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The growth of Australia’s real GDP over the past couple of decades has significantly impacted the number of domestic visitor nights in hotels across the country, especially in capital city markets. As a major economic determinant of hotel demand, the growth in real GDP has disproportionately impacted regional hotel markets compared to capital city hotel markets as illustrated by the table of demand elasticities below.

Over the past twenty years, a 1% increase in real GDP resulted in a 1% increase in domestic visitor demand for city hotel markets, but only a 0.38% increase in domestic visitor demand in non-capital city or regional hotel markets.

Australia’s real GDP grew at a compound annual growth rate (CAGR) of 2.9% from $1,084.7 billion to $1,871.6 billion in 2018. Over the ten year period 2009-2018 it grew slightly slower at a CAGR 2.6%. Real GDP grew by 73% since 1999 as illustrated in the graph below. Total domestic visitor nights in hotels etc., grew by 39%, compared to 66% for the capital cities and 24% for other regions.

Comparison in Growth of Domestic Visitor Nights in Hotels, etc. in Australia’s Capital Cities & Regions and Australia’s Real GDP, 1999-2018

Source: Australian Bureau of Statistics data and National Visitor Survey Results

Our hotel market forecasts come from estimating, then predicting with, a series of equations based on well-established economic and statistical principles. Arguably, the most important of these equations captures the relationships between hotel demand – the number of rooms sold – and economic determinants of hotel demand. To be included in a demand equation, economic variables must ‘make sense’ from an economic theory perspective (i.e., be economically significant) and have a demonstrated statistically significant relationship with hotels.

Since 1999, total domestic visitor nights in capital city hotel markets have been highly correlated with Real GDP with a correlation of 0.921. It ranged from a high of 0.964 for Melbourne to a low of 0.670 for Darwin. It is also highly correlated with Real Exports of Goods & Services (0.951), Real Government Consumption (0.937) and Real Personal Disposable Income (0.872). Interestingly, it has a moderate positive correlation with Real ADR at 0.202, ranging from a high of 0.344 for the ACT and -0.258 for Hobart.

So just how responsive has visitor night demand in Australia’s hotels, etc., been to changes in Australia’s GDP? We can provide the answer by examining the demand elasticity, defined as the percent change in total domestic visitor nights divided by the percentage change in real GDP.

Between 2000 and 2018, the demand elasticity has averaged 0.99 for capital city hotel markets, 0.38 for regional hotel markets and 0.62 for the industry as a whole. So the almost 1:1 ratio for capital city hotel markets means that on average, the visitor night demand has grown 1% for every 1% growth in real GDP.

Domestic Visitor Night Demand Elasticity for Hotels, etc., for Australia’s Capital Cities and Regional/Other Centers 2000-2018

City/Region2000-20182009-2018
Sydney1.141.71
Other NSW0.290.96
Melbourne1.721.38
Other VIC0.250.55
Brisbane0.971.42
Other QLD0.640.65
Adelaide0.790.90
Other SA0.24-0.11
Perth1.191.62
Other WA0.661.48
Hobart1.132.09
Other TAS0.861.00
Darwin0.931.46
Other NT0.912.19
ACT0.531.16
Total Capitals0.991.28
Total Regional/Other0.380.70
Total0.620.93
Source: Hotel Investment Strategies, LLC based on Australian Bureau of Statistics data and National Visitor Survey Results

Over the past ten years 2009 -2018, demand elasticity has grown significantly as illustrated in the graph below. It averaged 1.28 for capital city hotel markets, 0.7 for regional hotel markets and 0.93 for the hotel industry as a whole. A critical point to note is the dramatic fall in demand elasticity in 2008 and 2009 coinciding with the GFC.

Domestic Visitor Night Demand Elasticity for Hotels & Similar for Australia’s Capital Cities and Regional/Other 2000-2018

Source: Hotel Investment Strategies, LLC based on Australian Bureau of Statistics data and National Visitor Survey Results

The Australian Government recently forecasted that GDP will fall by 3.75% in 2020 and grow by 2.5% in 2021. The current sixty-four-dollar question is: Does hotel demand generated by the domestic market “snap back” to previous levels or does it reset at a new lower level after the COVID-19 pandemic?

Many argue that the long history of close correlation between hotel domestic visitor night demand and GDP suggests that eventually the “normal” correlation of close to 1 to 1 for capital city hotels will be re-established. Others suggest that there will be a significant reset at less than 1 to 1. What do you think?