Oliver's Insights - Listed property securities - have they bottomed?
This note looks at the outlook for listed property securities (or REITs). The key points are as follows:
While unemployment rebounded pretty much as expected to 5.7% in May, after April's hard to explain fall to 5.5%, the big surprise was that employment only fell by 1700 jobs in May. In other words the main factor driving the rise in the unemployment was a rise in the size of the labour force rather than a fall in employment. From the peak in employment last October so far only 24,200 jobs have been lost. This is a long way from the 6 million jobs that have been lost in the US over the last 18 months, highlighting Australia's far better economic performance.
To be sure various business surveys and the slump in job advertisements point to further job losses and rising unemployment ahead. However, the modest deterioration so far along with the improvement now becoming evident in indicators such as housing finance, building approvals, business confidence and consumer confidence suggest that there is a growing chance that the unemployment rate will actually peak earlier and below the Government's forecast for an 8.5% rate in June 2011. I had been expecting that the unemployment rate would peak at around 9% some time next year, but the peak now looks more likely to be 7.5%, probably in the first half of 2010. Further interest rate cuts are still likely as unemployment rises and inflation falls. But to the extent that the May labour force report continues the run of better than expected economic data, the risk that we have seen the low point for interest rates or that rate cuts only take the cash rate to 2.5% or 2.75% has increased.
