Weekly economic briefing: Tourism and Hotel Market Outlook – Australia’s tourism boom continues

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Tourism and Hotel Market Outlook: Australia’s tourism boom continues

Deloitte Access Economics’ latest Tourism and Hotel Market Outlook – Edition 2, 2017 reports that Australia’s tourism sector has posted yet another remarkable year of growth, highlighting tourism as a key growth sector within the Australian economy.

International visitor arrivals grew by 8.9% over the year to June, including 10.7% growth in inbound leisure travellers. Key source markets driving this strong growth in international visitor arrivals include India (with record growth of 14.6%), the US (14.0%), and China (9.9%). There was also double digit growth in arrivals from Japan, Malaysia, South Korea and Hong Kong.

But growth in visitor arrivals from China has eased over 2017. Over the past five years, visitor arrivals from China more than doubled, representing approximately 15% of all arrivals into Australia. And while arrivals growth of 9.9% in the year to June 2017 is an excellent result against any normal benchmark, it is considerably lower than the 22.5% growth in the year to June 2016. Australia’s strong growth in total international visitors over the last year, despite slowing arrivals from China, signals a healthy diversification of Australia’s tourism market.

International travel is set to benefit from Asia’s rapid growth going forward. With growth in travellers from Asia largely driving inbound tourist numbers, Deloitte Access Economics forecasts growth in international visitor trips at an average annual rate of 6.9% over the next three years. As commodity demand softens, the expected fall of the Australian dollar against other major currencies is expected to be one factor supporting a further boost for international tourism, along with continued strong income growth in economies through the Asian region.

Chart: Growth in visitor arrivals by country of origin

 

In contrast to international visitors, growth in domestic traveller numbers is slipping. An acceleration of corporate traveller growth was insufficient to counter the stalling of growth in domestic leisure travellers. In part, this reflects a pattern of generally weaker spending growth by Australian households.

As the Australian economy strengthens, so will domestic tourism. Australia’s economic growth is expected to pick up to 2.8% annually on average over the next three years. This is expected to flow into a recovery of consumer spending, including on domestic travel. In line with this, Deloitte Access Economics forecasts an average of 3.4% annual growth of domestic travel trips over the next three years.

For more information on the Australian brief, please contact the co-authors, David Rumbens and Adele Labine-Romain.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Europe’s cheapest housing market – Portugal or a UK region?

  • UK house prices have recovered from the slump that followed the financial crisis. According to the Office of National Statistics UK house prices have risen 45% since their trough in March 2009.
  • Over the same period earnings have risen by just 16% making life tougher for first-time buyers and those trading up in the housing market.
  • Financial crises tend to collapse asset prices and make housing more affordable. It’s been different this time because the authorities in the UK, and elsewhere, countered the crisis with low interest rates and quantitative easing. By slashing the cost of money and flooding the system with liquidity these policies set out to, and succeeded in, inflating asset prices. UK equities and house prices have risen at roughly the same amount in the last ten years. Taken together with weak wage growth the result is that housing in the UK, and in many other countries, has become less affordable.
  • UK house price inflation has slowed since the EU referendum. This bucks a global trend towards higher house prices. An index produced by surveyors Knight Frank shows that house prices rose by 6.5% globally in the year to March, the fastest pace in three years.
  • How overvalued is UK housing? And how does it compare to house prices elsewhere?
  • Two standard yardsticks compare house prices to rents and to incomes relative to long-term averages. At £223,000 the average UK house is almost ten times median annual earnings. The Organisation of Economic Cooperation and Development (OECD) estimates that UK housing is 30% overvalued against incomes and 28% overvalued against rents.
  • US housing looks better value. Despite having risen 34% since early 2012 the OECD estimates that US housing is 6% undervalued against incomes.
  • Across the 23 industrialised nations studied by the OECD housing is most overvalued in New Zealand, Australia, Canada and Belgium.
  • For those on the look-out for cheap housing, the countries with the most undervalued houses relative to incomes are South Korea, Japan, Portugal, Greece and Germany.
  • The economies of Southern Europe have endured both a global financial crisis and their own sovereign debt crises. House prices in Greece, Italy, Spain, Ireland and Portugal have seen large falls and are way off pre-crisis levels. House prices in Greece and Spain are down 43% and 28% since the financial crisis. Irish house prices halved between 2008 and 2012 but have since moved up and are now just under a third lower than at the start of 2008. Europe’s most affordable housing market is Portugal where the OECD estimates housing is 13% undervalued against incomes.
  • House prices in emerging market economies, including China, Brazil, India and Hong Kong, have grown rapidly since the financial crisis. Brazil’s housing market has recently begun to correct, although a decade of growth has seen prices rise by 282%. In Hong Kong and India rapid growth, strong demand and housing shortages have helped lift house prices by 148% and 213% respectively over the last ten years.
  • Growth has been less heady in China where prices have risen by 53% over the same period. Activity has slowed slightly in recent years as the authorities have tried to head off a housing bubble, including by raising the minimum deposit and restricting purchases of second homes.
  • According to Knight Frank the world’s ‘hottest’ housing market is Iceland. Prices here rose by 17.8% in the 12 months to March. This reflected supply shortages which have been exacerbated by tourists renting homes on sites such as Airbnb. With the tourism industry booming, Icelandic house prices seem likely to maintain their upward trajectory.
  • Most of the discussion of housing valuations around the world focuses on national house price indices. Yet in most countries prices vary enormously between regions. This means that national affordability figures conceal big differences across countries. Thus the simple characterisation of the UK as an overvalued housing market is consistent with significant under and overvaluation across different regions.
  • Our analysis shows that houses in London, the East of England and the South East are the priciest, with London overvalued by 37% against incomes. That makes London housing as overvalued as Canadian housing which is one of the world’s most expensive national markets relative to incomes. Interestingly, London housing is somewhat less overvalued than Australian or Belgian housing.
  • By contrast houses in most of the remaining UK regions are undervalued and affordability is closer to German, Italian or Greek levels. Most strikingly, housing in Northern Ireland is more affordable relative to incomes than in Portugal, Europe’s cheapest housing market.
  • In Germany, a country with some of the most affordable housing in the EU, the regional picture also varies. House prices in Munich have more than doubled since 2009 whereas prices in Frankfurt have risen by half.
  • It’s a similar story in the US with prices booming in San Francisco, up 91% since 2012, helped by the tech boom, while in New York prices have risen by ‘only’ 17%.
  • History shows that most housing booms end with busts and big falls in house prices. A much more benign adjustment in affordability could be delivered by strong growth in incomes and stagnating house prices. That’s just what policymakers would like to see. To secure it they need to be confident that income growth is on a sustainable and higher path before raising interest rates.
  • The real dilemma would come if inflation, not incomes, moved to a permanently higher path. Then central banks could face the choice of raising rates, crushing inflation and house prices – or holding fire on rates and watching inflation take hold. Fingers crossed that a recovery in income growth saves us from that choice.

