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Quarterly Economic and Property Report

Australia
Quarter 2 | 2012

Economic and Property Overview


It appears that times are tough all round if you are not part of the mining boom. Retail spending remains low, the housing and building markets have contracted while exports are still struggling with the high Australian Dollar. A case of dj-vu? Or is it? As predicted commodity prices have decreased, due to the slowdown in demand from the emerging global economies. This combined with the effects of natural disasters and mining employee strikes appear to have taken their toll, with the surprised closure of the Norwich Park Coal Mine. This was a blunt reminder of the boom to bust conundrum that is the mining industry. The rate of GDP growth continues to decrease in China, with the major trading partner of Australia registering growth at 8.1 per cent, down from a forecasted 8.5 per cent. Since 2007 the Chinese current account has dropped from 12 per cent to 4.0 per cent of GDP, reflecting a rise in imports and fall in exports, as the economy shifts towards domestic consumption. Consumption is likely to continue growing because of the upward trend in workers' wages, which increases manufacturing costs but is generally good for the domestic economy. On top of this, there is high scepticism on the validity of the economic data being released in China, with claims of fabrication. Europe is still doing it tough, with substantial social and economic problems in Greece, Spain, Portugal, Italy and even France. There is scope for this to get worse as elections in Greece and France could bring forth a crisis in these countries. The US Federal Bank has found itself in a challenging position as inflation starts to move, partly as a result of rising gasoline prices. More quantitative easing in response to the anaemic US recovery is very unlikely. In fact a discussion will have to be had at some point about how to drain the excess liquidity from the economy before 2013. Furthermore, US corporate profits are near record levels and only likely to fall, so after a big run over the past months the equity markets on Wall Street now look set for a correction. Here on Australian soil, we are in the midst of our own interesting times, as banks are increasing rates while the Reserve Bank of Australia (RBA) is trying to get them down. The property market continues to contract, as shown by housing finance approvals data, while bank rate increases and a tight fiscal federal budget will likely prevent any substantial green shoots in the market from gaining significant traction. So far unemployment has been fairly contained, but any significant change will hurt the property market. However, according to the International Monetary Fund (IMF), the Australian economy is expected to outpace all advanced economies with projected growth of 3.0 per cent in 2012 and 3.5 in 2013. It has also increased the forecast of global growth over 2012 to 3.5 per cent, from 3.3 per cent. In comparison the US is forecasted to grow at 2.1 per cent, up from a prior estimate of 1.8 per cent. Looking at the macro level property market, the reality is that while the rate of decline in values have slowed and could be even stagnant, a quick recovery to where sales activity and prices were at prior to the Global Financial Crisis of 2008 would be unthinkable, considering what global markets face in the near future. However investors could now be tempted back into the property market as the rate of decline in values erodes away, while the equity market remains not only turbulent, but has provided returns inferior to fixed bonds over the past five years.

Key Facts: CPI: 1.6% SVHL Rate: 7.4% AUS Unemployment Rate: 5.0% AUS Population Growth: 1.29% Average AUS Fuel Price: $1.50pl

Confidence
Sentiment strongest in South Australia
Early 2012 has seen negative sentiment linger from 2011, as the long-term six month moving average Australian Consumer Sentiment Index decreased by a further 0.1 point over the month to register 98.3 points. When compared to the previous year, a total decrease of 10.7 points has been recorded. On a monthly basis the Australian Consumer Sentiment Index decreased further by 5.0 points over the month of March 2012, to record a score of 96.1 points. Optimists will point to a likely rise in household consumption growth over the next year. Over the past year the Treasury has noted that spending has been in line with the longer term trend., despite natural disasters, anxiety over the global economic turmoil and declining global growth. Optimists now predict that household consumption will increase as they become less cautious. Employment growth is expected to increase at 1.25 per cent next year, pointing to a peaking unemployment rate. Furthermore, it is likely that the Reserve Bank will cut the cash rate again during 2012. Looking ahead to the most recent survey on consumer sentiment in April 2012, out of the five states measured for the Index, sentiment was highest in South Australia at 103.8 points. This score equated to a monthly increase of 20.4 per cent. Western Australia recorded a 3.4 per cent decrease over the month to register an Index score of 103.4 points. Pessimists continue to outweigh optimists in New South Wales (92.2 points), Queensland (91.1 points) and Victoria (93.2 points). However, Queensland resisted the trend of declining sentiment by recording an increase of 5.0 per cent over the month.

Australian Consumer Sentiment Graph (right): The Consumer Sentiment Index indicates short-run changes to consumer willingness to purchase goods in the forthcoming quarter. The Index is based on a monthly survey of 1,200 Australian households conducted by the Melbourne Institute and Westpac. It represents current and future perspectives of the broad economic climate and household financial state.

Australian Consumer Sentiment

130
Australian Consumer Sentiment Index Six Month Moving Average

120 110 100 90 80 70 60

Apr-92

Apr-93

Apr-94

Apr-95

Apr-96

Apr-97

Apr-98

Apr-99

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

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Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Prepared by PRDnationwide Research Source: Westpac/Melbourne Institute, last updated Apr-2012

Apr-12

Consumer Sentiment Index

Confidence cont.
Business confidence improves in 2012
Confidence decreased over the March 2012 quarter, to record -1.2 index points on the NAB Quarterly Index, equating to a fall of 2.6 points. The double cut to the official Cash Rate by the RBA in the fourth quarter of 2011 appears to have had only a temporary affect on business confidence, which did not carry through to the New Year. Considering the persistent concerns with the European debt crisis and sluggish US recovery, the Index result is not overly pessimistic, but is nevertheless still below the longer-term 10 year average of +5.1 points Over the March 2012 quarter, business confidence fell in most states, but increased dramatically in Western Australia (up 11 points). Victoria decreased the most at -6 points, while New South Wales, Queensland and South Australia all registered a fall of 1.0 Index point in confidence. Confidence is now weakest in Victoria and Tasmania, while slightly negative in the remaining states. Confidence improved over the March 2012 quarter in mining and recreational services, while a rapid deterioration was felt in wholesale and retail. Most industries are expecting a contraction in activity over the June 2012 quarter. Confidence is weakest in the wholesale and transportation & utilities, followed by manufacturing and retail. The Business Conditions Index marginally increased by one point to +1 in the March 2012 quarter. Trading conditions are reported to be stronger, but employment remains subdued. This suggests the economy is effectively moving sideways. According to a recent report from ASIC, the number of corporate insolvencies hit a 14 year high in February, with retail, tourism and the construction sectors the hardest hit.

