In macroeconomics, an assumption of the ‘small open economy’ is often used. The basis of this assumption is that being small and open, the economy operates as a reflection of economic conditions in the rest of the world. For Australia, floating of the currency and deregulation of the banking system were major steps on this path. For the past five years, an investment boom for the mining and energy sector has dominated (although the construction cycle is set to decline).
These were large, long strides. Gradually, the focus will shift to how well our ‘small open economy’ functions at a micro-level: in relation to people and property development. We have an ageing population, which will require greater net overseas migration – a long-term forecast of 240,000 persons p.a. is specified in the latest ABS (Series B) projections. To this gain, we need to add the impact of short-term visitors, led by growth in overseas tourists from Asia.
Our national economy has never been so heavily tilted by the international environment, with structural forces outside of the control of government policy. The traditional cycle levers, the domestic cash rate and fiscal policy, are close to exhausted.
The Australian dollar has been buoyed by the extremities of monetary policy in the U.S. and Europe. A sustained reversal of cheap money in the U.S. should lead to a substantial depreciation of the Australian dollar. Our view is that US$0.80 is a reasonable prospect for the end of 2014.
Asian investment and tourism is becoming a primary positive force for the Australian economy. There is strong appetite for property development and off-the-plan apartments, and visits by Asian tourists have surged. On development, we note that bidding power by overseas investors for sites and property would be even greater if the Australian dollar weakens.
More generally, the prospects for domestic tourism would improve with weakening of the Australian dollar. The improving environment for hotels and serviced apartments is expected to accelerate in 2014.
It would be ideal for the currency depreciation to largely occur in 2014, rather than 2015. There would be an earlier positive impact from tourism demand, particularly overseas departures by residents. Arrivals by international visitors would receive a stimulus, although the scale does depend on cross rates of some Asian currencies against the USD (in particular the Yuan).
A tourism sector recovery would raise the importance of airport capacity and curfews. It would reinforce the urgency of a second Sydney airport, with the potential for an announcement effect reverberating through western Sydney.
For the property sector, the need for short-term accommodation becomes prominent. High profile premium grade hotels take the limelight, but the lack of suitable sites will limit construction. Retrofitting of old office buildings is likely to become much more extensive – if the planning process can allow for this change of use.
As a tourism recovery gears up and then ripples out across property markets, there will be impacts from a slowing of mining construction. Winding down of work on mining & energy construction projects will gradually occur during 2014, and then gather pace in 2015. The critical issue here is the likely reduction of 457 visas associated with jobs in these projects, with greater impacts on Queensland and Western Australia.
It is important to note that a population growth impact stems from the rate of increase in long-term visitors: it is a measure of flow, not stock. There can be an outright reduction in population (ie negative growth) if the number of 457 visas being issued shows an extended fall. Trends for this visa data during 2014 represents a critical measure of population growth prospects in 2015 and 2016.
We emphasise that there will be compensating growth for 457 visas in other sectors: health services, computer technology and food services figure prominently. Current policy is generating population growth from long-term visitors (rental housing & new apartments), rather than new permanent residents (owner-occupiers & detached houses).
The rise of the apartment sector is being led by migration policy, rather than a shift in preferences of ‘locals’. The impacts vary by city (and sub-regions). Sydney’s current apartment boom was the 2013 leading edge, following at a lag to Melbourne. In 2014, the feedback effects of the global environment on Brisbane will be interesting, as a tourism revival should have its most pronounced effect on Queensland’s economy.
With an economy in transition, our view is that jobs growth will remain tepid in 2014, so the RBA cash rate will not be raised. Domestic credit growth remains very weak, which constrains growth for household spending & business capex.
Our funding growth for building and property is being dominated by overseas investors. In our view, the cultural evolution of our capital cities has created a foundation for the inflow of Asian investment funds. Permanent migration and university students from Asia have become a core component of population growth over the past decade. In turn, there is now a greater understanding of the Australian economy and property markets, in terms of cyclical forces and social characteristics.
In many cases, our success as individuals, businesses or governments over the next few years is likely to be defined by how we respond to this environment. Substantially raising the permanent migrant intake, rather than relying on 457 visas, would be a simple way to cement our success as a small, open economy. I will again put it on my wish list for Santa.
Contact Jason Anderson, Chief Economist today to discuss your property research requirements.