0.0) -7.0 (1.3) -6.3 (1.9) 5.0 (6.6) -0.3 (5.8) -0.5 (3.3)

SA 2.3 (4.3) 1.8 (4.1) 5.0 (2.8) -1.4 (-1.0) 2.9 (0.1) 11.5 (1.9) 9.2 (5.2) -1.3 (3.7) 2.6 (3.0)

ACT -1.9 (5.3) -1.6 (4.7) -2.8 (1.4) 1.3 (-0.1) 4.4 (1.4) 0.8 (4.8) 0.4 (5.2) 13.6 (2.7) 1.9 (3.3)

TAS 5.8 (4.2) 8.0 (4.4) -9.2 (1.1) 0.0 (0.0) -4.9 (0.3) -6.1 (0.5) 9.2 (5.2) 0.0 (0.0) 2.3 (2.8)

NT 0.6 (3.7) 2.2 (3.9) -0.9 (2.4) 0.0 (0.0) 0.4 (0.5) 5.0 (3.9) -4.5 (7.6) 0.0 (0.0) 0.1 (3.6)

AUS 2.7 (4.4) 2.7 (4.1) 0.8 (2.9) 1.0 (0.4) -0.4 (2.4) -3.3 (4.1) 1.9 (5.3) 2.7 (4.2) 1.8 (3.6)

Source: ABS/DOE/RBA/Savills Research; 10yr Averages shown in brackets.

18


Housing Trends

90

100

110

120

130

140

150

160

170

180

190 NSW VIC QLDWA SA ACTAUS

-9.2%

-7.0%

-4.5%

-3.0%

-0.8%

0.2%

2.6%

2.8%

8.3%

QLD

VIC

AUS

NSW

ACT

NT

SA

WA

TAS

90

100

110

120

130

140

150

160

170

180



With the exception of Western Australia, all states have recorded strong growth in residential house prices in their respective metropolitan areas since 2012. This coincides with monetary stimulus and the beginning of the resource construction downturn. In Sydney and Melbourne, house prices have almost doubled over the last 10 years, largely as a result of supply not keeping up with demand. While preliminary ABS numbers recorded a fall in price from the June quarter, median house prices in Sydney stood at $925,000 in September, this remains more than double any other capital city bar Melbourne. General consensus points to demand for housing now largely being met by supply in NSW after record development approvals in 2016. Restrictions on investor lending has also tempered demand in Sydney and Melbourne, with projections of a stabilising in housing prices on the Eastern seaboard.

Median House Prices by State (Metro)

“Since 2011, the cash rate has fallen by 325 basis points and as a result, Australian households have increasingly leveraged themselves as a result of accommodative monetary policy in line with global peers, driving residential property to record levels. However, prices have also been fuelled by long periods of undersupply and exceptional population growth.”

December 2017


90

100

110

120

130

140

150

160

170

180


-9.2%

-7.0%

-4.5%

-3.0%

-0.8%

0.2%

2.6%

2.8%

8.3%

QLD

VIC

AUS

NSW

ACT

NT

SA

WA

TAS

90

100

110

120

130

140

150

160

170

180


90

100

110

120

130

140

150

160

170

180


-9.2%

-7.0%

-4.5%

-3.0%

-0.8%

0.2%

2.6%

2.8%

8.3%

QLD

VIC

AUS

NSW

ACT

NT

SA

WA

TAS

90

100

110

120

130

140

150

160

170

180



Housing sales moderated across metropolitan areas in Eastern states over the 12 month period to June 2017, with total sales of houses declining by a slight 0.8% nationally. Brisbane recorded the largest fall as a result of oversupply in certain areas. Lower housing volume sales over the last 12 months have been largely attributed to declining interest from Chinese buyers amid capital tightening controls and housing affordability constricting demand. There are now growing concerns that the domestic economy, which has been led by the residential housing boom in recent years, will now require new avenues for growth, with the RBA and the IMF revising growth forecasts down for 2018 as a result.

Median apartment prices in Sydney have nearly doubled over the last 10 years following strong demand from overseas buyers, strong population growth and rapid density increases across the inner suburbs. On a sales volume weighted basis the average apartment price rose to $707,000 in the September quarter of 2017, according to the latest available ABS data refl ecting a 3.8% rise over the year. Latest data from CoreLogic, however, points to a moderation of prices being evident from July 2017.

