After 27 years of uninterrupted annual domestic economic growth, Australia’s property markets are facing rising headwinds with investors becoming more cautious in response to the increasing economic concerns and the impact of changing demographic trends on various property sectors.

Global Economy

Against a difficult backdrop that included intensified US-China trade and prolonged uncertainty on Brexit, momentum in global economic growth remained soft in the first half of 2019. In the United States, as the fiscal stimulus unwinds the economy continues to moderate, economic growth decelerated in the second quarter of 2019. With growth in consumer spending weak in the US, the Federal Reserve cut the US interest rates for the first time in 11 years. China’s GDP for the second quarter grew at its slowest rate since the global financial crisis in 2008. Although GDP growth eased in China, there are some signs that momentum has picked up again as the government announced additional measures to increase spending on infrastructure.

Australian Economy

Growth in the Australian economy has slowed to the weakest annual expansion since the September 2009 quarter. As was the case in the second half of last year, the main source of growth came from government spending. Household consumption also remains weak, impacted by modest income growth and a decreased wealth effect from falling home prices.

Looking ahead, growth momentum is unlikely to accelerate significantly through the rest of this year with the Australian economy is forecast to grow by 1.7% this year. In a bid to support economic growth, the RBA cut official interest rates in July 2019 to a new record low of 1.00% with further interest rate cuts are anticipated in 2019.

Conditions in the established housing market also remain soft. Housing prices have continued to decline, although the pace of decline has eased recently. Some other indicators, including auction clearance rates, have improved a little since the end of last year, but generally point to continued soft conditions.

Despite the adjustment in the housing market and weak consumption growth, the labour market remains healthy, with ongoing strong employment growth. Despite the solid employment growth, the unemployment rate of 5.2% remains well above the RBA’s current estimate of full employment. Forward-looking indicators, such as job advertisements and employment intentions, suggest that growth in employment will moderate over coming months.

At a state level, the improving trend in final demand of the past few years appears to have has stalled with most states experiencing slower growth in 2019 to date. Overall growth generally remains solid, with all Australian states and territories recording growth in gross state product over the year. With house prices having declined by around 10%, the NSW and Victorian economies has moderated. Elsewhere, Queensland’s economic growth forecast to strengthen through 2019 underpinned by the commencement of new metal mines and growth in education exports.

Australian Office Market

Australian office vacancies have decreased over the first half of 2019 with Australia’s total office vacancy rate falling to 8.3% as at July 2019, with falls recorded in the majority of CBD office markets. The total vacancy rate for the Australian office market has now fallen to its lowest level since July 2012. Melbourne and Sydney remain Australia’s strongest and best performing CBD markets with total vacancy rates of 3.3% and 3.7% respectively. With investor demand robust, transactional volumes across Australia’s office markets are on track for an above average year. In 2019 to date Urban Property Australia has recorded more than $8 billion of office properties transacted. Boosted by major sales, Sydney and Melbourne have accounted for 82% of all office transactions across Australia in 2019 to date.

Australian Retail Market

The retail sector continues to face challenges such as changing consumer preferences, soft consumer sentiment and technological changes. Impacted by modest income growth and a decreased wealth effect from falling home prices, Australian retail trade grew at its slowest rate in 12 months. Retail leasing activity has been subdued so far this year with retailers adopting a cautious approach to expansion amid weakening turnover growth. Rental levels continue to be under downward pressure as many retailers prefer consolidation rather than expansion strategies. The soft occupier and consumer sentiment conditions have also hindered investment activity with transactional activity to date indicating that the 2019 annual volume will be the lowest Australian annual total since 2011.

Australian Industrial Market

The Australian industrial property market continues to gather momentum with strong appetite from occupiers, developers and investors alike. Australia’s significant infrastructure pipeline continues to create new opportunities, boosting tenant demand as occupiers increasingly invest to improve supply chain efficiencies as e-commerce continues to mature. With vacancies falling across all markets, industrial rents have increased at 10-year high rates, land values growing by more than 20% in most established markets and prime yields declining to record lows. Although sales activity in 2019 to date has slowed in comparison to 2018, the lower sale volume more reflects a lack of investment opportunities rather than diminishing investor appetite.

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