Business Confidence
35 30 Improving Confidence 25 20 15 10

Business Confidence Graph (right): The Business Confidence Index indicates expectations of business conditions for the upcoming quarter. The Index is based on a survey of approximately 900 small to large businesses in the nonfarm sectors and is conducted by the National Australia Bank (NAB).

0 -5 -10 -15 -20 -25 -30 -35 -40

Sep-05

Sep-10

Sep-95

Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-06

Sep-07

Sep-08

Sep-09

Sep-11

Mar-08

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-09

Mar-10

Mar-11

Prepared by PRDnationwide Research Source: National Australia Bank (NAB), last updated Apr-12

Quarter

Mar-12

Index value

Macroeconomic Climate
Weak inflationary pressure over 2011
The March 2012 CPI figures recorded an annual change of 1.6 per cent, which equates to a dramatic decrease from the previous quarter of 3.1 per cent, and is well below the RBA target range of two to three per cent. The underlying inflation figure, as measured by the RBA removes volatile items such as fruit and fuel, remains inside the target range but has increased marginally from the September 2011 quarter by 0.2 per cent to 2.5 per cent as at the end 2011. Global financial and commodity markets have improved as a result of the European Central Bankss decision to further add substantial liquidity into the banking system (increasing the bail-out by 200 billion). Improved employment data from the US has also assisted in reducing market volatility and despite several emerging economies slowing in 2011 (such as China), the outlook for 2012 looks favourable. The NAB predicts GDP to remain at 3.25 per cent in 2012 and 2013, equating to low pressure on core inflation between 2.2 per cent to 2.5 per cent. Surprisingly, the official Balance of Trade recorded a deficit of $673 million in January, down from a $1.3 billion surplus in December. This was a result of an immense 8.0 per cent drop in exports, mainly focused around the large falls in the volume of iron ore (down 21 per cent) and coal (down 9 per cent). It is anticipated that exports have improved over February, leading back into a trade surplus.

Inflation Graph (right): Inflation is measured as a change in the Consumer Price Index (CPI), calculated by the Australian Bureau of Statistics as the price of a weighted 'basket' of goods and services which account for a high proportion of expenditure by metropolitan households. The Reserve Bank of Australia (RBA) aims to constrain inflation in a long-run target range of 23% through the setting of interest rates.

Inflation
8%
All groups Excluding volatile items

6%

4%

Reserve Bank's Target Range

2%

0%

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

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Mar-11

Quarter
Prepared by PRDnationwide Research Source: ABS Cat 6401, last updated May- 2012

Mar-12

Annual Change in CPI

Macroeconomic Climate cont.


Rate cut in May expected
The RBA has painted a rosy picture on the Australian economy. The possibility of a catastrophic outcome in Europe has receded, global activity on the whole has picked up, while Australian growth is close to trend and inflation near target. This combined with the depreciation of the Australian Dollar had led the RBA adopting a wait and see approach over the first quarter of 2012. Largely due to the significant drop in inflation at the end of April, the RBA decided to cut the official Cash Rate by 50 basis points to 3.75 per cent. While the RBA has kept rates on hold over the beginning of 2012, the major banks have mostly increased their lending rates by around 0.1 per cent, after several banks decided not to follow the official Cash Rate due to higher overseas lending costs. The ANZ was the latest bank to raise their lending rates independently. CLSA has stated that the cost of funds for the banks will likely continue to rise. So far, the standard variable home loan rate has remained at 7.4 per cent for the month of March 2012, but is expected to fall with the amount dependant on how much the big banks decided to pass on. The RBA has consistently said banks have just cause when they argue their margins have been eroded by rising funding costs. The RBA takes this into account during its own rate deliberations. The RBA has also stated that official rate would be a full percentage point higher if the banks had simply been passing on official rate movements. The Federal Budget seeks to encourage foreign bank competition to directly target the big four Australian banks. The rate of interest withholding tax (IWT) paid by foreign bank branches which borrow from their overseas head office will fall from 5.0 per cent to 2.5 per cent in 201415, and then be phased out entirely in 2015-16. Meanwhile, the IWT for other financial institutions that borrow from foreign financial institutions or offshore retail deposits will fall from 10 per cent to 7.5 per cent in 2014-15, and 5.0 per cent in 2015-16. The government says the measure will help local subsidiaries and branches of foreign banks to access cheaper offshore funding from their parents, ultimately putting more competitive pressure on the major banks.

Housing Loan Interest Rate Graph (right): The housing loan interest rate is the average rate of interest being offered by housing lenders. It is higher than the RBAs target cash rate due to lending costs and profit margins. Interest rates are set by the RBA, who acts independently of government and sets interest rates with the goal of maintaining inflation in a longrun target range of 2% and 3%. The RBA meets monthly to review the current interest rate and is only required to justify its decision if it chooses to alter the rate.

Housing Loan Interest Rate

18.0

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Apr-83

Apr-84

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Apr-00

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Prepared by PRDnationwide Research Source: RBA Bulletin F05, last updated May-2012

Month

Apr-12

Apr-82

Apr-97

Apr-11

Standard Bank Housing Loan Interest Rate %

16.0

Foreign Exchange
Australian Dollar subsides
As foreseen in the earlier edition of this report, there has been lower Chinese economic growth, with commodity prices reaching a peak. This has resulted the Australian terms of trade decreasing, resulting in a lower AUD. During the month of April 2012, the Australian Dollar Exchange Index only increased marginally by 0.1 per cent to register an Index value of 77.0, while decreasing 2.4 per cent over a 12 month period. The Treasury expects Australian consumers will take advantage of the strong Australian dollar by spending more on overseas travel and imported consumer goods. Import volumes are likely to rise by 7.5 per cent in 2012-13 and by 5.5 per cent in 2013-14. The NAB Export Index has increased in March by 3 points to record an Index score of zero, its highest level since July 2011. This was led by manufacturing (up 15 points) and aided by the softening in the Australian Dollar. The Australian Dollar continues to be above parity with the US Dollar since September 2011, but has only appreciated by 0.5 per cent over the month of April 2012. Over the 12 month period ending April 2012, the Australian Dollar has depreciated the most against the Chinese Renminbi (down 6.8 per cent), while appreciating the most to the Euro (up 7.4 per cent). The strength of the Australian Dollar is proving to be a handicap for exporters of transformed manufactured goods, and for firms that sell services, such as tourism and education-related travel to foreigners.