PS – Michael Johnson, a Research Fellow of the Centre for Policy Studies, got in touch last week in response our Monday Briefing on intergenerational fairness. Michael sent me a copy of his excellent research paper, ‘Who Will Care for Generation Y’ which outlines proposals to curb the burden of spending obligations on future generations. One idea would be to require the government to make clear the future cost of all current spending commitments. This approach, which is similar to that followed by corporates, would shine a powerful light on the sustainability, and fairness across the generations, of today’s spending decisions.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 1.2% at 7,401.

International economic briefing by Ian Stewart

Economics and business

  • Germany’s economy expanded at its fastest annual rate since 2014 in Q2, fuelled by the fastest rise in household spending since 2011
  • French business confidence reached its highest level since April 2011 in August
  • The US President, Donald Trump, threatened to shut down the US government should Congress not agree to funding his proposed Mexican border wall
  • President Trump also threatened to pull the US out of the North American Free Trade Agreement (NAFTA) saying “I don’t think we can make a deal…I think we’ll end up probably terminating NAFTA at some point”
  • The UK’s Society of Motor Manufacturers and Traders backtracked on their announcement that second hand car sales had fallen by 13.5% during Q2, revising the fall down to 0.7%
  • UK new home builds started in the year to June 2017 were 13% higher than the previous year, and the highest rolling annual total since 2008, according to the Department for Communities and Local Government
  • Theresa May, the UK’s prime minister, set out plans for UK companies to disclose and justify the pay gap between their CEO and workers
  • Self-driving lorries will be tested on Britain’s roads next year
  • Reuters reports that a Chinese carmaker, Great Wall Motor, has “an intention to acquire” some or all of Fiat Chrysler
  • The 2016/17 Scottish net fiscal deficit was 8.3% of GDP, more than three times the UK’s 2.4% overall figure, largely due to the collapse in North Sea oil revenues
  • Discount retailer Lidl overtook the upmarket competitor Waitrose in terms of UK market share in Q2, according to the Kantar Worldpanel
  • Private equity investments into central Europe hit the highest level since the financial crisis in response to the region’s sustained economic recovery
  • The total worth of the world’s richest 100 tech billionaires surpassed $1trn for the first time, according to the 2017 Forbes 100 Richest in Tech list
  • UBS forecasts that the UK’s largest companies’ profit growth will slow by more than half in 2018
  • The monthly cost of commuting into London are typically double that of commuting into Brussels, and four times as much for equivalent journeys into Rome and Berlin, according to the Rail, Maritime and Transport workers’ union
  • A study by the Electoral Reform Society found that the UK’s Conservative party would have won a majority if they had won 533 more votes in nine marginal constituencies
  • Google has introduced a self-assessment tool “to check whether you’re clinically depressed” in search results for depression
  • The founders of 116 robotics and artificial intelligence companies have called for the ban on lethal autonomous weapons, or “killer robots”

Brexit and European politics

  • The UK government conceded that the ECJ could continue to have a say in UK affairs during a transition period and in overseeing any future EU-UK trade deal
  • The UK government plans to closely mirror the EU’s data protection laws after Brexit, in a bid to ensure legal certainty for businesses
  • Ireland plans to double its diplomatic trade presence overseas by 2025 to mitigate any effects on its trade due to Brexit
  • British officials called for UK-approved products to not have to undergo further regulatory checks in the EU after Brexit
  • Net migration to the UK was 246,000 in the 12 months to March, down a quarter from 327,000 the previous year
  • Data published by the ONS showed fewer than 5,000 foreign students overstayed their visa last year, compared to the previous estimate of 100,000
  • The Guardian reports that David Davis, the UK’s Brexit secretary, will refuse to discuss Britain’s exit bill from the EU when talks resume next week
  • Boris Johnson, the UK’s foreign secretary, softened his stance on the Brexit divorce bill and said “we will certainly have to meet our obligations”
  • The Scottish and Welsh leaders announced they will collaborate on amendments to the UK’s Brexit legislation to mitigate damage to their devolved powers
  • A former White House official warned President Trump is “hostile to trade” and that he “cannot magic up a trade deal” with the UK after Brexit
  • The French president’s approval ratings have fallen from two thirds when he was elected to 36% as doubts are cast over the budget and tax breaks for the wealthy

And finally…

  • Financial responsibility was ranked as the most important quality in a potential mate, ahead of sense of humour and attractiveness, in a survey of online daters by Tinder’s parent company – Credit score

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