Housing Sales Volume (12 Month Growth)

Median Attached Prices by State (Metro)

Source: ABS / Savills Research; *12 month growth rates in brackets; **10yr Averages shown in brackets

METROPOLITAN NON-METROPOLITAN STATE

Median Price* Sale Volume* Median Price* Sale Volume* DAs* DAs / 100**

AUS 677 (5.1%) 178,554 (-4.5%) 402 (1.3%) 127,444 (0.7%) 115,518 (-1.5%) 0.89 (0.81)

NSW 925 (1.7%) 48,247 (-3.0%) 445 (3.5%) 50,494 (3.0%) 28,705 (-2.2%) 0.89 (0.63)

VIC 698 (11.5%) 57,025 (-7.0%) 326 (3.5%) 24,607 (0.8%) 36,640 (1.3%) 1.06 (0.98)

QLD 520 (4.0%) 35,090 (-9.2%) 430 (-1.1%) 33,913 (-5.3%) 24,842 (2.9%) 0.84 (0.83)

WA 500 (-3.1%) 5,752 (2.8%) 320 (-3.0%) 5,752 (2.8%) 14,015 (-9.9%) 0.77 (1.02)

SA 445 (0.7%) 23,337 (2.6%) 272 (0.7%) 6,074 (3.3%) 8,001 (-2.8%) 0.72 (0.70)

ACT 670 (8.1%) 4,354 (-0.8%) n.a n.a 968 (-20.0%) 1.22 (1.15)

Residential Statistics (Houses) by State

20


Household Sector

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

-

50,000

100,000

150,000

200,000

250,000

300,000 Houses Attached DwellingsApprovals Per 100p

-5%

0%

5%

10%

15%

20%

25%Owner Occupier Investment

5

6

7

8

9

10

11

12

13

14

60

70

80

90

100

110

120

130

140 Household Debt / GDP

Household interestpayments to income


Development approvals for the residential housing sector across Australia fell 7.3% over the year to October 2017 after 5 years of record construction activity in Sydney, Melbourne and Brisbane appears to have run its course. However, it is important to note that much of this fall was attributed to declining development approvals for attached dwellings, which fell 13.2% over the same period. Residential development approvals in Queensland fell 17.5%, 10.9% in ACT, 9.1% in WA and 8.9% in NSW. Victoria and SA remained the only major states to record a rise in residential DAs over the preceding 12 month period. Indeed, Victoria remains the only state to record increasing demand for land, fuelled by historically high population and employment growth.

Residential Development ApprovalsRecent scenario modelling suggests interest rates will need to rise by nearly 2% for the household interest payments to income ratio to go back to the 2008 high.

December 2017


0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

-

50,000

100,000

150,000

200,000

250,000


-5%

0%

5%

10%

15%

20%


5

6

7

8

9

10

11

12

13

14

60

70

80

90

100

110

120

130



0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

-

50,000

100,000

150,000

200,000

250,000


-5%

0%

5%

10%

15%

20%


5

6

7

8

9

10

11

12

13

14

60

70

80

90

100

110

120

130




The adjoining chart shows annual growth in loans for housing in Australia (apartments and detached houses) split between owner-occupiers and investors. Macroprudential tightening on investor and interest only lending has led to a siginifcant slowdown in investment loans, alleviating some of the investor demand. While a slowdown in overall lending is evident, interest-only loans fell from making up 30.5% of all new loans in June to just 16.9% in September, on the back of lending restrictions introduced by APRA in March.

The key area of concern for the Australian economy is the level of indebtedness, with Household Debt now at just under 140% of GDP being almost double that of most other advanced economies. Recently however a recent moderation in the residential housing market appears to have drawn out the requirement for future interest rate hikes to stem this growth and the impact of any such uplift in rates will be magnifi ed due the extent of household leverage. However, when looking at household interest payments to income, concerns regarding mortgage stress appear to be overplayed. As a result of record low interest rates, the debt interest payment to income ratio remains nearly 30% below the peak reached in 2008.