Apr-11 EU Euro JP Yen NZ Dollar UK Pound US Dollar 0.73 88.91 1.36 0.65 1.09

Apr-12 0.79 83.77 1.27 0.64 1.05

% Change 7.4% -5.8% -6.5% -1.9% -4.1%

So urce: RB A B ulletin F1 1

Trade Weighted Exchange Rate Index Trade Weighted Exchange Rate Index (right): The trade weighted exchange rate index is compiled monthly by the Reserve Bank and ranks the Australian dollar against the currencies of our significant trading partners. Exchange rates directly affect the prices of our exports in foreign trade dollars.
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Dec-11 Mar-12 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

80
75 Improving Affordability of Imports 70 65 60 55 50 45 40

Prepared by PRDnationwide Research Source: RBA Bulletin F11, last updated May-12

Month

Trade Weighted Index

Fuel Prices
Fuel prices expected to increase over winter
In dollar value terms, the nation experienced an increase of 2.7 per cent to the average petrol price during the month ending March 2012. The average price Australians pay at the pump increased to $1.50 per litre. During the year petrol prices increased at an average rate of 4.4 per cent across the nation. Melbourne continues to be the capital city where motorists pay the least but is now joined by Canberra at $1.46 per litre. Melbourne experienced 5.8 per cent increase over the quarter, while Canberra increased at 0.8 per cent. In Darwin consumers continue to pay the most at $1.57 per litre, followed closely by Hobart at $1.55. Over the three month period ending March 2012, all other capital cities experienced an increase to petrol prices with Perth increasing the most at 7.2 per cent. This was followed by Brisbane (6.3 per cent), while Adelaide increased by 5.8 per cent. During the course of the 12 month period, Adelaide petrol prices increased the most at 7.3 per cent, while Canberra increased the least at 2.2 per cent. Despite demand for fuel falling in both the US and Europe, prices are expected to keep rising. Demand has risen substantially in the Americas and in Asia (mainly China) with several global refineries recently closing, cutting supply at a crucial time during the Iran trade sanctions.

Retail Fuel Prices

$1.80
Brisbane Melbourne Sydney

$1.60 $1.40 $1.20 $1.00 $0.80 $0.60

Retail Fuel Prices Graph (right):


Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-09 Mar-10 Mar-11 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

$0.40

Sourced from Fueltrac, this chart tracks the average retail price for unleaded petrol across a broad range of suppliers in metro areas.

Prepared by PRDnationwide Research Source: AAA/Fueltrac, last updated May-2012

Month

Sep-11

Mar-12

Mar-08

Average Retail Price of ULP

Commodities Prices
Commodity prices to fall in 2012?
During the month of April 2012, the Commodity Price Index increased by 0.4 per cent to reach 99.5 points. When compared to the previous year, the Index has fallen by 5.2 per cent. Commodity prices are still above the longer-term 10 year average of 71.8index points. The town of Dysart, Queensland has been rocked with the news that BHP Billiton will close this Norwich Park coal mine. The impact of floods, rising production costs and softening coal prices were cited as the principal reasons for the mine closure. Although the town of Dysart supports seven mines, the closure still delivers a timely reminder of the boom to bust challenge that many regional towns face. Comparisons have been made to the town of Ravensthorpe, Western Australia, in which the BHP Billiton nickel mine closed in January 2009. This mine was only opened in 2008 with a predicted life span of 21 years and the closure meant a direct loss of 1,800 jobs. The last financial year approximately $86 billion in revenue was registered from the mining services sector. This is expected to increase by 17 per cent this year. Deloitte Access Economics estimates that there is $189 billion in investment being spent with a further $217 billion on projects within the industry awaiting approval. The International Monetary Fund (IMF) has played devils advocate and stated RBA Commodity Price Index
140 120

that the uncertainty in the global markets combined with the slowdown in the emerging economies (such as China) has softened demand on commodities. The IMF believes that price growth in the commodity market will not reach the highs experienced in 2011. Copper prices have contracted to a three month low, and the price for coal has also declined, while iron ore remains stable. Australia could face a large balance of payments deficit if a sharp slow-down in China results in a drop in export earnings while imports of capital goods soar as resource companies complete their major investment projects. According to the latest budget projections, Australias current account deficit is expected to increase to 4.75 per cent of GDP in 2012-13, and to 6.0 per cent of GDP the following year. According to Treasury, the deterioration reflects the fact that the trade balance is likely to fall into deficit as miners step up their imports of foreignmade investment equipment while export earnings fall as a result of lower commodity prices. Even though commodity prices appear to have peaked in the third quarter of 2011, Treasury expects that our export earnings will remain relatively buoyant in the next two years, due to continuing strong demand from China and India. Australias coal and iron ore exports are likely to rise, following major expansions in resource projects in Western Australia and along the east coast.

RBA Commodity Price Index Graph (right): Primary commodities account for more than half of Australias export earning. The Reserve Banks Commodity Price Index provides an indicator of primary commodity price movements. The index includes 17 commodities with separate weightings, the highest of which are coal, gold and iron ore. High commodity prices are one of the primary drivers behind Australias robust economy, influencing real estate prices particularly in Western Australia, Northern Territory, Northern Queensland and as of late South Australia. Coupled with the resource industry boom, employment and population growth follow, which spurs demand for housing and rental accommodation, particularly in neighbouring resource rich regions.

100
80 60 40 20 0

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Prepared by PRDnationwide Research Source: RBA Bulletin G5, last updated May-12

Month

Apr-12

RBA commodity price index value

Construction Market
Construction spend contracts while residential continues to struggle
The national gross spend on construction (other than houses) decreased during the December 2011 quarter by 2.4 per cent. When compared to the previous quarter, the gross spend in the December 2011 quarter was at a similarly high level, recording just over $26 million. The overall spend for the year ending December 2011 was just over $101 million, up 6.3 per cent from the previous year. The ABS has released recent data showing a decline in both new housing and major alteration spending for the December 2011 quarter, equating to a third consecutive decrease. The seasonally adjusted figures decreased by 1.8 per cent to $44.5 billion. The largest fall occurred in Queensland, with a decrease of 4.9 per cent over the quarter, followed by 3.9 per cent in New South Wales. Spend for new residential construction improved the most over the quarter in Tasmania, by 11.7 per cent. A recent report from the Centre for International Economics (CIE) has found that new housing is the second most heavily taxed of Australias largest sectors, being those valued over $10 billion. The HIA has followed with a statement that exclaims in some states the total tax bill amounts to over 40 per cent of the final price of new home taxes on new housing. The taxes are a brake on economic activity, and represent a constraint on housing affordability and labour productivity. From the Federal Budget, the government plans an allocation of $3.6 billion to duplicate the Pacific Highway, in a 50:50 funding partnership with the New South Wales state government. The highway, due for completion by 2016, is expected to improve freight efficiency along with other initiatives including development of the Moorebank Intermodal Terminal in New South Wales and the contribution of $232 million to Adelaides Torrens and Goodwood rail project. The measures come under the umbrella of a total of $36 billion spending on roads, rails and ports in the six years to fiscal 2014.

