Confidence in Australia’s property industry remains high amid strong economic conditions and a massive pipeline of work, the latest survey has found.

Conducted by the Property Council of Australia in conjunction with ANZ and sponsored by RCP, the March quarter Property industry Confidence Survey measured sentiment across residential and commercial real-estate regarding prospects over the next twelve months.

It found that overall, the Property Industry Confidence Index stood at 137 for the March quarter.

This is five points below the 142 recorded in the December quarter. Nevertheless, it remains above the 100.0 level which separates optimism from pessimism and indicates the equal fourth highest level of confidence since the survey began in 2011.

ANZ-Property Council Survey, March 22

Speaking at the survey’s online launch last week, ANZ Senior Economist Felicity Emmett says confidence is being driven by strong economic momentum along with a large pipeline of work.

On the economy, the survey found that participant expectations of economic growth over the next year are well above both long-run survey averages and pre-pandemic levels.

Such expectations are consistent with ANZ’s own view of the economic outlook as well as those of the Government, the Reserve Bank and many economists.

In last month’s Federal budget, for instance, the Commonwealth Government forecast real GDP growth of 4.25 percent and 3.5 percent in 2021/22 and 2022/23. The Government also forecast a further fall in unemployment to 50-year lows for 3.75 percent by the September quarter.

It said economic momentum is being driven by a strong labor market and high levels of consumer spending.

Emmett agrees, adding that the economy will be further supported by the pipeline of projects in residential construction and civil infrastructure.

That pipeline itself is the other factor driving industry confidence.

Across all sectors, participants reported their highest quarterly levels of forward work schedules over the survey’s eleven-year history. Participants also reported their highest ever levels of staffing expectations.

Turning to specific sectors, sentiment and conditions vary.

In residential, participants remain confident overall despite moderating expectations regarding valuations and prices.

On prices, sentiment is being dampened by growing expectations of interest rate rises. Overall, more than 80 percent of survey respondents expect official interest rates to increase over the next twelve months.

This corresponds with ANZ’s own expectation that the cash rate will rise from 0.10 percent to 1.0 percent by the end of the year. Market expectations have an even higher cash rate of 2.0 percent by year-end.

Speaking of ANZ’s own forecast, Emmett says the bank expects house price growth to ease and values to eventually contract over the next two or three years as rates rise.

Whilst the timing and magnitude of this remains uncertain, Emmett expects the fall in prices to remain modest.

One factor supporting this is an improvement in household finances.

Recent years, Emmett says, have seen a doubling on the number of people who are ahead in their mortgages, a build-up of around $280 billion in household deposits and average owner-occupier repayments which are 2.5 percent over and above required payments. This means that households now have a buffer which will help them to absorb rate increases.

Also helping to softening any contraction in values will be additional housing demand from international arrivals amid reopened borders.

Finally, continued low unemployment will further help to underpin household confidence in their ability to meet mortgage commitments.

Turning to construction activity, Emmett expects the pipeline of work in detached home building to keep builders busy over the next twelve months.

With approvals for multi-residential construction having lifted, meanwhile, Emmett expects a shift in focus later this year and into 2023 and 2024 away from detached house construction and toward multi-unit developments.

This will help to stabilise activity levels even as the impact of the Commonwealth Homebuilder program subsides.

Turning to the commercial sector, overall confidence stands at survey record highs.

This is being driven by the industrial subsector. Already performing well before the pandemic, the industrial property market has since benefited from the move toward online sales and demand for warehousing and logistics facilities.

Confidence in this sub-sector is above any levels seen prior to the pandemic.

In other commercial sub-sectors, confidence in tourism and accommodation real-estate is recovering as borders are reopening. Retail property sentiment is picking up despite structural challenges amid the shift to online sales. Confidence in office real-estate is also relatively high even as as workplaces seek to establish a more permanent balance between coming into the office and working from home.

Finally, as the Federal election approaches, survey participants indicated that housing supply and affordability is the most important policy issue at both Commonwealth and state levels. This ranked above energy, environment and emissions; cities and infrastructure delivery; economic management; taxation reform; and planned population growth.

Asked what to expect after the May election, Emmett said there is unlikely to be much impact on either the broader economy or the property sector specifically irrespective of the outcome.

This is the case as both major parties have opted for relatively ‘small target policies’.

It contrasts with the 2019 campaign, during which Labor promised to abolish negative gearing and the capital gains tax discount.

Speaking about housing affordability, Emmett said this requires a multi-dimensional approach.

Whilst it is important to unlock opportunities to deliver additional supply, she says this will not on its own resolve affordability concerns.

Pointing to Grattan Institute data, she says that even if the property sector were to boost annual housing completions by 50,000 (approx. 25 percent) every year for a decade, prices would still only be reduced by between five and twenty percent.

On supply, Emmett welcomes recommendations in the recent Falinski report into housing affordability and supply for the Commonwealth to provide incentives to state and local governments to increase density and supply – particularly in areas surrounding transport hubs.

There will help to overcome challenges as local governments and communities often fail to see benefits of higher density in their areas.

Also needed is taxation reform. This includes replacing stamp duty with other taxes which are broader in application. Without giving specifics, Emmett said other taxation issues around investors also need to be addressed.

In addition, Emmett says more needs to be done to improve rental affordability.

Finally, asked about rising construction costs and builder insolvencies, Emmett acknowledges concerns in this area.

“We are definitely seeing a rise in insolvencies in the construction sector,” she said.

“It has been a very difficult environment given the lift in costs – massive increase in costs for raw materials which are sometimes difficult to pass through on fixed price contracts.

“It is a concern and it is something that we are watching quite closely …

“… (Going forward,) I think we are likely to see some of those costs come back a little. But at the same time, we are seeing hefty increases in wages which are being anecdotally reported. Even if we look at official data – which suggests that wage growth overall is quite modest – one of the sectors where growth is the strongest is construction.

“I think it is going to be a challenging period for builders over the next couple of years as they manage those cost increases.”

Key Points:

• The survey was conducted between March 14 and March 31, 2022. It includes responses from 653 respondents including property developers, managers and agents and service providers.
• Nationally, the Property Industry Confidence Index dropped five points from 142 in the December quarter to 137 in the March quarter – the equal fourth highest reading in the survey’s eleven-year history. Any score above 100.0 denotes net optimism.
• Confidence was high across all states/territories, but was strongest in the ACT (155)
• Expectations regarding forward work schedules and staffing levels are at record highs
• Expectations remain robust for state and national economic growth. These have softened in NSW and Vic but remaining high in Queensland and WA.
• Whilst COVID is impacting property firms across the board, most survey participants expect its effect to ease in the next three months. This is especially the case in Victoria and NSW where restrictions have been most severe.
• COVID’s impact has been most heavily felt across the hotels, tourism and leisure sector followed by the office
• Expectations for interest rate increases have firmed. More than eight in ten participants now expect rates to be higher in twelve months compared with today.
• Sentiment remains strong in the residential sector and is very strong in industrial and retirement living. Sentiment is lifting in office and retail and hotel
• Among survey participants, housing supply and affordability has emerged as the most important issue for both state and Federal governments. This is followed by energy, environment and emissions; cities and infrastructure delivery; economic management; tax reform and planned population growth.