Residential Housing Loans (YoY Change)

Housing Indebtedness & Interest Payments

Source: ABS / Savills Research; *12 month growth rates in brackets

METROPOLITAN NON-METROPOLITAN STATE

Median Price* Sale Volume* Median Price* Sale Volume* DAs* % of Total

AUS 553 (3.8%) 106,706 (-3.4%) 379 (3.8%) 37,231 (-3.9%) 102,670 (-13.2%) 47%

NSW 707 (1.0%) 38,447 (4.7%) 395 (9.7%) 12,134 (2.1%) 41,041 (-13.1%) 59%

VIC 531 (6.2%) 35,736 (-5.4%) 275 (5.9%) 4,437 (4.9%) 30,222 (1.3%) 45%

QLD 404 (1.1%) 11,508 (-22.9%) 375 (2.7%) 18,039 (-10.5%) 16,144 (-36.8%) 39%

WA 405 (-6.9%) 6,698 (-2.2%) 240 (-11.1%) 559 (5.9%) 5,928 (-7.1%) 30%

SA 375 (4.2%) 8,478 (2.1%) 167 (-17.3%) 968 (16.3%) 4,331 (12.7%) 35%

ACT 426 (-3.1%) 3,612 (-4.3%) n.a n.a 4,043 (-8.4%) 81%

Residential Statistics (Attached Dwellings) by State

22


5yr Forecasts (IMF)

USA GDP: 10.3%

Infl ation: 12.3%

Pop. Growth: 3.2%

Germany GDP: 8.3%

Infl ation: 11.8%

Pop. Growth: 0.4%

UK GDP: 8.4%

Infl ation: 13.4%

Pop. Growth: 3.2%

Canada GDP: 10.7%

Infl ation: 10.0%

Pop. Growth: 5.2%

December 2017


Singapore GDP: 13.8%

Infl ation: 10.3%

Pop. Growth: 5.1%

Australia GDP: 14.4%

Infl ation: 13.2%

Pop. Growth: 8.0%

China GDP: 36.1%

Infl ation: 12.8%

Pop. Growth: 3.0%

Japan GDP: 4.0%

Infl ation: 6.5%

Pop. Growth: -1.5%

South Korea GDP: 15.7%

Infl ation: 11.0%

Pop. Growth: 2.1%

December 2017



Key State Contacts

New South Wales Simon Fenn +61 (0) 2 8215 8830 [email protected]

South Australia Rino Carpinelli +61 (0) 8 8237 5005 [email protected]

Victoria Stuart Fox +61 (0) 3 8686 8029 [email protected]

Australian Capital Territory Andrew Stewart +61 (0) 2 6221 8295 [email protected]

Queensland Anthony Ott +61 (0) 7 3002 8904 [email protected]

Australian CEO Paul Craig +61 (0) 2 8215 6000 [email protected]

Western Australia Graham Postma +61 (0) 8 9488 4153 [email protected]

Savills is a leading global property service provider listed on the London Stock Exchange. Trusted since 1855, we have extensive experience across the Asia Pacific, with over 50 offices, and in Australia, we have over 800 staff focused on meeting all your property needs.

This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills.

Figures written in this report may not coincide with numbers published by entities such as the Australian Bureau of Statistics, as a result of differing calculation methods (such as on a rolling year basis, consolidating numbers from a number of entities, etc.).

Note on Methodology

The Savills Research & Consultancy team has years of experience, and is supported by our extensive agency, property management and valuation professionals. For national-level consultancy or subscription requirements please contact:

Capital Strategy & Research Chris Freeman +61 (0) 2 8215 6093 [email protected]

Key Sector Contacts

Capital Transactions Ian Hetherington +61 (0) 2 8215 8925 [email protected]

Hotels Michael Simpson +61 (0) 2 8215 8831 [email protected]

Project Management Gavin Boswarva +61 (0) 3 8686 8029 [email protected]

Retail Investments Steven Lerche +61 (0) 2 8215 8929 [email protected]

Valuations Sandra Peachey +61 (0) 2 8215 8853 [email protected]

Office Leasing Rob Dickins +61 (0) 2 8215 8833 [email protected]

Residential Ged Rockliff +61 (0) 2 8215 8861 [email protected]

Industral Darren Curry +61 (0) 2 9761 1034 [email protected]

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