National Construction Gross Spend Graph (right): The construction industry is one of the driving areas in the economy, having a significant contribution to GDP and a multiplier effect on the activity in other industries. Indicators of price movement of construction outputs will be a valuable tool in economic analysis. Construction industry output price indexes are being developed to measure changes over time in the price of new construction outputs, other than houses.

National Construction Gross Spend


6.0%

5.0%
5.0%

4.7% 3.7%

Percentage change from previous quarter

4.0% 3.0% 2.0% 1.0%

1.8%

2.1% 1.5% 0.9% 0.0% 1.0%

0.0%

-0.1%
-1.0% -2.0% -3.0% Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

-2.4%
Dec-11

Quarter
Prepared by PRDnationwide Research Source: ABS Cat 1350, last updated Apr-2012

House Finance
Spending slides in the month of February
The gross spend on housing finance was $20.3 billion during the month of February 2012. Compared to the previous year, the total spend has increased by 4.9 per cent, equating to $1 billion more. The spend on housing finance has yet to reach the levels experienced prior to the Global Financial Crisis of 2008. Investor spend increased slightly to just under $7 billion, and largely follows the greater trend established at the start of 2011. For the month of February 2012, investor financial commitment increased by $400 million to record $6.9 billion. During the month of February 2012, owner occupier spend decreased by $700 million to equate to $13.4 billion. Approximately 33.9 per cent of the property market is now investor financed and is expected to increase as rental yields across the nation continue to become more attractive. The seasonally adjusted number of loans for new housing fell by 5.8 per cent in New South Wales, 1.3 per cent in Victoria, 2.1 per cent in Western Australia, and 26.9 per cent in the Northern Territory. There was a rise of 4.9 per cent in Queensland while increases were also recorded for South Australia (+2.8 per cent), Tasmania (+18.3 per cent), and the Australian Capital Territory (+7.0 per cent). Lending for the purchase of new dwellings is down $66 million to $605 million in February, while the purchase for established dwellings has fallen $529 million to $11.4 billion. Lending for renovations is also down $26 million to $341 million. The ABS finance releases show borrowers and lenders becoming more cautious in early 2012. Personal finance fell 3.8 per cent, while commercial finance decreased 8.4 per cent in February. The fall in commercial finance equates to four consecutive months of decreases.

Housing Finance Commitments

20

Owner Occupied

Investment

18

14 12

Housing Finance Commitments Graph (right): Housing finance commitments track the volume of finance commitments made by significant lenders to individuals for the purchase of housing. This graph tracks the value of loans approved for both owner occupiers and investors.

10 8 6 4 2 0

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Prepared by PRDnationwide Research Source: ABS Cat. No. 5609, last updated Apr-2012

Month

Feb-12

Value of Commitments ($ billion)

16

10

Labour Market
Unemployment picks up in 2012
During the month of April 2012 unemployment decreased to 5.0 per cent and is on par with the longer-term five year average. Since the turn of the year unemployment remained stubbornly above 5.0 per cent. When looking at the moving annual average, the rate has been steady at 5.1 per cent since the corresponding period in the prior year. For the month of April 2012, the nations lowest rate of unemployment occurred in the ACT at 2.9 per cent, a rate that has significantly decreased by 1.5 per cent from the previous month. Tasmania continues to have the highest rate of unemployment at 7.5 per cent, up 0.5 per cent over the month. Unemployment in Queensland increased by 1.0 per cent to 5.1 per cent during the month of April, while Victorian unemployment also increased at 0.8 per cent to 5.5 per cent. Unemployment in New South Wales has remained fairly stagnant over the month at 5.0 per cent. The ABS Jobs Vacancies data displays a tight labour market, with a marginal rise of 0.7 per cent in February, following a 3.4 per cent rise in the fourth quarter of 2011. The ANZ Job Ads Index also increased in February by 3.3 per cent, after increasing by 7.5 per cent in January. The US has registered an improved unemployment rate of 8.2 per cent while Spain has 23 per cent of its workforce unemployed. Another staggering statistic is that of Spain's workforce aged 25 years or under, approximately 51 per cent is unemployed (as well as in Greece), 36 per cent in Portugal & Italy and 30 per cent in Ireland. France is in better shape, but only just with one in five young people out of work. Nicolas Sarkozy was the eighth leader of a Eurozone member country to have been removed from office in little over a year. Is the grass always greener on the other side? There is growing discontent regarding the misleading method utilised by the ABS in recording the official unemployment rate. Many leading economists cite a rival employment survey produced from Roy Morgan Research as portraying a more accurate rate. This research currently puts Australian unemployment at 9.7 per cent, almost twice that of the ABS rate. The Federal Government has struck a deal with GM Holden in which $275 million was spent to ensure the car manufacture remains on Australia soil for the next ten years. The automotive manufacturing industry is worth $7.7 billion, with annual turnover at $160 billion. In 2012 the industry employed 59,000 people directly, representing the largest sector of Australian manufacturing.

Unemployment Rate Graph (right): Unemployment is calculated as the proportion of people in the labour force that were unemployed and actively seeking work during the survey period. The labour force is defined as the number of people aged between 16 and 55 who were either employed or actively looking for work during the survey period. This graph tracks the unemployment rate on a monthly and moving annual average basis over the last 30 years.

Unemployment Rate

12%
Unemployment Rate Australia Moving Annual Average Australia

10%

8%

6%

4%

2%

Apr-87

Apr-06

Apr-82

Apr-83

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Prepared by PRDnationwide Research Source: ABS Cat 6202, last updated May-12

Month

Apr-12

Unemployment Rate

11

Stock Market
Cautious times ahead for equity markets
On the whole, the Australian Securities Index has remained stable since the turn of the year. The Index increased its monthly average value during the month of April 2012 to reach 4,332 points, up from February's average of 4,255 points, equating to an increase of 1.8 per cent over the month. Equity markets could be set for further turbulent times in 2012, as the US economy will face its biggest fiscal contraction ever, labeled the fiscal cliff. Next year will see the end of the Bush tax cuts, the expiration of the 2010-11 payroll tax cut, expiration of emergency unemployment benefits and most importantly, $1.2 trillion of spending cuts that will commence automatically. It could be a potential mix to cause another recession in 2013. While not normally known for producing high returns, Australian fixed interest bonds have outperformed the equity market over the past five years. A Morgan Stanley report advises investors to not relocate from bonds to equities as a result of continued turbulence in the global environment. The report is sceptical that US growth will accelerate, with the high price of oil a significant risk to growth. There is substantial uncertainty surrounding Chinas economic data while recent data from Europe has been disappointing. After comments released from the Treasury, investors would be wise to consider mining related stocks. Approximately 60 per cent of capital expenditure on buildings and structures over the past year have been mining related, up from 29 per cent in 2003. This has supported growth in insurance and finance, scientific and technical services, which have increased by 40 per cent. Over the past decade, professional and scientific equipment exports have tripled while chemical related product exports have increased by 60 per cent.

S&P / ASX 200 Graph (right): The S&P/ASX 200 is recognized as the primary investable benchmark in Australia. The index covers approximately 78% of Australian equity market capitalization. Index constituents are drawn from eligible companies listed on the Australian Stock Exchange. This index is designed to address investment managers' needs to benchmark against a portfolio characterized by sufficient size and liquidity. The S&P/ASX Australian Index is a real-time, market capitalisation weighted index that include the largest and most liquid stocks in the Australian equity market listed on the Australian Stock Exchange (ASX).

S&P / ASX 200


7,500 7,000 6,500 6,000

Index Value

5,500 5,000 4,500 4,000 3,500

3,000
2,500

Prepared by PRDnationwide Research Source: Standard & Poors, last updated May-2012

Day

12

Superannuation
SMSFs become popular with baby boomers
Superannuation contributions to June 2011 totalled $104.8 billion, equating to an increase of 4.8 per cent over the year. Employers contributed $71.4 billion (68.7 per cent) and members contributed $32.5 billion (31.3 per cent). Other contributions, which include spouse contributions and government cocontributions, totalled $0.9 billion. Total superannuation assets increased by 11.5 per cent during the year to 30 June 2011 to $1.34 trillion. Of this total, $810.6 billion are held by APRAregulated superannuation entities and $407.6 billion are held by self-managed superannuation funds (SMSFs), which are regulated by the ATO. The remaining $117.0 billion comprises exempt public sector superannuation schemes ($80.9 billion) and the balance of life office statutory funds ($36.1 billion). There is an increasing trend of more retirees shifting their pension funds into a self-managed superannuation fund. As Australians reach retirement, they have more time available to manage their superannuation. Between 2007 to 2011, the ATO reported that the number of SMSFs increased by 31 per cent. Currently, superannuation is a $1.3 trillion industry. There is a growing debate on whether superannuation funds should increase the portion of bonds at the expense of shares. Typically Australian pension funds have a high share allocation with a low bond allocation, at 50 per cent to 18 per cent. When observing longer-term periods, shares have tended to return a higher return (of 11.9 per cent) than bonds (6.0 per cent). The Federal Budget shows plans to increase the superannuation guarantee to 12 per cent by 2019-20, a measure that will boost retirement savings by $500 billion by 2037. Also among superannuation reforms funded by MRRT revenue, a higher concessional contributions cap will be available for older Australians with super balances below $500,000, from July 1, 2014. Government will reduce the super tax break on concessional contributions for the top 1 per cent of earners. Around 128,000 people earning over $300,000 per annum will have the tax break on their super contributions cut from 30 per cent to 15 per cent. Tax receipts from superannuation funds are expected to grow by 10.9 per cent, to $711 million, in fiscal 2012, and by 11.3 per cent, to $820 million, in the following year.

Superannuation Contributions Graph (right): The APRA Annual Superannuation Bulletin comprises statistics on the superannuation industry which have been prepared from the following sources: I. superannuation returns submitted to APRA

II. data from quarterly returns submitted to APRA by select exempt public sector superannuation schemes in Australia. III. data provided by the ATO on self-managed superannuation funds IV. returns submitted to APRA under the Life Insurance Act 1995 by registered life companies in Australia V. returns submitted to APRA by retirement savings account (RSA) providers

Superannuation Contributions

$180,000

Employer

Member

Total Contributions
$160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2011

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Prepared by PRDnationwide Research Source: APRA Bulletin, last updated Apr-12

Financial Year

Total Contributions ($ million)

13

Home Affordability
Affordability on the way up
The Home Loan Affordability Index has continued to increase since the June 2011 quarter, with affordability increasing by a further 0.6 points in the December 2011 quarter to an Index score of 30.4 points. Over the quarter the states were divided in changes to affordability, with Victoria, Queensland, Western Australia and Tasmania all experiencing increasing in the Index. New South Wales, South Australia, the ACT and the Northern Territory all experienced declines in the Index. The state that experienced the largest growth in affordability was Victoria, increasing by 2.1 per cent over the quarter. The ACT experienced the largest decrease at 2.3 per cent to register 53.7 points. On average, Australian households now need approximately 32.9 per cent of the family income to service their home loan. New South Wales continued to be the least affordable state, with households requiring 37.9 per cent of the family income to service their home loan, equating to 5.0 per cent above the national average. Queensland families require approximately 31 per cent of the average family income to service the average home loan, while Victoria requires 33.1 per cent. The ACT requires the least amount, with 18.6 per cent of the average income. According to the REIA, the proportion of family income needed to meet the average rental payment has increased slightly during the December 2011 quarter to 24.9 per cent. The Real Estate Institute of NSW (REINSW) has tried to source an innovative way to stimulate the market by urging the state government to allow firsthome buyers to pay off their stamp duty over three years rather than in one upfront lump sum.

Home Loan Affordability Index Graph (right): The Home Loan Affordability Index measures average loan repayments against median wages and tracks these values over time. Continued price growth in the property market without an accompanying rise in income saw a long period of decline in the home loan affordability index across the nation. The Home Loan Affordability index commenced its rapid descent during 2002. After a short leveling between 2004 and 2006, affordability levels have again continued to trend downwards.

Home Loan Affordability Index


70.0

60.0

Improving Affordability
50.0

40.0

30.0

20.0

Dec-81

Dec-82

Dec-83

Dec-84

Dec-85

Dec-86

Dec-87

Dec-88

Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Prepared by PRDnationwide Research Source: REIA / Deposit Power, last updated Apr-2012

Quarter

Dec-11

Index value

14

Dwelling Market
New dwellings plummet
The total number of dwelling commencements drastically decreased during the December 2011 quarter by 8.6 per cent, equating to 3,245 less new homes for the quarter. When compared to the previous year, commencements have decreased by 13 per cent. On a state-by-state basis, Victoria continued to record the highest number of dwelling commencements during the December quarter, representing 35 per cent of all dwellings commenced nationally. New South Wales followed with 22 per cent and Queensland contributed with 17 per cent of commencements. The least amount of dwellings commenced for a state during the December 2011 quarter was the Northern Territory (down 21.7 per cent to 260), followed by Tasmania (up 16.7 per cent to 637). Larger Australian developers have commented on the amount of green tape put in place by the Federal Government to overcome, costing millions of dollars. Requests have been made for the environmental approval process to be given back to State Government, in an attempt to streamline the process. The latest figures to be release by the ABS have shown that building approvals has increased by 7.4 per cent over the month of March 2012. New South Wales lead the way, with an increase in multiresidential units of 49.3 per cent. Dwelling approvals increased in Western Australia (up 11.1 per cent) and South Australia (up 4.2 per cent) but decreased in Queensland (down 8.7 per cent), Tasmania (down 6.7 per cent) and Victoria (down 5.0 per cent). The number of dwellings approved are still 15 per cent below from the previous year.

Dwelling Commencements

Dwelling Commencements Australia Annual moving average

55,000

50,000

Dwelling Commencements Graph (right): Dwelling commencements indicate the number of new dwellings that have commenced their construction phase. A moving yearly average is used to filter out seasonal fluctuations in the number of dwellings commenced. Nationally, the annual number of dwelling commencements have been on a downward trend since Sep-04 (earlier in NSW and VIC).
Dec-99
Dec-95 Dec-96 Dec-97 Dec-98 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

45,000

40,000

35,000

30,000

25,000

Quarter
Prepared by PRDnationwide Research Source: ABS Cat. No. 8750, last updated Apr-2012

Moving Annual Avg. of Commencements .

15

Dwelling Market Cont.


Mining states decrease in the Time to Buy a Dwelling Index
Over the March 2012 quarter, the Time to Buy a Dwelling Index significantly decreased in the two mining related states while South Australia, New South Wales and Victoria all experiencing an increase in the Index. The mining boom states of Queensland and Western Australia experienced dramatic decreases of 13.4 per cent and 22.4 per cent respectively. For the month of March 2012 South Australia registered the highest index value at 138.5 points, but was followed closely by Queensland at 129.5 and Victoria at 121.2 points. This represents an increase from the previous quarter of 19.9 per cent for South Australia, a fall of 13.4 per cent for Queensland and an increase of 3.1 per cent increase for Victoria. According to the Westpac-Melbourne Institute Survey of Consumer Sentiment, family financial conditions deteriorated over the 12 month period ending April 2011 in four of the five measured states, with the largest decline felt in New South Wales (down 29.8 per cent) and Victoria (down 27.7 per cent). Queensland experienced a decline of 12.3 per cent, while South Australia fell 17.2 per cent. The only state to improve its family financial condition was Western Australia, by 35 per cent. Indications for the coming 12 months show a strong decrease in Queensland (down 19.9 per cent) while South Australia could rise by 8.2 per cent.

Time to Buy a Dwelling Index

NSW

VIC

QLD

WA

SA

180

160

140

120

100

80

60

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

The Time to Buy a Dwelling Index indicates short-run changes in consumer sentiment regarding whether it is a good time to buy a dwelling. It is a component of the Melbourne Institutes Consumer Sentiment Index which is undertaken monthly.

Prepared by PRDnationwide Research Source: Westpac/Melbourne Institute, last updated Apr-2012

Moving Annual Average

Mar-12

Time to Buy a Dwelling Index Graph (right):

40

Moving annual average of Time to Buy a Dwelling Index

16

Home Prices
Home values fall in 2011
According to the ABS House Price Index, all capital cities, except Darwin, experienced a decline in value over the 12 month period ending March 2012. On average, property values have fallen by 4.5 per cent, with the largest declines felt in Hobart (-6.7 per cent) Melbourne (6.6 per cent) and Sydney (-4.6 per cent). Brisbane and Adelaide only experienced a slight decrease of 3.7 and 3.6 per cent respectively, with Perth decreasing by 1.7 per cent. Darwin experienced an increase of 3.5 per cent, while Canberra remained fairly stagnant over the year, decreasing by 0.5 per cent. When observing changes in home values over the quarter, green shoots appear in Canberra, Brisbane, Darwin and Perth, as marginal, but still positive growth was recorded, while the rate of decline in the other capital cities increased on the December quarter. According to the RPData-Rismark Home Value Index, Canberra was the best performing capital city over a 12 month period ending in April 2012, by only experiencing a softening in the Index of 0.72 per cent to $577,820. This was followed by Darwin, experiencing a decrease in the Index by 1.10 per cent, to $479,330. According to the Index, the largest decline was felt in Hobart, recording a 8.47 per cent fall in the Index to $326,490.

ABS House Price Index Change by Capital City

Average of all capitals Canberra Darwin Hobart

-1.1 -4.5 1.2 -0.5 4.4 3.5

March 2012 Quarterly Change March 2012 Annual Change


-2.7 -6.7

Capital City

Perth Adelaide Brisbane Melbourne Sydney -8 -6

1.1 -1.7 -0.9 -3.8 0.4

-3.7
-2.2 -6.6 -1.8 -4.6 -4 -2 0 2 4 6

ABS House Price Index Graph (right): The chart to the above measures the annual change in house prices in the capital cities, together with the weighted average of the eight capital cities.

Prepared by PRDnationwide Research Source: ABS Cat 6416, last updated May 2012

Change in house price index (%)

17

Rental Market
Capital city vacancy rate stabilises
The Australian average vacancy rate remained steady at 2.5 per cent over the most recent December 2011 quarter. Sydney remains the tightest rental market with a 1.6 per cent vacancy rate, followed by Canberra at 1.9 per cent. Three capital cities experienced a marginal decrease in vacancy rates over the quarter, with Perth leading the way at a drop of 0.5 per cent, followed by Melbourne (-0.4 per cent) and Canberra (-0.2 per cent). The rate increased the most in Adelaide, by 0.3 per cent and now has the highest vacant rate at 3.4 per cent. Darwin maintains the highest median rental price for a standard three bedroom house at $523 per week, despite this price decreasing by 4.0 per cent over the quarter ending December 2011. Adelaide remains the most affordable city to rent in, with a median rental price of $320 per week. Rental prices for a standard three bedroom house in Melbourne, Brisbane and Adelaide have remained steady over the December 2011 quarter. Rental prices in Sydney and Perth increased by 5.0 per cent, while Hobart experienced an increase of 3.0 per cent. The Australian capital city average increased to $397 per week, equating to a 1.2 per cent shift over the quarter. According to the Australian Property Monitors Rental Price Series, the national median weekly asking rent for houses increased by 1.1 per cent over the December 2011 quarter, with units increasing by 1.4 per cent.

Quarterly Vacancy Rates


4.0% Dec-10 Dec-11 3.5%

3.0%
Dec-11 Average 2.5%

2.5%

2.0%

1.5%

1.0%

Quarterly Vacancy Rates Graph (right):


Aus Average Canberra Darwin Hobart

0.5%

0.0%
Prepared by PRDnationwide. Source: REIA Last Updated Apr- 2012

An industry benchmark for vacancy rates is considered to be 3%. Vacancy rates lower than 3% indicate strong demand for rental accommodation, whilst rates higher than 3% reflect an oversupply of rental accommodation.

Perth Capital City

Adelaide

Brisbane

Melbourne

Sydney

Quarterly Vacancy Rate

18

Office Market
Office vacancy rates continues to decline
The Property Councils latest Office Market Report shows Australias office vacancy dropped from 9.0 per cent to 7.9 per cent during the six months to January 2012. Perth CBD is now has the lowest level amongst the major Australian CBDs with a vacancy rate of 3.0 per cent, followed by Melbourne CBD and Hobart CBD at 5.0 per cent. The Brisbane CBD experienced the largest net absorption in the 12 months to January 2012, at 92,140 sq. m, followed by Perth CBD at 80,054 sq. m. The vacancy rate by grade increased only in Premium Grade (up 2.8 per cent to 5.1 per cent), with all other grades experiencing a decrease (an average fall of 1.1 per cent) in the vacancy rate.

National Office Vacancy Rate


25

20

Vacancy Rate %

15

10.3 10

7.9 5

National Vacancy Rate

Source: Property Council of Australia / PRDnationwide Research

Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Historical Average

19

Demographics
Natural increase appears to have peaked
Over the quarter ending September 2011, the Australian rate of population growth increased slightly by 0.33 per cent to 1.29 per cent, equating to 75,421 new residents. Although the increase in the growth rate is marginal, the outcome is the first increase to the population rate since September 2009 and equates to 288,300 new residents over the year. The growth rate in Western Australia continues to increase, with an annual increase of 2.63 per cent (up from 2.18 per cent), equating to 60,690 new residents. Victoria registered the highest number of new residents with 73,770 during the 12 month period ending September 2011. This is just above Queensland with 67,093 new residents and New South Wales with 64,117. The Northern Territory has registered the slowest population growth at 0.44 per cent for the 12 month period ending September 2011. This represents an increase of only 1,006 new residents for the state. Tasmania was not far behind, recording only 0.48 per cent growth (2,418 new residents) during the twelve month period. The rate of the natural increase in the Australian population has decreased, with 3,366 less net newborns over the September 2011 quarter than the previous year, equating to fall of 9.3 per cent. The sharp rate of decline in the number of immigrants entering Australia over the past year has stopped, with Australia realising two consecutive quarters of an increase in the rate of net international migrant growth. The most recent quarter experienced a 5.2 per cent increase from the previous year. Over the September 2011 quarter, the slight majority of the overseas migrants tended to take up residence in New South Wales (25 per cent), followed by Victoria (24 per cent) and Western Australia (24 per cent).

Population Growth 2006 v 2011

3.5%

2.9%

Annual Percentage change over five years

Annual % change year ending Sep-11


2.4%

2.6%

3.0% 2.5%

2.0%
1.3%
1.5% 1.0%

1.1%

0.9%

Population Growth Graph (right): Population change tracks the change in population across the states and territories of Australia. Population growth is seen as the key driver of demand for housing.

Australian average 1.3%

0.5%

0.4%

0.5% 0.0%

QLD

NSW

VIC

SA

TAS

NT

Prepared by Colliers International and PRDnationwide Research Source: ABS Cat 3101, last updated Apr-2012

State

AUST

ACT

WA

Annual percentage change

1.9%

1.9%

2.0%

1.4%

1.3%

1.5%

0.7%

0.8%

1.8%

1.8%

20

Demographics Cont.
Western Australia proves to be popular
The number of net migrants entering Western Australia continued to increase at an exponential rate of 66.6 per cent over the 12 month period ending September 2011. The state recorded a net 2,002 new residents, which equates to the second largest number of net residents entering a state (behind Queensland). Queensland net migration has increased once again, with 2,665 new interstate migrants during the September 2011 quarter. This high level of growth has not been experienced since the December 2009 quarter. The rate of interstate migrant growth has slowed in Victoria over the September 2011 quarter. Approximately 259 net migrants decided to call Victoria home, equating to the smallest amount since September 2009. New South Wales still records the highest outward migration of residents nationwide and until recently, this rate was in decline. However this rate has increased again, with the September 2011 quarter registering an outward net migration of 3,786 residents. South Australia continued to lose residents, with 693 net residents departing during the quarter, while the ACT increased a net 45 interstate migrants.

Net Interstate Migration

NSW VIC

15,000

WA

5,000

-5,000

Net Interstate Migration Graph (right):


Sep-05
Sep-85 Sep-86 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

-10,000

-15,000

Net interstate migration tracks the net population change in each state attributable to interstate migration. Net interstate migration figures fluctuate with the seasons, so a moving yearly average is shown to filter out these changes.

Prepared by Colliers International and PRDnationwide Research Source: ABS Cat 3401, last updated Apr- 2012

Quarter

Sep-11

Annual Avg. of Number of Persons .

QLD

10,000

21

Retail Trade
Modest consumer spending set for 2012
After retail expenditure declined at the end of 2011 (over the build-up to the holiday season), the first two months of 2012 recorded stronger growth, albeit only marginal. January recorded an improved 0.3 per cent from December, with February continuing to add a further 0.2 per cent. Over the 12 month period ending February 2012, Australias annual change in retail expenditure increased 2.03 per cent from the previous year, but remained fairly flat during the month itself. Western Australia continued to incur the greatest increase in retail spending over the 12 month period ending February 2012, with an 8.2 per cent surge, followed by Victoria at 3.2 per cent. New South Wales was the only state to experience less spending for retail from the previous year, at -0.4 per cent. The largest growth in expenditure occurred in other retailing, registering an annual growth of 6.6 per cent. This was followed by other cafes, restaurants and takeaway food which registered an annual growth of 5.0 per cent. Department stores experienced a softening of 2.8 per cent from the previous year, while clothing and soft good retailing also softened by 1.5 per cent. Australian households spent on average $5,100 each on Chinese-made product last year (up 16 per cent). This was mainly focused on telecommunications equipment, clothing and computers.

Annual Change in Retail Expenditure

Annual Change in Retail Expenditure Graph (right): Retail spending figures are estimated by the ABS based on the Retail Business Survey conducted monthly amongst 4,350 retail and selected service businesses. The annual change in retail spending indicates how active consumers are in the marketplace and the degree to which consumers are willing to spend. The seasonally adjusted figures are used to smooth out seasonal factors associated with this data.

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Month Prepared by PRDnationwide Research Source: ABS Cat No: 8501.0 Seasonally adjusted figures last updated May-2012

Annual percentage change

22

Federal Budget
An overview with an insight into how it affects property
The government has upheld its promise to return the federal budget to surplus in 2013, through the largest budget turnaround in over 50 years, despite a larger than expected deficit forecast for the current year. Originally it was thought that the surplus would come from 'saving' its way out of deficit, but when scrutinised it hasnt, only managing to find $4.7 billion in savings in this budget while increasing $39.6 billion in tax revenues. A large portion of the new revenue derives from the carbon tax. Overall, this appears to be a big taxing, big spending budget, with an increase spending by $201.2 million, culminating from a total of 284 separate increases in spending in the budget. One difference between Australia and the US is demonstrated in the 2012-13 Australian budget. In the 2012 Presidential election campaign, Mitt Romney desires to cut US taxes to 25 per cent while President Obama wants them cut to 28 per cent. The Australian government was planning a 1.0 per cent reduction in company tax and was expecting consequent growth dividends to benefit all Australians and reduce unemployment. The company tax cut was to come out of the revenue that the government speculates can be raised from the mineral resources tax. The corporate tax cut was rejected by the opposition who plan to abandon the resources tax. The government has responded by not cutting corporate tax, so the Australian company tax rate will stay at 30 per cent. That will boost the budget bottom line by $300 million in 2012-13, $1.2 billion in 2013-14, and $1.55 billion in 2014-15. Total money that the 1.0 per cent tax cut would have returned to the corporate sector over four years was $4.5 billion. So where will the revenue be generated from? The Treasury is expecting higher than normal tax receipts for starters. Tax receipts usually grow by about 8 per cent a year, a result of fiscal drag (taxpayers moving into higher marginal brackets), but this years increase is expected to be 11 per cent. The resources sector of the economy is expected to grow at around 8.5 per cent from fiscal 2012 to 2014. In comparison, the non-resources part of the economy is expected to grow at a below-trend average annual rate of 2.0 per cent over the next two years, with a high Australian dollar and shifts in household spending attitudes towards debt assisting the disparity. However, iron ore and coal companies arent expecting to pay any Minerals Resource Rent Tax (MRRT), so the $3.5 billion budgeted from that in 2012-13 could be a challenge, with the remaining increase dependant on economic growth of 3.25 per cent. The Treasury expects carbon permit money to provide $4.02 billion in the coming financial year, followed by an estimated $6.61 billion in 2013-14. Yet the two major contributors to income (the carbon tax and the claimed mineral resources tax revenue) are both measures that the opposition has guaranteed to drop. Where does the Treasury plan its expenditure? In total, welfare payments, including the school kids bonus and the extra family welfare, will increase by $4.8 billion. In the schoolyard, parents who have combined income below $112,000 with two children will be celebrating the kids' bonuses of $820 for a secondary student and $410 for primary school students (a carbon tax dividend). In income taxes, the tax-free threshold jumps from $6,000 to $18,200, but the next $18,800 is taxed at 19 per cent (up from 15 per cent), and between $37,000 and $80,000 the tax take rises from 30 to 32.5 per cent.

23

Federal Budget Cont.


A significant change that is property related will be the removal of the Tax Breaks for Green Buildings program. This scheme, worth $405 million over four years, is deemed surplus and the Department of Climate Change's suggestion to firms who wished to use the old scheme is to seek low-cost financing of energy savings measures from the Clean Energy Finance Corporation (CEFC) instead. The CEFC has $10 billion to directly invest in renewable energy or energy efficiency projects over the next four years. Currently Australia has a legislated requirement for 20 per cent of our energy needs to be sourced from renewable energy by 2020. The federal government has also allocated $29.8 million to a Manufacturing Technology Innovation Centre in an effort to boost the troubled industry, which has been hit by the high Australian dollar and reductions in personal and business spending following the global financial crisis. An additional $25 million will be spent in the six years from 2013 on assistance for automotive manufacturers, including $20 million on grants covering up to 50 per cent of costs on activities intended to expand companies customer bases or product range. On the whole, the budget has received criticism from leading property groups in response to the industry being largely ignored. The Housing Industry Association has described a lack of initiative to boost the housing supply, the Green Building Council was against the scrapping of tax breaks for building retrofits and Australian Industry Group is negative about the focus on short term consumption at the expense of long term growth. The broken promises regarding the retrofits and also company tax rate reductions has provoked poor sentiment from the construction industry. A shift into surplus will help ease pressure on monetary policy and give the Reserve Bank more flexibility to alter interest rates than would otherwise have been the case. In addition, its a significantly positive message that Australia portrays to the international scene as an investment destination after the governments fiscal discipline relative to international peers. The announced measures allowing companies which make losses in a given financial year to carry back these losses against any profits made in previous years (and thus claim back some of the taxes paid on profits in those years) are particularly useful in the building industry given the cyclical nature of the industry, and will be especially important in helping construction firms to survive through lean years.

24

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Prepared by PRDnationwide Research. For further details, contact Aaron Maskrey on 07 3370 1702 www.prdnationwide.com.au PRDnationwide is a Colliers International company.

PRDnationwide does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been varified by us. We have no belief one way or the other in relation to the accuracy of such information, and projections. PRDnationwide will not be liable for any loss or damage resulting from any statement, figure calculation or any other information that you rely upon that is contained in the material. COPYRIGHT - PRDnationwide 2012.